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.
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.