Re­view of Col­lat­eral Reg­istry Act and prospects for credit ac­cess ex­pan­sion in Nige­ria

China in 2007, en­acted a prop­erty law, which strength­ened its frame­work for cre­at­ing se­cu­rity over mov­able as­sets. The coun­try has since wit­nessed a 21% an­nual growth in the num­ber of com­mer­cial loans se­cured by mov­able as­sets.

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Back­ground

Out of the es­ti­mated 37 mil­lion mi­cro, small, and medium-sized en­ter­prises (MSMEs) in Nige­ria, only 31% are able to ac­cess credit for their busi­nesses from lo­cal fi­nan­cial in­sti­tu­tions (com­mer­cial and mi­cro fi­nance banks). As at Q4 2015, loans to MSME's ac­counted for a mea­gre 0.1% of to­tal credit ad­vanced by com­mer­cial banks.

This low credit ac­cess was pri­mar­ily due to MSME's lack of credit his­tory and their in­abil­ity to pro­vide ac­cept­able col­lat­eral, which usu­ally sees them fall­ing short of the un­der­writ­ing con­di­tions of the banks.

It is com­mon knowl­edge that prior to the en­act­ment of the Se­cured Trans­ac­tion in Mov­able As­sets Act (pop­u­larly called Col­lat­eral Reg­istry Act), there was no le­gal frame­work for the reg­is­tra­tion and en­force­ment of se­cu­rity in­ter­est in mov­able as­sets (such as au­to­mo­biles, plants and ma­chin­ery, ac­count re­ceiv­ables, com­modi­ties, amongst oth­ers). As a re­sult, com­mer­cial lenders, over the years, re­stricted col­lat­eral to real es­tate and other forms of credit guar­an­tee prod­ucts, which are typ­i­cally re­quired to be cash-backed.

MSME's have, there­fore, had to rely prin­ci­pally on self-fund­ing and in­for­mal

credit sup­port (from friends and fam­ily) to sus­tain their busi­nesses. This dearth of liq­uid­ity has sig­nif­i­cantly ham­pered real sec­tor growth and the con­tri­bu­tion of MSMEs to eco­nomic de­vel­op­ment. (MSMEs cur­rently con­trib­ute about 47% of real GDP with growth ca­pac­ity that is al­most nonex­haus­tive.)

In a bid to im­prove fi­nan­cial in­clu­sion and MSMEs ac­cess to fi­nance, the Cen­tral Bank of Nige­ria (CBN), in Septem­ber 2014, in­tro­duced the Col­lat­eral Reg­istry Reg­u­la­tion (the Reg­u­la­tion), which es­tab­lished the Na­tional Col­lat­eral Reg­istry (NCR), to fa­cil­i­tate the use of mov­able as­sets as se­cu­rity for credit and also pro­vide an ef­fi­cient process of reg­is­tra­tion and re­al­iza­tion of such se­cu­rity in­ter­est with­out jeop­ar­diz­ing the in­tegrity of the fi­nan­cial mar­ket. The Reg­u­la­tion was un­able to garner the de­sired im­pact given the fact that it lacked leg­isla­tive back­ing that would guar­an­tee its en­force­ment.

To re­in­force the ob­jec­tives of the Reg­u­la­tion as well as give it the back­ing of law, the Na­tional As­sem­bly – as part of the 60-day na­tional ac­tion plan on ease of do­ing busi­ness – com­mit­ted to ex­pe­dite the pas­sage of the bill, which was spon­sored by the Pres­i­den­tial En­abling Busi­ness En­vi­ron­ment Coun­cil (PEBEC is re­spon­si­ble for im­ple­ment­ing the FG's ease of do­ing busi­ness pol­icy). The bill was fi­nally as­sented by the Act­ing Pres­i­dent, Yemi Os­in­bajo, on 30th May, 2017.

It is ex­pected that the new law will en­hance re­spon­si­ble lend­ing to MSMEs and boost real sec­tor growth.

