The Secured Transactions in Movable Assets Act [previously the Secured Transactions in Movable Assets Bill (SB. 261)] was passed into the law by the National Assembly in 2017. On Tuesday May 30th, 2017, Acting President Yemi Osinbajo signed the bill into law. The Secured Transactions in Movable Assets Act (“STMAA”) which is otherwise known as the Collateral Registry Act presents a formal regulatory framework for government efforts to stimulate responsible lending to micro, small and medium enterprises (MSMEs) while similarly providing a mechanism for efficient registration of security interests in movable property and the realisation of such interests in the event of a default. Furthermore, the STMAA seeks to promote financial inclusion, enhance access to credit and establish a Collateral Registry to facilitate the grant of loans secured by movable assets.
The explanatory note of the STMAA reads thus: “This Act provides for secured transactions, registration and regulation of security interests in movable assets.”
Scope of the Act
The Act applies to loan agreements that transfer rights in the movable assets of the borrower to the lender pending the discharge of the borrower’s obligation to pay his debt, where such an agreement is drafted to be governed by the provisions of the STMAA.
Security Interest and Security Agreement
Section 3 (1) of the STMAA defines Security Interest as interest “created by a Security Agreement between a Grantor and Creditor” while 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. This is similar to creating a floating charge on the present and future assets of the borrower and should provide some assurance to the lending company about the ability to recover its loan as long as the borrower remains a going concern.
For the purpose of adequately describing the collateral, the Security Agreement must reflect the “item, kind, type or category, year of manufacture or any other description” for assets presently owned by the Grantor. The Act however pre-empts a possible dispute over future assets and provides a remedy in Section 6(1)(c) which states that a collateral is adequately described if the Security Agreement contains a statement that “a security interest is taken in all the present and future assets of the grantor” and a description of the insurance cover on the collateral. The additional requirement of an insurance cover may however create an additional burden as this is bound to come at an extra cost.
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). 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.
It should be noted that a Security Agreement must contain the description of the Collateral in which the Creditor is being granted a security interest. The security interest however extends to the identifiable or traceable proceeds of the Collateral, whether or not the Security Agreement contains a description of the proceeds. To derive these benefits however, the Creditor must take steps to perfect the Security Agreement by registering the Financing Statement at the National Collateral Registry created by the Act. The Creditor may indeed take possession of the asset where a default arises but in the event that he is challenged by the Grantor, mere possession may not avail him if he has failed to perfect the Security Agreement.
Registering a Financing Statement
Any company that wishes to engage in the business of providing credit access or loans to MSME’s may do so under the STMAA as the Act simply defines a Creditor as “the person granting a facility on the back of a security interest created under this Act.” The STMAA does not prescribe any minimum benchmark for granting loan facilities as a Creditor; it rather places emphasis on the registration of the Financing Statement at the National Collateral Registry. In the same vein, both individual and corporate bodies can enter into Security Agreements under the STMAA with the intention to use their movable assets as Collateral which must be registered with the Collateral Registry. In this regard, Section 11 of the Act states that the Collateral Registry shall:
- receive, register and store information about security interests in movable assets;
- provide access to persons who may seek information on security interests from the Collateral Registry; and
- perform such other functions as may be prescribed by Regulations made under this Act.
The Financing Statement to be registered with the Collateral Registry must contain the following information listed in Section 14 of the Act:
- Grantor type description: individual, micro, small or large business;
- In the case of a Company, Co-operative or registered Business Name, the unique identification number which shall be the Corporate Affairs Commission registration number or other registration number issued by the appropriate authority for registering these types of debtors;
- In the case of an individual, the unique identification number derived from approved biometric based identification, gender, name, address including telephone and date of birth;
- the name and address of the creditor or its representative;
- a description of the collateral;
- the maximum amount for which the secured obligation may be enforced;
- the period of time for which the registration is to be effective; and
- such other information as the Registrar may consider necessary.
