nigeria

Udo Udoma & Belo-Osagie Barristers and Solicitors

Introduction

1. Are there any requirements foreign lenders are required to comply with when advancing a loan to a domestic borrower in your jurisdiction?

There are no mandatory requirements that a foreign lender must comply with in order to advance a loan to a borrower in Nigeria. Having said that, Nigeria’s foreign exchange regulations stipulate that in order for a borrower to remit interest and principal payments to a lender through the official foreign exchange market, the lender must have obtained evidence, in the form of a certificate of capital importation issued by a Nigerian bank (commonly referred to as a “CCI”), to the effect that the foreign loan was brought into Nigeria. In the absence of a CCI, the borrower will be unable to access the official foreign exchange market for the purpose of remitting interest and principal payments but could, if it has access to independent sources of foreign currency (i.e. as would a borrower that generates foreign currency through exports) lawfully make such interest and principal payments from its own resources.

2. Are there any obligations domestic corporate borrowers are required to comply with when entering into a foreign loan?

Save for those formalities associated with procuring loans generally, Nigerian companies are not required to comply with any particular formalities or requirements, in order to enter into a foreign loan. The usual formalities that a Nigerian company must comply with in order to borrow, whether domestically or from a foreign lender, include ensuring that the company’s memorandum and articles of association provide that the company with the requisite borrowing powers, and ensuring that the board of directors of the company has approved the borrowing in question.

Once the loan has been obtained by a Nigerian company, the company will be required to withhold tax on any interest payments made to the foreign lender at a rate that is dependent on whether the lender is domiciled in a country that has entered into a double taxation treaty with Nigeria. The tax, when withheld from interest and paid over to the Federal Inland Revenue Service, will be the final tax payable to the Nigeria tax authorities on that income in the case of a foreign lender.

3. Are there any requirements and/ or considerations which may impact a foreign lender's ability to enforce rights and obligations under a loan agreement and/or security documents?

A foreign lender will suffer no particular disadvantage, relative to a local lender, in proceedings that are brought to enforce a loan agreement and / or security document that is governed by Nigerian law, save that the foreign lender will be required to appoint an agent for service of process in Nigeria.

In the case of agreements and/or security documents that have a foreign (i.e. non-Nigerian) governing law the courts of Nigeria will, as a general rule, give effect to the parties’ choice of a foreign governing law and will, accordingly, apply such law in the determination of any claims that come within their jurisdiction. The Nigerian Supreme Court has held, however, that the parties’ choice of law is not conclusive and that to be effective the choice of law must be “real, genuine, bona fide (in good faith), and reasonable”. The Nigerian Supreme Court has further held that the foreign law chosen by parties as the proper law of their contract” must have some relationship to and must also be connected with the realities of the contract considered as a whole”.

Where a lender has obtained a judgment (a “foreign judgment”) in a court other than a Nigerian court, the lender can enforce the judgment in the Nigerian courts in either of two ways. Where the judgment has been obtained in the courts of a country that accords reciprocal treatment to the judgments of Nigerian courts, a lender can enforce such judgment in the Nigerian courts by virtue of either the Reciprocal Enforcement of Judgments Act, Chapter 175, LFN, 1958 (in the case of the judgments of an English court) or the Foreign Judgments (Reciprocal Enforcement) Act, Chapter 35, Laws of the Federation of Nigeria, 2004.

A foreign judgment will not be enforced if it is contrary to Nigeria’s public policy, or does not relate to a definite sum; or if it is made by a court of the foreign country that has no jurisdiction over the matter or where the defendant was not given an opportunity to present its case. A foreign lender also has the option of suing upon or bringing a fresh action for the recovery of a debt, based on the foreign judgment.

As regards foreign arbitral awards, Nigeria is a party to the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards and Nigeria’s  Arbitration Act (the Arbitration and Conciliation Act (Chapter A18), LFN 2004) is modelled very closely upon the UNCITRAL model law and its rules.




Assets Available as Collateral

4. What are the assets available as collateral in your jurisdiction and what are the most common forms of security granted over it? (When answering the question please consider the related questions below.)

What is considered to be real estate/immovable property in your jurisdiction?

The types of assets considered to be real estate / immovable property in Nigeia include bare land, residential and industrial buildings constructed on such land, and any property (referred to as “fixtures”) that is so firmly attached to the land and/or buildings that the law deems such property to have become part of the land.

What are the most common forms of security granted over real estate and how is security created and perfected (i.e. made valid and enforceable) in relation thereto?