Key Pro­vi­sions Of The Act

1. Cre­ation and recog­ni­tion of se­cu­rity

in­ter­est in mov­able as­sets

The Act rec­og­nizes and gives the back­ing of the law to any se­cu­rity in­ter­est cre­ated over mov­able as­sets once an agree­ment is ex­e­cuted be­tween the Gran­tor (the provider of the Se­cu­rity, which need not be the bor­rower) and the Cred­i­tor, pro­vided that:

(i) the Gran­tor has a valid in­ter­est over

the mov­able as­set;

(ii) the con­tract re­flects the in­ten­tion of the Gran­tor and Cred­i­tor to cre­ate a se­cu­rity in­ter­est;

(iii) the con­tract suf­fi­ciently iden­ti­fies the

Gran­tor and the Cred­i­tor;

(iv) the con­tract discloses the value of the se­cured obli­ga­tion in­clud­ing the tenor; and the con­tract ad­e­quately de­scribes the col­lat­eral and con­firms the agree­ment of the par­ties to sub­mit to ar­bi­tra­tion, as first re­course in the event of any re­lated dis­pute.

The Act fur­ther pro­vides for the re­quire­ment to per­fect the se­cu­rity in­ter­est through its reg­is­tra­tion at the NCR to en­able the Se­cured Cred­i­tor (the ben­e­fi­ciary of such se­cu­rity in­ter­est) to en­joy the ben­e­fit of pri­or­ity.

Un­like the pre­vi­ous Reg­u­la­tion, this Act is broader in scope and en­vis­ages that se­cu­rity in­ter­ests may be cre­ated to se­cure obli­ga­tions to en­ti­ties other than fi­nan­cial in­sti­tu­tions reg­u­lated by CBN. The Act also at­tempts to sig­nif­i­cantly re­duce cost and sim­plify the pro­cesses of cre­at­ing, per­fect­ing and en­forc­ing se­cu­rity in­ter­ests in mov­able as­sets.

(v)

2. Na­tional Col­lat­eral Reg­istry

The Act re-es­tab­lishes the Na­tional Col­lat­eral Reg­istry as an on­line repos­i­tory for in­for­ma­tion re­lat­ing to se­cu­rity in­ter­ests cre­ated in mov­able as­sets. The NCR is to be domi­ciled at the CBN and su­per­vised by a Regis­trar ap­pointed by the Gov­er­nor of the CBN. The pri­mary func­tions of the NCR in­clude: col­lat­ing and stor­ing in­for­ma­tion about se­cu­rity in­ter­ests cre­ated in mov­able as­sets and pro­vid­ing ac­cess to in­for­ma­tion on se­cu­rity in­ter­ests to the pub­lic.

The NCR is ex­pected to op­ti­mise in­for­ma­tion stor­age and re­cov­ery through ef­fi­cient use of tech­nol­ogy. This al­lows fi­nan­cial in­sti­tu­tions to have re­al­time ac­cess to in­for­ma­tion on the sta­tus of mov­able as­sets to be uti­lized as se­cu­rity by cred­i­tors. It will also guar­an­tee timely reg­is­tra­tion of se­cu­rity agree­ments ex­e­cuted in favour of Se­cured Cred­i­tors to en­sure the ben­e­fit of pri­or­ity. It will af­ford the pub­lic the op­por­tu­nity to run a check at the Reg­istry to de­ter­mine the sta­tus of any mov­able as­set (whether or not it is en­cum­bered) be­fore trans­act­ing on it.

3. Per­fec­tion of se­cu­rity

The Act enu­mer­ates the pro­ce­dure for the per­fec­tion of se­cu­rity in­ter­ests in mov­able as­sets. It re­quires a fi­nanc­ing state­ment to be reg­is­tered at the Reg­istry (a fi­nanc­ing state­ment is the pre­scribed form in which in­for­ma­tion for reg­is­tra­tion is pro­vided to the Reg­istry). The fi­nanc­ing state­ment con­tains a de­scrip­tion of the Gran­tor, name an ad­dress of the Cred­i­tor or its rep­re­sen­ta­tives, a de­scrip­tion of the col­lat­eral and the pe­riod dur­ing which the reg­is­tra­tion shall re­main ef­fec­tive.

