Process of Debt Recovery on Loans Secured Against Movable Assets: The New Legal Regime in Nigeria

 

Introduction

In our article on the Process of Debt Recovery in Nigeria, we have laid down the basic foundation and general guidelines applicable to both court and out-of-court processes on recovery of debts in Nigeria. The article under reference is purely on debt recovery of liquidated money demands and not specifically on loan or any reference to security interest or collateral.

By and large, loan may be secured either against immovable or movable property. When loan is secured against immovable property such as land and/or a structure or other things attached to land, such transaction may be regarded as mortgage, pledge or charge as the agreement between parties may determine. On the other hand, loan can be secured against movable property which include tangible assets like car, vehicle, machine, equipment, etc., or intangible assets such as receivables, negotiable instruments and other choses in action. Until recently, there is no thorough, unchallenging and propitious procedure for recovering credits secured against movable assets in Nigeria.

The new legal regime has caused a paradigm shift in the status quo ante. As a way of aiding the prosperity and growth of purposeful Micro, Small and Medium Enterprises (MSMEs) in Nigeria and to ameliorate the challenges faced in recovery of loans advanced to MSMEs, the National Assembly enacted the Secured Transactions in Movable Assets Act, 2017 (the Act). This Act specifically makes provisions on the procedures to be adopted in certain loan transactions and how to recover such credits upon default when movable asset is to be used as collateral for the loan. Noteworthy, Section 1 of the Act enumerates the general objectives of the Act as follows:

• To enhance financial inclusion in Nigeria;
• To stimulate responsible lending to micro, small, and medium enterprises;
• To facilitate access to credit secured by movable assets;
• To facilitate perfection of security interests in movable assets;
• To facilitate realization of security interests in movable assets; and
• To establish a collateral registry and provide for its operation.

To understand the processes and procedures better, we shall look through the Act under the following sub-headings:

(1.) Establishment of National Collateral Registry

To begin with, a very important step taken by the Act is the establishment of a body known as National Collateral Registry (the Registry). This Registry is essential because of the nature of the issues it was set up to address. Securing loan against movable property can be very challenging when it comes to enforcement of the rights of the lender/creditor. Hitherto, the process generates a lot of problems. Since in most cases, the asset is usually in the custody of the borrower for obvious reasons – he may fraudulently move it to a location unknown to the lender, or craftily disallow the lender or his agent, access to it. Some borrowers demand for order of court for levying execution. The borrower may outrightly sell the property to a third-party innocent purchaser without the knowledge of the lender. A borrower may use a property to secure various amount of credits from different lenders. As a result of all these, the creditor employs all means mostly forceful and unlawful to obtain the collateral or recover his credits which oftentimes boomerang with other multiplier side-effects. These are some of the challenges that Microfinance Banks face in Nigeria. There is therefore a need to have a special registry and system of documentation to control such sharp practices, fraudulent dispositions and unbecoming reactions. The Registry is charged with the following responsibilities:

• To receive, register and store information about security interests in movable assets, and
• To provide access to persons who may seek information on security interests from the Registry.

It follows that a lender, an innocent purchaser and the general public will have the opportunity to approach the Registry to conduct search on the status of any movable property or collateral. This is done by using the unique biometric identifier of the grantor and the serial number of the collateral. The Registry therefore works like Lands Registry whereat searches are conducted on lands with registered title.

(2.) Definitions of Salient Terms

• Grantor: is a person who has rights in the property used as collateral. He may be the borrower or a third party to the transaction, such as a guarantor.
• Movable Asset: means a tangible or intangible property that is not a real property such as land. Thus, the transactions contemplated by the Act do not include those involving transfer of interest in land other than account receivables. The Act does not apply to transactions relating to ships or aircraft. Also, in a transaction where right of set-off is available to the creditor, the Act does not apply.
• Account Receivable: means an asset account created when a company lets a buyer purchase their goods or services on credit. The outstanding invoices a company has or the money clients owe the company are account receivables. Companies record accounts receivable as assets on their balance sheets since there is a legal obligation for the customer to pay the debt. For example, an electric company that bills its clients after the clients received the electricity. The electric company records account receivables for unpaid invoices as it waits for its customers to pay their bills. Thus, where Company A issues invoices for goods or services delivered to Company B on credit. Company B may sell the invoices on discount to Company C in order to make urgent payments to Company A. Company C holds the invoices as collateral to recover its credit from company B.

