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Critical Analysis: Rights and Liabilities of Creditors in Secured Credit Transactions

Crystal Plc is a Bank registered in Nigeria to do the business of banking. The Bank was approached by Dann Holdings Ltd for a loan of N300,000,000.00 {Three Hundred Million Naira} to be paid back within 2 years and further executed a deed of legal mortgage covering the company’s property located at Victoria Island Lagos, worth N350,000,000.00 {Three Hundred and Fifty million naira} and the personal guaranty of the Managing Director of Dann Holdings Ltd; Chief S.O. Dann. However, since the grant of the loan the Company has defaulted in payment and the Bank is now left with no other option than to recover the indebtedness from the Company and its Managing Director, Chief S.O. Dann by approaching a court of competent jurisdiction to foreclose the right of the debtor to the mortgaged property and attach the personal properties of Chief S.O. Dann to satisfy the indebtedness.  

INTRODUCTION

Commerce and Investment are the lifeblood of any economy. Financing major economic activities require the grant of credit facilities by banks to investors – individual entrepreneurs, corporate entities, small and large scale industries and multi-nationals who require these credit facilities for investment purposes. To ensure that banks do not lose their money, some form of security is required from the investors {borrowers}, to secure the credit granted to them by the bank so that where the credit facilities are not repaid the bank can exercise its right against the borrower in attaching the security to recover the debt description.

WHAT IS SECURED CREDIT TRANSACTION

A secured credit transaction is simply a loan granted upon the provision of a security {collateral} by the borrower. Consequently, the lender acquires a security interest in the collateral owned by the borrower and is entitled to foreclose on or repossess the collateral in the event of the borrowers’ default in repaying the loan.

CLASSIFICATION OF SECURITY

Security for credit are classified into either Real security, Personal Security and Fixed or floating charge.

a) Real security – Real security confers an estate or interest in the property of the debtor or of a third party on the creditor by way of security. It takes the form of a right in rem over the specific property to the satisfaction of a particular debt so that the debt is a primary charge on the property. By the reality of real security, the property subject matter of the security is in principle, that of the creditor. Thus it is the asset of the debtor that forms the security.

b) Personal security – This is where security is in the form of a personal undertaking which reinforces the debtor’s primary undertaking to make the payment or other performance in case of default by the debtor. We can, therefore, see personal security as the promise by a person to pay another’s debt in the failure of the primary debtor to so pay. Personal security exists in two forms namely: by guarantee or Indemnity.

c) Fixed or floating Charge – Fixed Charge is created on a fixed asset, whether the assets are tangible or intangible while Floating Charge covers the current assets of the company, which varies from time to time. This type of security is often utilized by corporate entities in obtaining loans from banks. A fixed charge supposes that the asset subject of security is already appropriated to the satisfaction of the debt immediately or upon the debtor acquiring an interest thereunder while a floating charge is ambulatory and shifting in nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp. 

CREATING SECURED CREDIT FACILITY

Credit facility can be created over immovable property through a mortgage, a pledge, or charge or over movable property.

BY MORTGAGE

In Bank of the North v Bello (2000) 7 NWLR (Part 664) 224 C. A., the Court defined mortgage as “the creation of an interest in a property defeasible (i.e. annullable) upon performing the condition of paying a given sum of money with interest at a certain time. The legal consequence of the definition is that the owner of the mortgaged property becomes divested of the right to dispose of it until he has secured a release of the property from the mortgagee.”

The essential element of a mortgage is that it is a conveyance of a legal or equitable interest in the property with a provision for redemption (equity of redemption); A mortgage is either Legal Mortgage or Equitable Mortgage.

Note that the laws regulating mortgage of property depend largely on where the property is located because of the different conveyancing laws which operate in Nigeria.

CREATION OF LEGAL MORTGAGE IN CONVEYANCING ACT (C. A) STATES

A legal mortgage is created when an agreement under seal (Deed of Legal Mortgage) is executed for transfer of the legal title from the mortgagor to the mortgagee subject to reconveyance to the mortgagor on payment of the mortgage debt.

All states in defunct Northern Nigeria and Eastern Nigeria are referred to as the C.A. States; Under the C.A. a legal mortgage of a leasehold interest may be created by the following ways:

(i)  Assignmentof the mortgagor’s interest in the land with a covenant for reassignment or re-conveyance of the mortgage. Assignment is the transfer of the unexpired residue of the term in the property to the mortgagee. The advantage of this mode is that there is no reversionary interest in the mortgagor, hence in the event of a default, the mortgagee can pass his entire interest to a purchaser without difficulties. Although there is no privity of contract between the Governor/Headlessor and the mortgagee, there is privity of estate. This makes the mortgagee liable for all the covenants and conditions in the head lease. The mortgagee is bound to observe and perform the restrictive covenant that runs with the land in equity; this is no doubt a hardship on the mortgagee being bound by onerous covenants he was not privy to.