The Act does not man­date the per­fec­tion of a se­cu­rity in­ter­est cre­ated in mov­able as­sets; nei­ther does a fail­ure to per­fect nul­lify any se­cu­rity in­ter­est cre­ated. As is with other forms of se­cu­rity in­ter­est, a fail­ure to reg­is­ter or per­fect a se­cu­rity in­ter­est cre­ated over mov­able as­sets re­sults in the Se­cured Cred­i­tor los­ing pri­or­ity where there is a com­pet­ing in­ter­est, which is reg­is­tered.

The Act, with due con­sid­er­a­tion to the MSMEs, seeks to min­i­mize the cost of per­fec­tion by dis­ap­ply­ing the pro­vi­sions of the Stamp Du­ties Act and con­se­quently stamp duty payable in re­spect of the Se­cu­rity Agree­ment (as­sessed at the rate of 0.375% of the value of the se­cured sum). Whilst this re­duces the cost of funds of for the Bor­rower (typ­i­cally cost of per­fec­tion is borne by Bor­row­ers), it should be noted that, cor­po­rate Bor­row­ers (Com­pa­nies) will still be re­quired to pay about 0.01% of the mon­e­tary value of the se­cu­rity in­ter­est to the Cor­po­rate Af­fairs Com­mis­sion to reg­is­ter any se­cu­rity in­ter­ests cre­ated over their as­sets as re­quired by the Com­pa­nies and Al­lied Mat­ters Act.

4. Re­al­i­sa­tion of se­cu­rity in­ter­est

a) Pri­or­ity of se­cu­rity in­ter­est

Per­fec­tion of the se­cu­rity in­ter­est af­fords the Se­cured Cred­i­tor pri­or­ity when at­tempt­ing to en­force or, in the event of wind­ing up, liq­ui­da­tion or bankruptcy of the Obligor. Fur­ther­more, a per­fected se­cu­rity in­ter­est will have pri­or­ity and rank ahead of other un­reg­is­tered se­cu­rity in­ter­ests, un­se­cured cred­i­tors, and judg­ment cred­i­tors (pro­vided the se­cu­rity in­ter­est is per­fected prior to the grant of the judg­ment) (The Act in this re­gard dis­ap­plies the pro­vi­sions of the Sher­riff and Civil Pro­ce­dure Act which grants pri­or­ity to the right of a judg­ment cred­i­tor). Where there are two reg­is­tered in­ter­ests over the same col­lat­eral, pri­or­ity will be de­ter­mined by the or­der of reg­is­tra­tion.

The Act equally pre­serves the right of a bona fide pur­chaser who pur­chases or leases col­lat­eral in the or­di­nary course of busi­ness with­out knowl­edge of the ex­ist­ing se­cu­rity in­ter­est. The Se­cured Cred­i­tor, in this case, is per­mit­ted to trace and claim in the hand of the Gran­tor the pro­ceeds of sale of the col­lat­eral.

b) En­force­ment

In the event of de­fault by the Obligor, there

are a num­ber of op­tions avail­able to the Se­cured Cred­i­tor in re­la­tion to the en­force­ment of its se­cu­rity in­ter­est. These in­clude the right to re­pos­sess the As­set; the right to dis­pose of the as­set by way of a sale, lease or li­cence; and the right to ren­der the as­set in­op­er­a­ble where it is not eas­ily re­cov­er­able. The fol­low­ing are ju­di­cial reme­dies in the Act. How­ever, the Se­cured Cred­i­tor is not pre­cluded from seek­ing other ju­di­cial reme­dies avail­able out­side of the Act.