• Security Interest: is the proprietary right in collateral that is created by agreement to secure payment or other performance of an obligation.

(3.) Security Agreement

One of the requirements that a transaction must meet to enjoy the benefits of the Act is that – parties to the transaction must enter into a Security Agreement. The Act specifies some salient provisions that must be in a Security Agreement and the specific manner in which the clauses should be couched to meet the qualifications set out in the Act. Parties must also agree to register the transaction (a financial statement in accordance with the agreement) with the Registry. It is interesting to know that S. 45 of the Act specifically provides that the Provisions of the Stamp Duties Act shall not apply to any secured transaction under the Act. What this means is that there is no requirement for payment of stamp duties on any documents used in any transaction to which the Act applies.

(4.) Remedies Available to the Creditors in the Event of Default

In the event of default on the part of the borrower, the Act introduces a more drastic approach. The creditor can lawfully take the following remedies and simple procedures to recover his credit:

a. Repossession of the Collateral

When an event of default occurs, the Act specifies that the creditor gives a ten-working-day notice in a prescribed form to the borrower and/or the grantor. The Act describes the nature of the notice and the specific mode of serving same. Upon the expiration of the period of the notice, the creditor may take possession of the asset either by the well-known judicial order or without judicial order but with the assistance of the Nigeria Police in accordance with the laid down procedure under the Act. This is the first time such a seamless move is made in this country.

b. Sale of the Collateral

The Act gives the creditor authority to dispose of collateral at reasonable price it could be sold at the time of disposal. Disposal may be by sales, lease, licence or by any other form of disposal. The disposal may be as it is, that is to say, in its current condition or after passing it through any reasonable preparation or processing that could give it commercial value. The sale may be conducted by way of auction sale, public tender, private sale or any other method determined in the Security Agreement. Where convenient, the creditor may dispose of the collateral in his own premises or at any other convenient place.

c. Notice of Intention to Sell

The creditor is required to give a notice in a prescribed form to the borrower and/or the grantor of his intention to sell the collateral. The date of service of the notice must not be less than ten (10) working days before the date of the sale. However, the requirement for notice does not apply to collateral that:

1. is liable to perish within the length of the notice.
2. may decline substantially in value if not disposed of immediately.
3. the cost of its care and storage is disproportionately large compared to its value.
4. consists of inventory or farm products.

 

d. Statement of Account

After the sale, the creditor is required to, within fifteen (15) working days, give a statement of account consisting of the amount realised from the sale, all costs of sale and of the balance due to him or to the borrower or the grantor as the case may be.

e. Distribution of Proceeds of Sale

The proceeds of sale of collateral may also be applied to satisfy specific obligations other than security interest for which reason the sale was conducted. The creditor will first deduct all reasonable costs and expenses of the sale. Then, settle the borrower’s total indebtedness to him. The creditor is obliged to apply the residue to other subordinate security interest(s) registered with the Registry in order of priority. A party who is entitled to damages for any breach of agreement or failure of any other party to discharge his duty or obligation imposed by the Act is also entitled to be paid such damages as determined by the agreement. If there is any amount remaining, the creditor is to pay such amount to the grantor. However, where there is dispute as to the application of the surplus, the creditor may pay it into the court and apply to court for the court to settle entitlements of parties to the surplus. Action on this note may be by way of interpleader summons.

f. Right of Redemption

At any time before the sale takes place, the borrower or grantor or other creditor (as the case may be) possess the right to redeem the collateral upon fulfilment of all the obligations secured by the collateral and payment of all reasonable expenses incurred by the creditor. It is apt to note that the grantor’s right of redemption is higher and above all other person’s right of redemption.

(5.) Duty of Good Faith and Commercial Reasonableness

The Act imposes obligations on parties to secured credit transactions (grantor, borrower and creditor) to act in good faith and in accordance with commercial reasonableness in exercising their rights and discharging their duties under the Security Agreement and the Act.

Conclusion

Indeed, the Act is in actuality, a knight in shining armour to the Nigerian economy and the civility of the society. In view of the duties and obligations imposed on parties to transactions regulated by the Act, it is advisable to have an independent body or firm engaged in the process of the recovery and that adequate legal advice is sought before a Security Agreement is concluded between parties.

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