We have assumed, for purposes of our response to this question, that the security in question will be created by a company. This being the case, a company can create security over its real estate assets by way of a legal or equitable mortgage or, alternatively, by way of a charge.

Mortgage:

A legal mortgage over real estate involves the transfer of legal title to the property by one party (mortgagor) to another (mortgagee), as security for the payment of a debt or discharge of some other obligation, subject to the condition that such title shall be re-conveyed to the mortgagor when the debt is paid or the obligation has been fully discharged. A legal mortgage gives the mortgagee immediate rights against the secured property and must be created by a deed.

An equitable mortgage of real estate, on the other hand, is created by the borrower depositing the title deeds to the property with the lender, with or without a memorandum of deposit. Unlike a legal mortgage which gives the lender immediate rights over the mortgaged property, an equitable mortgage creates personal rights against the mortgagor, which rights the mortgagee can only exercise with an order of the court.

In order to perfect a legal mortgage that has been created by a company over real estate three main steps must be taken. The first step, which is required by Nigeria’s Land Use Act (Chapter L5), Laws of the Federation of Nigeria 2004, is to obtain the consent of the governor of the state in which the land is situated, for the mortgage to be created (“Governor’s consent); the second step is to submit the mortgage deed to the Stamp Duties Office so that stamp duty can be assessed at an ad-valorem rate (tax on a piece of real estate) and paid by the mortgagee within the time prescribed by law (although payment of stamp duty is an obligation of the mortgagee, lenders will usually seek, contractually, to pass on this obligation to the Borrower); and the third step is to register the stamped mortgage on which the governor’s consent has been endorsed, at the relevant lands registry. Simultaneously with registering the mortgage at the Lands Registry, the mortgage will have to be registered at the Corporate Affairs Commission (“CAC” – i.e. Nigeria’s companies registry) as a charge created by the company.

Charge:

A charge created by a company over real estate does not transfer title or property in the charged asset to the chargee, but simply creates a security interest in favour of the charge, which can be enforced upon the occurrence of specified events. Two types of charges can be created by a company over real estate, namely, a fixed charge or less usually, a floating charge. A fixed charge is created over specific property of a chargor, attaches to the charged property from the time of creation and restricts the rights of the chargor to deal with the property without the consent of the party in whose favour the charge is created.

A floating charge, on the other hand, is one that generally takes effect over the whole or a specified class of a company’s assets and undertaking, but which permits the company to use, deal with or dispose of the assets that are subject to the charge in the ordinary course of business. Unlike a fixed charge, which attaches to the specified property immediately, a floating charge only attaches to the company’s assets or undertaking when a specified event occurs that causes the charge to ‘crystallise’.

A fixed charge which creates a legal or equitable mortgage over land requires Governor’s consent in order to be valid but, prior to its crystallisation, a floating charge does not require Governor’s consent as it does not, prior to such crystallisation, create or transfer any interest in land but only appropriates such land to the debt.

The procedure for perfecting a fixed charge that has been created by a company over its real property is the same as the procedure, already discussed above, for perfecting a legal mortgage created by a company over real estate.

Tangible Moveable Property

What is considered tangible moveable property, for example, machinery, trading stock (inventory), aircraft and ships?

Tangible moveable property will comprise those assets that, under Nigerian law, are described as choses in possession – i.e. property that can be felt or touched and which is capable of being moved from one place to another. Examples include vehicles, equipment, furniture and fittings, machinery, aircraft, ships etc.

What are the most common forms of security granted over it and how is security created and perfected (i.e. made valid and enforceable) in relation thereto?

The most common forms of security that can be created over tangible moveable property owned by a company in Nigeria are a mortgage, charge and a pledge.

Mortgage:

A mortgage of a tangible movable asset can be created in ways similar to that in which a mortgage is created over real estate, namely, by a transfer of legal title with a proviso for re-conveyance when the debt is discharged, or by the creation of a charge. A mortgage created by a company over its tangible moveable property must, if it is to be valid against third parties and against the liquidator in the event of the company’s insolvency, be registered at the CAC as a charge under section 197 (1) of the Companies and Allied Matters Act (Chapter C20) Laws of the Federation of Nigeria, 2004.

Charge:

We have already discussed the nature of a charge and the types of charges that can be created, in our response to the question about real estate above. These principles also apply to charges created over movable property.