(ii) Sub-demise at least one day shorter than the term of the original lease with a proviso for re-conveyance on the redemption of the mortgage. The disadvantage is that it preserves the mortgagor’s right to reversion. Title in the mortgaged property is vested in the mortgagor. Which means that the mortgagee cannot give a perfect title to the purchaser in the event of default by the mortgagor. This interest can be avoided by drafting device – either a Power of Attorney Clause or a Trust of declaration or both may be inserted to vest the mortgagor’s reversionary title in the mortgagee.

(iii) Deed of statutory mortgageis also another form by which mortgage in the C. A States may be created. Section 26(1) of the Conveyancing Act states in part that “a mortgage of freehold or leasehold land may be made by a deed expressed to be made by way of statutory mortgage, being in the form given in Part I of the Third Schedule to this Act…” The form in the schedule may be modified as circumstances require. The major advantage of this method is that it is simpler to create and may be discharged by a simple receipt; which turns out to be one of its disadvantages also since the receipt is not registrable and the mortgage may continue to be reflected in the register.

PROPERTY AND CONVEYANCING LAW STATES

These are States in the Old Western Region of Nigeria namely – Oyo, Ogun, Osun, Ondo, Ekiti, Edo and Delta.

(i)   Demiseis for a term of years absolute, subject to a provision of cesser upon redemption. – section 108(2) PCL. However, the creation of a legal mortgage even though sanctioned under the PCL is no longer possible because of the Land Use Act which provides that the greatest interest a person can have is a specified term of not more than ninety years (90 years). As a result of this, sub-demise is used for the creation of legal mortgage in the PCL States.

(ii)      Sub-demise or sub-leasemust be at least one day shorter than the term of the lease which is being mortgaged otherwise it will operate as an assignment – section 109(1) PCL. The advantage of the sub-demise is that it allows for second and subsequent mortgages to be created on the lease. Further, where a mortgage is created by sub-demise under the PCL, the two remedial devices, that is, Power of Attorney and Declaration of Trust are not necessary because section 112 of the PCL grants the mortgagee the right to sell the property with the reversionary interest of the mortgagor where he defaults to pay the principal with interest.

(iii) Legal Charge: Section 108(1) of PCL. Section 110 of PCL provides that where a legal mortgage of land is created by a charge by deed expressed to be by way of legal mortgage, the mortgagee shall have the same protection, powers and remedies. The charge must be made by deed and not by writing; otherwise, it shall have no legal effect.

PERFECTION OF LEGAL MORTGAGE

Perfection of Legal Mortgages involves three key stages:

(1) STAMPING: Section 22 of the Stamp Duties Act makes provision for stamping of mortgage instruments for it to be admissible as evidence of a loan agreement in a Court of law

(2)   GOVERNOR’S CONSENT: For a mortgage instrument to be perfected, Governor’s consent must be obtained. The Land Use Act makes any transaction with regard invalid without Governor’s Consent. – Section 22 LUA, AWOJUGBAGBE LIGHT INDUSTRIES LTD V CHINUKWE (1993) 1 NWLR (PT. 270) P.458

(3)   REGISTRATION: A mortgage instrument is a registrable instrument. Registration is needed for it to be admissible in evidence. Also, a registered instrument has priority over other competing instrument and priority is ranked from date of registration – S.53 MPL

Registration of the Mortgage with CAC where a COMPANY is a mortgagor: every mortgage or charge created by a Company must be registered with the Corporate Affairs Commission (CAC) within 90 days from the date of its creation – see s. 197 of CAMA, Cap C20, LFN, 2004

CREATION OF LEGAL MORTGAGES IN LAGOS STATE:  

Creation of Legal Mortgage in Lagos state is regulated by the Mortgage & Property Law (MPL), 2010 of Lagos State.

The mode of creating mortgages in Lagos depends on the nature of interest. The interest may be Right of Occupancy or Leasehold

(a) MODES OF CREATION OF LEGAL MORTGAGES IN LAGOS WHERE THE MORTGAGOR`S INTEREST IS A RIGHT OF OCCUPANCYS.15 MPL: Mortgage of a Right of occupancy can be created either by:

Demise for a term of years absolute, or

Charge by deed expressed to be by way of legal Mortgage, or

Charge by deed expressed to be by way of statutory mortgage as in Form 1 in 2ndSchedule (S.49, MPL)

(b)  MODES OF CREATION OF LEGAL MORTGAGES IN LAGOS WHERE THE INTEREST IS LEASEHOLD, SECTION 16 MPL: Mortgage of leasehold interest can be created either by:

Sub-demise for a term of years absolute less by one day at least, or

Charge by deed expressed to be by way of a legal mortgage, or

Charge by deed expressed to be by way of a statutory mortgage as in Form 1 in 2ndSchedule (S.49, MPL)

