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Position of creditors
Forms of security
What are the main forms of security over moveable and immoveable property and how are they given legal effect?
A pledge is created when movable and immovable property is delivered by a debtor to its creditor as security for a monetary obligation. The pledgor transfers the possession and use of the asset to the pledgee as guarantee for the payment of a loan with the common intention of redeeming the asset on payment of the debt. Under Nigerian law, property can be pledged only if it transferrable by delivery of possession.
Mortgage Under Nigerian law, taking security over real property is usually done by way of legal mortgage. This involves the transfer of the legal title in the property to the creditors as security for the loan, subject to the borrower’s equity of redemption (ie, the right to have the property transferred back once the debt has been repaid). The mode of creation of a legal mortgage over real property in Nigeria depends on whether the property is situated in a Conveyancing Act state or a Property and Conveyancing Law state.
Charge Another way in which creditors can take security is by way of a charge. A charge is an equitable proprietary interest granted by way of security without the transfer of title or assets in the discharge of liability. Chares are distinct from a mortgage, as the creditor obtains neither legal nor beneficial title to the charged asset. However, the chargee obtains an equitable proprietary interest in the asset by way of security. A charge created by a company may be fixed or floating.
A fixed charge results in the acquisition of immediate real rights over the property and prevents the charger from dealing with the property as soon as the charge is created, except where the chargee’s consent has been obtained. Assets subject to a fixed charge cannot be disposed of without the chargee’s consent.
A floating charge is an equitable charge over the whole or a specified part of the company’s undertakings and assets. The company is allowed to continue to deal with such assets until the security becomes enforceable, in which case the holder – pursuant to the power in the security deed – will appoint a receiver or manager or enter into possession of such assets. The courts may appoint a receiver or manager of the assets on application by the holder or if the company goes into liquidation.
Floating charges can include cash and the company’s uncalled capital and can be extended to cover the company’s future property. The essence of a floating charge is to enable the charger, while continuing to carry on its day-to-day business, to charge its changing assets as security for loans.
Before any security is recognised, it must have been validly created under the applicable law and perfected. The perfection of a security interest in the assets of a Nigerian company is generally determined by:
- the type of asset over which the security interest is created; and
- the type of security interest which will be created.
In accordance with Section 197 of the Companies and Allied Matters Act (CAP C20, Laws of the Federation of Nigeria, 2004), every charge created by a company that is intended to provide security will be void against the liquidator and any creditor of the company unless it is registered with the Corporate Affairs Commission (CAC) within 90 days of its creation.
While the failure to register a registrable charge with the CAC does not render the document illegal or non-binding among the parties, nor does it prejudice any obligation for repayment of monies secured by the charge, it does renders the security void against the liquidator or any creditor. Effectively, the secured creditor loses priority to other competing creditors that validly registered their security.
In the event of breach by a borrower, creditors may enforce their security in Nigeria by means of foreclosure, sale, the appointment of a receiver or through a court action to recover the debt.
Ranking of creditors
How are creditors’ claims ranked in insolvency proceedings?
In insolvency proceedings, creditors are ranked according to the type of security that they possess over the insolvent company’s assets. In accordance with Section 494 of the Companies and Allied Matters Act, secured creditors with fixed charges are paid first, followed by secured creditors with floating charges and then unsecured debentures.
Can this ranking be amended in any way?
This ranking can change if the terms of the floating charge prohibit the company from granting any later charge with priority over the floating charge and the person in whose favour such later charge was granted had actual notice of such prohibition when the charge was granted.
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