Pledge:

A pledge is the deposit of goods or other tangible moveable property (or of negotiable instruments), and in certain cases of the documents of title to such goods or other tangible moveable property, with a lender as security for a debt on condition that the pledged items will be re-delivered to the borrower if the debt is repaid, or sold if the borrower defaults. The essential element of a pledge under Nigerian law is possession, and a valid pledge can only arise where the pledged item is in the actual or constructive possession of the lender.

Shares and Financial Instruments

What are the most common forms of security granted over financial instruments, such as shares and other securities (both in certificated and in dematerialized form) and how is security created and perfected (i.e. made valid and enforceable) in relation thereto?

The most common forms of security granted over financial instruments such as shares and other securities in Nigeria are legal or equitable mortgages and charges.

In order to create a legal mortgage of shares the borrower or mortgagor will be required to transfer its shares to the lender or its nominee, with the proviso that such shares will be transferred back to the borrower upon repayment of the loan. The lender or its nominee must, in order to create a legal mortgage over shares, be registered in the company’s register of shareholders as the owner of the shares over which the security was created.

While this form of mortgage is capable of providing lenders with a great deal of comfort, it is regarded with suspicion by many borrowers. Typically, therefore, lenders tend to take as security, an equitable mortgage over the shares in question, with the principal terms of this equitable mortgage being set out in a memorandum that will accompany the deposit of the share certificates in respect of the shares. In addition to requiring the borrower to deposit its share certificate(s) the lender will usually also require the borrower to execute a blank share transfer form as well as a dividend mandate form.

A fixed or floating charge is another form of security that can be taken over shares. The requirement that such charges must be registered at the CAC has already been discussed in relation to land and this requirement also applies to charges created over shares.

Where the shares to be charged have been ‘dematerialised’, as may be the case where the shares in question relate to a listed company, notice of the charge must also be given to Nigeria’s Central Securities Clearing System Limited (i.e. the company which operates Nigeria’s central depositary for listed shares) so that the interest of the mortgagee in the specified shares can be noted.

Claims and Receivables

What are the most common forms of security granted over claims and receivables (such as debts and rights under contracts) and how is security created and perfected (i.e. made valid and enforceable) in relation thereto?

Security can be created over a company’s claims and receivables, including insurance policies, cash in bank and other contractual rights, either by way of a floating charge (which we have already discussed in relation to real estate) or, where it is intended that the borrowers right to use the specified assets should be immediately restricted, by way of a fixed charge (in the case of cash in a bank account for instance) or by an assignment of such contractual claims or receivables. Under Nigerian law, only rights (but not obligations) can be the subject of an assignment and where it is intended that the borrower should transfer both its rights and obligations to a third party by way of security, this can be done by way of a novation – effectively a new contract, in which the lender replaces the mortgagor as creditor.

Assignments are required to be in writing and there is no legal requirement that the consent of the borrower’s counterparty must be obtained to the assignment. In order, however, for the assignment to vest legal (as opposed to equitable) rights in the lender, notice of the assignment must be given to the borrower’s counterparty. An assignment by way of security will require registration as a charge under Section 197 of CAMA, and such registration must be preceded by the payment of stamp duty on the deed of assignment, at an ad-valorem rate. Where a lender fails to register an assignment it will be void against other creditors of the borrower company and against its liquidator in the event of the borrower’s insolvency.

Intellectual Property

What are the most common forms of security granted over registered and unregistered intellectual property (such as patents, trademarks, copyright and designs) and how is security created and perfected (i.e. made valid and enforceable) in relation thereto?

Security can be created over patents, trademarks, copyright and designs by way of a charge (fixed or floating) in much the same way as we have described in relation to real estate. The instrument creating the charge will require registration under Section 197 of CAMA as a charge, and such registration must be preceded by the payment of stamp duty at an ad-valorem rate.




Problem Assets

5. Are there any types or class of assets over which security cannot be granted or if granted, is difficult to enforce?

Apart from licenses (for more information about licenses, see below), there are generally no asset classes over which security cannot be taken, nor are there particular difficulties associated with the enforcement of security over any particular asset class.

Future assets or assets to be created

It is possible, under Nigerian law, to create security over future assets either by way of a floating charge over specified asset categories or by the execution of a fixed charge, where the future assets in question are capable of being clearly and adequately identified. In this latter case, the lender’s security interest will attach to the future assets as soon as such assets are acquired by the borrower, but such acquisition will be deemed to have taken effect from the date on which the charging instrument was executed.