PERFECTION OF LEGAL MORTGAGES IN LAGOS STATE:

The following steps are involved:

(1) The usual/general perfection: Governor`s Consent, Stamping and Registration;

(2) Registration of the Mortgage with the Lagos State Mortgage Board — The Mortgagee must deliver the mortgage Deed/Instrument to the Executive Secretary of the Lagos State Mortgage Board for registration — S.53 MPL

(3) Registration of the Mortgage with CAC where a COMPANY is the mortgagor: Every mortgage or charge created by a Company must be registered with the Corporate Affairs Commission (CAC) within 90 days from the date of its creation – see s. 197 of CAMA, Cap C20, LFN, 2004

EQUITABLE MORTGAGE

An equitable mortgage is created whenever there is an agreement to enter into a legal mortgage or where there is a mere deposit of title deed or mortgage executed under hand only. The legal effect of an equitable mortgage is that for the mortgagee to be able to exercise his right of sale over the mortgaged property, he would need to obtain an order of Court to that effect.

Equitable mortgages are created in any one of the following ways:

(a)  Where mortgagor has only an equitable interest, he creates an equitable mortgage. A legal mortgagor can create a second mortgage over the same property in favour of a subsequent mortgagee.

(b)  By delivery of title deeds with requisite intention to create a mortgage. In AFRICAN CONTINENTAL BANK LTD. V. YESUFU977 NCLR, PAGE 212 the court held that the mere deposit of title deed with a bank will not constitute the bank an equitable mortgagee; the borrower shall sign a memorandum under seal contemporaneously with the delivery of the deed.

  (c) By operation of law, the court may also infer a mortgage relationship.

RIGHTS OF A MORTGAGEE IN A MORTGAGE TRANSACTION

Under a mortgage transaction, a mortgagee has the right to do the following:

1. Right to the enforcement of covenant to repay

2. Right to enter into possession

3. Right to Sale of a mortgaged property

The right to sell a mortgaged property depends on two conditions namely:

a) The power of sale must have arisen and

b) the power of sale must have become exercisable

4. Right to the appointment of a Receiver

5. Right to foreclosure of the equity of redemption

BY CHARGE

A charge encumbrances the debtor’s property in favour of the creditor such that the latter can pursue remedies against the property and not merely the debtor in the event of default by the debtor in repaying the debt. The creditor is the chargee and the debtor is the chargor.

CREATION OF A CHARGE: no special words or formalities are needed to create a charge. It is enough if it can be gathered from the instrument an intention by the parties to use the property in question as security

RIGHTS OF THE CHARGEE AND CHARGOR

§ The chargee acquires a right to be paid out of the property securing his loan the moment the charge is created. This right resides in him until it becomes realizable.

§ The chargor has the right to unencumber his property by redemption.

SECURITY OVER MOVABLE PROPERTIES

Securities in credit transactions may also be created using movable properties as collateral, under Secured Transactions in Movable Assets Act 2017 

In general, the Act provides a broad framework governing the creation of security interests in moveable assets, the rights and obligations of parties to registered security agreements, mechanisms for perfecting security interests in moveable assets.

Section 3 (2) extends the rights the Creditor (or lender) has over the assets of the Grantor (the borrower) to assets purchased after the execution of the Security Agreement provided that the asset “falls under the collateral description in the Security Agreement” and the Security Agreement provides that the Security Interest extends to the Grantor’s present and future assets- Section 3 (2) (a) (b) of the STMAA

Further to the above, where an asset is jointly owned by the Grantor and some other persons, the security interest transferred to the Creditor allows him to recover his debt by taking control or disposing the asset to the extent of the Grantor’s rights of ownership in the asset(s)- Section 4 (1) of the STMAA. 

The STMAA also allows the Creditor to take a security interest in an Account Receivable by the Grantor even where the Grantor supposedly enters into any other agreement limiting its right to assign its Account Receivable. In essence, where a business entity has delivered goods to a third party who is expected to make a payment at a specified period of time, the payment can be assigned to a Creditor who has given a loan to that business entity. Such transfer of payment is effective at all times according to the provisions of the STMAA regardless of any other agreement the Creditor may have signed that purports to limit its ability to transfer such payments.                                           

Section 44 of the STMAA preserves the right of the Creditor to dispose of Collateral by sale, lease, license or other forms of disposal. The disposal may be done through an auction, public-private sale or any other method provided for in the Security Agreement. The Creditor, however, has a duty to obtain a reasonable price available at the time of the sale or disposal.

CONCLUSION

The risk associated with money lending is quite high, therefore the need to protect the creditor against loss in the process of engaging in this venture. The legal mechanisms put in place by law seek to protect the lender against unwarranted loss while the corresponding liabilities are meant to remove the creditor from the realms of arbitrariness or from taking undue advantage over the debtor.  

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