30 Apr The Creation, Enforcement and Transfer of Security Interests

INTRODUCTION

A security interest is a legal right granted by a debtor to a creditor over the debtor’s asset (usually referred to as the collateral). This enables the creditor to have recourse to the asset if the debtor defaults in making payment or otherwise performing the secured obligations under a Security Agreement.

Security interests can be taken on any type of property. Nigerian law, which adopts English common law, differentiates between two types of property classes namely, Real Property and Personal Property. Real Property is land, the buildings affixed to it and the rights attached to the land while Personal Property is any property other than personal property.

Some of the major types of security interests include:

• Legal Mortgage;
• Equitable Mortgage;
• Fixed Charge;
• Floating Charge;
• Pledge; and
• Lien

Although most security interests are created by agreement between the parties, it is also possible for a security interest to arise and be transferred by operation of law. This will be discussed further.

We will discuss the steps necessary to create a security interest valid and enforceable against a debtor, the various methods of enforcement open to the secured creditor in the event of a default by a debtor and modes of transfer of a security interest by the act of the parties or by the operation of law.

CREATION OF SECURITY INTEREST

In order to create a security interest, there must be attachment to an asset of the debtor. Attachment is the creation of a security interest. For a consensual security interest to attach to an asset, some conditions must be fulfilled including but not limited to:

• There must be a Security Agreement which must be valid and enforceable as a contract. The Agreement must also show an apparent intention to create security;
• The asset to be given in security must be identifiable and fall within the scope of the Security Agreement;
• The debtor must have the power and capacity to give the asset in security i.e. the asset must be one which is capable of being given as security and the debtor must have an interest in the asset or the legal power vested in it to dispose of it;
• There must be some current obligation of the debtor to the creditor, or to another, which the asset is designed to secure;
• In the case of a pledge, actual or constructive possession must be given to the creditor.

The attachment of a security interest (whether legal or consensual) confer on a secured creditor at least two real rights over an asset being the right of pursuit and the right of preference. Other real rights are available for the enforcement of the security, depending on the nature of the security interest. These are: retention or recovery of possession of the asset; sale of the asset; foreclosure; and an order vesting legal title in the secured creditor. The aforementioned will be discussed in further detail below.

ENFORCEMENT OF THE SECURITY

The core remedies available to a secured creditor besides a debtors guarantee for payment are possession, sale, appointment of a receiver and foreclosure.

Possession

Typically, a creditor will wish to be inserted into a security agreement, a right to take possession of an asset in a given event, most notably the debtor’s default. The right to take possession can be expressly provided for in the security agreement and is then exercisable notwithstanding the type of security the creditor holds i.e. legal mortgage, equitable mortgage or a charge.

Sale

In the event that the Security Agreement stipulates so, every class of secured creditor can sell the security subject to any applicable statutory restrictions. Under Nigerian law, the right to power of sale is implied by statute.  The statutory power of sale is limited to legal mortgages only, an equitable mortgagee can only apply to court for judicial sale.

Appointment of receiver

A receiver may be appointed either by way of statute or under an express power of the Security Agreement. The statutory power is exercisable in the same circumstances as the statutory power of sale and is subject to the same restrictions. The function of a receiver as appointed by a mortgagee is to utilize the charged assets to the advantage of the secured creditor inter alia running of business, collection of income arising from mortgages property, entering into contracts, realization and/or disposal of assets.

Foreclosure

A debtor/mortgagor has a right to redeem a mortgaged property at any time by payment of an amount due to a creditor. There are three instances whereby this right to redeem cannot be utilised: a) sale; b) foreclosure; c) expiry of limitation period. Foreclosure is the termination of the right to redeem via a court order its effect is to vest the mortgaged property in the secured creditor/mortgagee free of any right of redemption.

TRANSFER OF SECURITY INTREST

A security interest may be voluntarily disposed, either absolutely or by way of sub-security and may also be transferred or transmitted by operation of law e.g. death or bankruptcy.

A secured creditor may freely assign his security interest without the debtors consent. The methods in which the security interest may be assigned depend on the nature of the asset constituting the security. Goods, Land, Life Policy, Debts and other chose in action each have varying methods of transfer.

Transfer by operation of law

Bankruptcy

If a creditor holding security becomes bankrupt, the debt and security pass automatically to his trustee in bankruptcy.

Death

In the event of a creditor’s death, debts owed to him and security for such debts vest in his personal representatives.

The information provided in this article is for general informational purposes only and does not constitute legal advice. If you require specific legal advice on any of the matters covered in this article please contact info@berkeleylegal.com.ng