Fungible assets (a pool of assets indistinguishable from each other which may change over time)

Lenders can take security over a fungible pool of assets through the creation of a floating charge over such assets. It is also possible where the assets in question are fungible, as would be the case with listed shares or negotiable instruments, to create security over such assets by way of a fixed charge. In both such cases (i.e. in relation to either a fixed or floating charge) the charge would attach to the original pool of assets as well as to any replacement assets.

Other assets?

The creation of security over licenses can be problematic. This is because the creation of security over a licence inevitably raises the possibility that in the event of a borrower default the lender or its nominee (rather than the original licensee) will seek to operate the enterprise or discharge the function in respect of which the licence was issued. In view of this possibility, and against the background of the fact that the issuance of licences involves an exercise of discretion by the relevant government departments or agencies, it is not possible under Nigerian law to create security over a licence without the consent of the issuing department or agency.




Credit and/or Collateral Enhancement Techniques and Structures

6. What type of commercial or quasi security structures (i.e. legal structures used instead of taking security) are common in your jurisdiction?

Equipment leases, including sale and lease-backs, reservation of title clauses, guarantees, comfort letters, negative pledges, and rights of set-off are the most frequently used collateral enhancement techniques.




Company Law

7. Do company law rules or conventions affect taking security in your jurisdiction?

The following company law rules or requirements affect the taking of security in Nigeria:

(i) Financial Assistance:

Section 159 of CAMA prohibits a Nigerian company or any of its subsidiaries from granting financial assistance, directly or indirectly to any person for the purpose of subscribing to the shares of such company. “Financial assistance” is widely defined in the section as including “a gift, guarantee, security or indemnity, loan, and any form of credit ...”

(ii) Restrictions on Borrowing in the Articles:

The articles of association of a company may limit, by reference to a specific sum, the power of the directors to borrow money and/or create security over the company’s assets on behalf of the company. (iii) ‘Hardening Period’:

The combined effect of Section 495 of CAMA and of Section 46 of the Bankruptcy Act (Chapter B2) Laws of the Federation of Nigeria, 2004, is that any security created by a company within the three month period prior to when winding up proceedings are commenced against the company, or of when the company’s shareholders pass a resolution for the voluntary winding up of the company, shall be deemed a fraudulent preference of the company’s creditors and be invalid accordingly. (iv) Registration of Charges Under Section 197 of CAMA:  

We have referred, previously, to the requirement under Section 197 of CAMA that where a company creates any of the charges specified in that section of CAMA, such charge must be registered within 90 days after its creation failing which it will be void against other creditors of the company and against the company’s liquidator, in the event that the company should become insolvent.




Enforcement of Security and Insolvency

8. Under which circumstances can a secured lender enforce its collateral?

A secured lender will be entitled to enforce its security upon the occurrence of a default by the debtor in meeting its obligations under the relevant facility agreement. These obligations can range from a payment default (principal, interest, fees or other payments) to a breach of financial or other covenants. A lender is generally not required to give notice of the borrower’s default (although the facility agreement may so require) but will be required to give the borrower or any third party that has provided security, notice of its intention to enforce the security. Remedies available to a secured lender will depend on the type of security and include taking possession of the charged assets, exercising a power of sale, exercising a right of foreclosure in the case of a mortgage, or appointing a receiver.

9. Are company rescue or re-organisation procedures (outside of insolvency or receivership proceedings) available and practiced in your jurisdiction?

The following types of re-organisation procedures are available under Nigerian law:

(i) Scheme of Arrangement and Compromise ( Chapter XVI of CAMA):

A company and its creditors or any class of them, or a company and its members or any class of them may rely on the provisions set out in Chapter XVI of CAMA, for the purpose of embarking upon a shareholders or creditor's scheme of arrangement with a view to re-organising the company or restructuring its debts. A scheme of arrangement must be approved by not less than 75% of the shareholders and creditors, present and voting at separate meetings. Thereafter, the scheme must be referred to the Securities and Exchange Commission ("SEC") for approval and, if approved, must be sanctioned by the Federal High Court.

(ii) Mergers and Takeovers:

Its is also possible to achieve the re-organisation of a company by undertaking a merger of that company with one or more other companies, under the provisions of the Investments and Securities Act, 2007 ("ISA"). The ISA procedure also requires that the proposed merger must be approved by 75% of the shareholders, present and voting at a meeting convened by the Federal High Court, and that the merger must be approved by the SEC and sanctioned by the Federal High Court.