Re­pos­ses­sion: A Se­cured Cred­i­tor is per­mit­ted to re­pos­sess the col­lat­eral pur­suant to a court or­der or with­out a Court Or­der where the Gran­tor has con­sented to the re­pos­ses­sion in the Se­cu­rity Agree­ment; in which case he may seek the as­sis­tance of the Nige­ria Po­lice hav­ing ju­ris­dic­tion over the lo­ca­tion of the as­set upon pre­sen­ta­tion of the se­cu­rity agree­ment and the con­fir­ma­tion state­ment (a con­fir­ma­tion state­ment is the doc­u­ment re­ceived from the NCR which ev­i­dences the reg­is­tra­tion of a se­cu­rity in­ter­est). The abil­ity to re­pos­sess se­cu­rity with­out the cum­ber­some fore­clo­sure pro­cesses is a wel­come de­vel­op­ment, as it has the ca­pac­ity to de­liver prompt and timely en­force­ment of se­cu­rity and liq­ui­da­tion of the se­cured as­set.

Trac­ing: The Act per­mits a Se­cured Cred­i­tor to trace its in­ter­est in the col­lat­eral to the pro­ceeds of sale of such col­lat­eral; and its in­ter­est in goods that have been comin­gled or be­come part of a prod­uct. The Act recog­nises that a se­cu­rity in­ter­est over an as­set, when per­fected au­to­mat­i­cally, gives the Se­cured Cred­i­tor a right over the pro­ceeds of its sale and over the as­set even when it has been co-min­gled with other ma­te­ri­als to make a prod­uct or be­come a part of a mass. This pre­sup­poses that a se­cured in­ter­est can only be ex­tin­guished by a sat­is­fac­tion of the un­der­ly­ing obli­ga­tion; a sale or dis­si­pa­tion of the as­set on its own will not ex­tin­guish such in­ter­est.

Ren­der­ing col­lat­eral in­op­er­a­ble: The Act rec­og­nizes that there may be sit­u­a­tions where it is in­ex­pe­di­ent to or where the col­lat­eral can­not be eas­ily moved from the gran­tor's premises. In such sit­u­a­tion, the Se­cured Cred­i­tor is per­mit­ted to take steps to ren­der the col­lat­eral in­op­er­a­ble. This could in­volve dis­man­tling and tak­ing cus­tody of the mo­tor in a ma­chine ca­pa­ble of ren­der­ing the fa­cil­ity fully dys­func­tional.

It should be noted that the Act does not pre­clude the Se­cured Cred­i­tor from ex­er­cis­ing other ju­di­cial reme­dies avail­able to it un­der any other law such as ap­point­ing a re­ceiver; and in­sti­tut­ing bankruptcy or wind­ing up pro­ceed­ings against the Obligor.

c) Redemp­tion

The Act rec­og­nizes the Gran­tor's right of redemp­tion over the As­set. Once the se­cured obli­ga­tion has been per­formed, the se­cu­rity in­ter­est over the as­set au­to­mat­i­cally ex­tin­guishes and the Se­cured Cred­i­tor's eq­uity of redemp­tion crys­tal­lizes. Fur­ther­more, the Obligor may at any time prior to the sale of the as­set, re­deem the se­cu­rity by per­form­ing his obli­ga­tion and pay­ing back any rea­son­able ex­pense, which may have been in­curred by the Se­cured Cred­i­tor in fa­cil­i­tat­ing a sale.

d) Can­cel­la­tion

A fi­nanc­ing state­ment can be can­celled at any time upon the reg­is­tra­tion of a can­cel­la­tion state­ment by the Se­cured Cred­i­tor. Where the Obligor has per­formed all obli­ga­tions un­der the Se­cu­rity Agree­ment, the Se­cured Cred­i­tor shall be re­quired to file a can­cel­la­tion state­ment within fif­teen (15) work­ing days of re­ceiv­ing a re­quest from the Gran­tor or Obligor. Where a Se­cured Cred­i­tor has an ob­jec­tion to the can­cel­la­tion de­mand, he shall re­spond within seven days of re­ceipt of the no­tice. Where the Se­cured Cred­i­tor fails to ef­fect the can­cel­la­tion, the Obligor may ap­peal to the Regis­trar show­ing cause why the reg­is­tra­tion should be can­celled by the Regis­trar. The Regis­trar's de­ci­sion in this re­gard is fi­nal and bind­ing on all par­ties.