Registration of a Financing Statement gives the Creditor priority over Collateral where there is a dispute with any other Creditor laying claims to the same collateral. Persons intending to give out loans may also take advantage of the search facility provided by the Collateral Registry to reduce the possibility of taking a security interest in a Collateral that has already been assigned.
Summary of the Procedure under the STMAA
- Execution of a Security Agreement (with the required information) between the debtor and secured creditor (Finance Company).
- The security interest created by the security agreement is perfected by registration in the prescribed form (Financing Statement) by the Secured Creditor at the Collateral Registry.
- A Financing Statement is effectively registered when “a unique registration number, date and time are assigned to it by the Collateral Registry”. After registration, a “Confirmation Statement” is to be provided to the secured creditor.
- The registration of a financing statement shall be effective until the earlier of; (a) the expiration of the term specified in the financing statement; or (b) its cancellation.
In the event of default, a creditor is to give the Borrower and the Grantor a notice of the default and an intention to repossess the collateral. By the provision of Section 40(2), the notice may be delivered by hand, courier service, electronic mail, registered mail or any other means agreed to under the Security Agreement.
The STMAA empowers the Creditor to take possession 10 (Ten) days after sending the notice of default. He may also choose not to take possession but simply render the Collateral inoperative. Where he decides to take possession, he may do so through or without the courts. Section 40(5) of the STMAA gives room for the Creditor to request the assistance of the Nigeria Police Force where he does not seek to use the instrumentality of the court but limits the role of the police to a “peaceable repossession” of the collateral.
Section 41 of the STMAA also establishes a ‘Mediation and Dispute Resolution Panel’ to serve as the first recourse for mediation and settlement of any civil dispute arising from the relationship between the Creditor and the Grantor. This may considerably stand as an effective check on possible excesses that may result from seeking the assistance of the police in effecting supposedly peaceable repossession for instance.
Section 44 of the STMAA nonetheless 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.
A Creditor who intends to sell a Collateral shall, not less than 10 working days before selling the Collateral, send notice in the manner stipulated in section 40 (2) of the STMAA to the following:
- the Borrower;
- the Grantor; and
- any other Creditor who has registered a Financing Statement in respect of the Collateral before the Creditor repossessed the Collateral.
The requirement of notice will however be waived where the Collateral is such as may perish within 10 working days of the repossession, the Creditor believes on reasonable grounds that the Collateral will decline substantially in value if it is not disposed of immediately, the cost of care and storage of the Collateral is disproportionately large in relation to its value or the Collateral consists of Inventory or Farm Products.
The Act is a commendable piece of legislation, the diligent implementation of which is guaranteed to improve access to credit for investors especially small and medium enterprises. Such investors have over the years faced the challenge of being turned down by banks and other financial institutions for not having real property or such other valuable assets to be used as security. The growth of small businesses has therefore been limited in the absence of required funding to expand their operations with a consequential effect of limiting job creation and rise of gross domestic product (GDP). As an alternative to loans from financial institutions that require real property, small business owners may now be able to secure small loans to gradually grow their enterprises by presenting such movable assets like vehicles and electronic items that they may easily be able to produce. It is worthy of note that the STMAA not only improves access to credit but also facilitates the protection of creditors making their financial resources available to support small businesses. Through the operations of the Collateral Registry, creditors will be able to obtain required information to guide their decision making when approached for loans and be guided on the enforcement of the security attached to the loans provided.
It is our hope that more enlightenment will be provided by relevant stakeholders on the implementation of the Law and also that the Collateral Registry will be effectively administered in line with global best practices. As legal practitioners with over 30 (thirty) years of advising businesses on financing options and implications, it is our advice that creditors and borrowers seeking to transact under the framework of the STMAA seek proper counsel before drafting or executing the Security Agreement and other relevant documents. Concerned business entities seeking clarifications in this regard and other issues discussed above may therefore contact us at any of our offices or the various channels of communication provided in this report.