10. In what order are creditors paid on a company's insolvency?

The order in which creditors will be paid on an insolvency of a Nigerian company is specified by Sections 480 and 494 of CAMA and by Rule 167 of the Companies Winding-Up Rules 2001, and is as follows:

(i) The holders of fixed charges are entitled to realise their security and to prove, together with other unsecured creditors, for any shortfall.
(ii) The costs, charges and expenses of the winding up.
(iii) Preferential payments, such as taxes and certain unpaid wages.
(iv) Floating charge creditors.
(v) Unsecured creditors
(vi) Subordinated creditors
(vii) Shareholders

11. Are there any restrictions in granting security (over all forms of property) to foreign lenders?

The only restriction that exists, in relation to foreign lenders, is with regard to the creation of security interest over land.  Nigeria is a federation comprising of 36 states and a Federal Capital Territory and the laws on this matter differ from state to state.  Generally, such restrictions as do exist in relation to creating security over land in favour of foreign individuals or foreign-owned or controlled companies are not absolute and, in our experience, can usually be waived by the governor of the state in which the land is situated.

12. How is the priority between creditors, holding a security interest, determined?

Under Nigerian law, the priority of security interests is generally determined by the order of their creation as well as by the nature of these interests – i.e. whether legal or equitable. Thus, for instance, a fixed charge will usually have priority over a floating charge that has not crystallised, irrespective of whether the fixed charge was created before or after the floating charge. Where, however, a fixed charge is created subsequent to a floating charge, and the holder of the fixed charge had actual notice that the floating charge prohibited the company from creating any later charge having priority over the floating charge; the fixed charge will not have priority over the later floating charge.

More specifically in relation to secured creditors, the priority rules will operate with the effect set out below although these rights can be varied, subordinated or waived by agreement:

(i) A creditor with a legal interest will rank ahead of a creditor with an equitable interest.
(ii) If more than one creditor is granted the same security interest over the same asset, the creditor that was first granted security will rank ahead of the second creditor that was granted security.
(iii) A later fixed charge (whether legal or equitable) will have priority over an earlier floating charge, provided the floating charge did not prohibit the company from creating the fixed charge in question, and provided the holder of the later fixed charge did not have actual notice of the prohibition.

Complicating these rules is the interplay of the requirement in Section 197 of CAMA that certain charges created by a company must be registered; and the parallel requirements imposed by various land and ship registries. As a general matter, however, registration of a charge at the CAC is not a priority point, provided the charge is registered within the statutorily prescribed period of 90 days. Where that is done, a registered charge (i.e. registered at the CAC under CAMA) will have priority according to the date of its creation and not according to the date of its registration at the CAC. Where, however, the charge is not registered within the 90 day period it fails completely, and will lose priority to a subsequently created and registered charge.




Fees and Taxes

13. Are taxes or fees paid on the granting and enforcement of security or the granting of a loan?

Various taxes and / or fees are payable in connection with the perfection and enforcement of security. These include:


(i) Fees payable for Governor's Consent and Registration at the Lands' Registry

Where the security is real estate, the borrower will be required to obtain Governor's consent to the creation of the mortgage, and this usually attracts the payment of a fee that varies from state to state. In addition, once the Governor's consent has been granted, the mortgage must be registered at the relevant state's lands registry – and, again, this attracts a fee that varies from state to state.

(ii) Stamp Duty

Instruments that create a charge over the assets of a company are subject to the payment of ad valorem stamp duty. The applicable rate is usually 0.375% of the sum secured, although the precise rate can only be confirmed following an assessment of the security documents by the Stamp Duties Commissioner.

It is worth mentioning that where the charging instrument is executed outside Nigeria, the obligation to pay stamp duty is suspended until the document is brought into Nigeria. Thereafter, stamp duty must be paid within 30 days after the document is first brought into Nigeria.

(iii) Fees for registering the security as a charge at the CAC

In the case of a private company, the registration fee payable to the CAC in connection with the registration of a charge, amount to 1% of the sum secured.

(iv) Fees / taxes payable in connection with the enforcement of Security

Apart from the usual court fees, the lender must bear in mind that in the event that Governor's consent is to be sought in order to dispose of an asset that was previously the subject of a floating charge, further fees may be payable; with the amount of such fees depending on the state in which the land in question is situated.

Address:
Udo Udoma & Belo-Osagie
St. Nicholas House (10th Floor)
Catholic Mission Street
Lagos
Nigeria
Tel: 234 1 4622307 10
Fax: 234 1 4622311
Web: www.uubo.org