5. Dis­pute Res­o­lu­tion

The Act es­tab­lishes a Dis­pute Res­o­lu­tion Panel whose man­date is to me­di­ate and set­tle all civil dis­putes aris­ing from se­cured trans­ac­tions un­der the Act in a timely man­ner. The Panel is to be gov­erned by reg­u­la­tions to be made pur­suant to this Act. It is our ex­pec­ta­tion that the Panel will be con­sti­tuted by per­sons knowl­edge­able in fi­nance and le­gal mat­ters to fa­cil­i­tate ef­fi­cient res­o­lu­tion of dis­putes.

Whilst the Act rec­og­nizes the ju­ris­dic­tion of the high courts over mat­ters re­lat­ing to com­mer­cial bor­rower and lender claims, it at­tempts to com­pel par­ties to a se­cu­rity agree­ment to use the Panel as a first re­course to re­solve civil dis­putes be­fore ex­plor­ing the right to seek re­course be­fore a court of com­pe­tent ju­ris­dic­tion. In re­spect of all crim­i­nal mat­ters, those shall at all times be de­ter­mined by the court of law.

Po­ten­tial Im­pact of the Act

China in 2007, en­acted a prop­erty law, which strength­ened its frame­work for cre­at­ing se­cu­rity over mov­able as­sets. The coun­try has since wit­nessed a 21% an­nual growth in the num­ber of com­mer­cial loans se­cured by mov­able as­sets. Liberia also in con­cluded its se­cu­rity in mov­able as­sets re­forms in 2014. This has seen dis­burse­ment of fa­cil­i­ties of over US$277 mil­lion se­cured by mov­able as­sets be­ing reg­is­tered within a year, not­with­stand­ing the Ebola out­break ex­pe­ri­enced in the coun­try in the same year.

The pro­mul­ga­tion of the Act sends a pos­i­tive sig­nal to lo­cal and in­ter­na­tional lenders that the na­tion is strength­en­ing ac­cess to credit in­for­ma­tion and the ease of en­forc­ing se­cu­rity cre­ated over the as­sets of MSMEs. This pos­i­tive step is ex­pected to en­cour­age a siz­able in­flow of funds to­wards the group. It is also ex­pected that this will drive growth and ca­pac­ity amongst lo­cal auc­tion firms, and the com­modi­ties mar­ket, which will be the mar­kets for dis­posal of many of these mov­able as­sets.

The Act has also con­sciously set the tone for the re­moval of un­nec­es­sary red tape in our reg­is­tra­tion pro­cesses, with the use of tech­nol­ogy to fa­cil­i­tate re­al­time ser­vice de­liv­ery by the NCR. The ap­proach to the cost­ing of ser­vices at the NCR as the dis­ap­pli­ca­tion of stamp du­ties shows a strong com­mit­ment of govern­ment to de­liver on its ease of do­ing busi­ness mantra.

Con­clu­sion

By deep­en­ing the pool of as­sets, which may form the ba­sis of a reg­is­ter­able se­cu­rity in­ter­est, and pro­vid­ing in­cen­tives to reg­is­ter such se­cu­rity, the Act is poised to have a sig­nif­i­cant im­pact on fi­nan­cial in­clu­sion and ac­cess to credit in the Nige­rian mar­ket. The suc­cess of the ini­tia­tive will, how­ever, be hinged on the abil­ity of the will­ing­ness of our fi­nan­cial in­sti­tu­tions to pro­vide credit to this oth­er­wise ex­cluded mar­ket seg­ment.

Cen­tral Bank of Nige­ria head­quar­ters, Abuja

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