Part V Enforcement

A secured transactions law that does not enable a secured creditor to legally and reasonably enforce the security is more or less useless to say the least. Reasonable expectations, honesty and observance of fair dealing during the course of realisation and enforcement of security interests should be demonstrated by contracting parties.178 Parties are bound to always uphold honesty and in no case is this reasonable expectation subject to any exception.179 Ultimately, the courts have the responsibility of deciding what conduct satisfies this requirement by looking primarily at best practices carried out in the international arena. However, subject to the above provisions, the grantor may decide to waive any of its rights (for instance, the right to be notified during an auction or sale of the collateral) as provided by the Draft Law’s enforcement procedures and may agree with the secured creditor on such right waiver.180 Realistically, the waving of such rights can only be done after default in payments or obligations. Any person who challenges the effectiveness of the agreement based on any irregularity of the above provisions will bear the burden of proof.181 Parties who breach enforcement procedures such as wrongful repossession and wrongful sale will be held liable for damages.182 _{It was stated that where other wrongful acts are not covered} by the Draft Law, the recommendations outlined in the ST Guide would cover such cases.183

After default, a secured creditor may use judicial or extrajudicial methods to take possession of the collateral, sell or dispose of the collateral, or render the collateral unusable while in the possession of the grantor. During disposition of the collateral, a grantor or other interested persons have the right to ask the court for relief if the secured creditor violates proper enforcement procedures.184 The Draft Law did not indicate which court would have jurisdiction to entertain matters regarding the enforcement of security interests in personal property. Nevertheless, the State High Court of the location of the collateral will most likely be the place to commence and hear proceedings of this nature.185

Proceedings will be heard and conducted under expeditious procedures as provided by law.186 The exercise of one post-default right by the secured creditor will not extinguish

178 _{Draft Law, para 54.1. The Draft Law objected to the generic use of ‘good faith’ as a standard for enforcement}

and has purportedly used the definition found in UCC Article 1-201 (b) (20) instead.

179 _{Draft Law, para 54.2.} 180 _{Draft Law, para 55.1.}

181 _{Draft Law, para 55.3; ST Guide, Chapter VIII, para 16 – 17; Recommendation 135.} 182 _{Draft Law, para 56.1; ST Guide Recommendation 136.}

183 _{ibid; Draft Law, para 56.1 (Commentaries).} 184 _{Draft Law, para 57.1.}

185 _{See for example, High Court of the Federal Capital Territory (FCT) Abuja, Civil Procedure Rules (CPR),}

Order 10 (1).

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the possibility of exercising another right, and a post default right exercised in respect to collateral will not prevent the exercise of another post-default right with respect to the agreed obligation, and vice versa.187 Notice of sale of the collateral must be in writing and in a language reasonably expected to inform its recipients about its content, and the notice must include a statement that the grantor is entitled to an account of the amount owed, and a statement informing the grantor of its right to redeem the collateral.188 Following on from the limitations in the provisions of the CEAL Registry Report which dismissed the option of a government guarantee scheme for the purpose of reviewing the financial statement before registration, the grantor will be better protected if the notice for extrajudicial disposition is written in the same language used in the security agreement.189 _{If the language differs, the} notice of disposition may be voided altogether.190 _{Further, notice must be provided to all} secured creditors who have filed against the same collateral, and to the secondary owner of the collateral if it is not primarily owned by the grantor.191 Excluding goods deemed perishable which may be sold instantly, it is a requirement that this notice is sent within five calendar days before the collateral is disposed, and the notice must mention the date, time, place and terms of the disposition.192

Enforcement may not always be possible through court procedures especially if the property is in the grantor’s possession. Unreformed legal systems with slow court enforcement procedures will likely make the security less attractive due to high cost and delay in enforcement, especially when the enforcement takes place outside insolvency.193 It is even estimated that judicial enforcement proceedings in unreformed systems normally take between one to three years, by which time the collateral may have depreciated in value, expired or even lost.194 Hence, secured creditors should be able to foreclose their security speedily without a court order such as the use of self-help. The Draft Law specifies that the effect of default on the part of the grantor could result in the secured creditor taking possession of the collateral or its proceeds, or other documents representing the collateral by

187 _{This right will only be applicable to the extent that there is no prohibition on the exercise of a post-default}

right after a prior right has been effected. See Draft Law, para 58.2 – 58.3.; ST Guide, Chapter VIII, para 32 – 35; Recommendations 143 - 144.

188 _{Draft Law, para 59.1 – 59.2.} 189 _{CEAL Registry Report, 15 - 16.} 190 _{Draft Law, para 59.3.}

191 _{Draft Law, para 67.1.} 192 _{Draft Law, para 67.2 – 67.4.}

193 _{Hugh Beale, ‘The Uncitral Legislative Guide: Some Conclusions’ in N. Orkun Akseli (ed), Availability of} Credit and Secured Transactions in a Time of Crisis (Cambridge University Press 2013) 284.

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peaceful means.195 The use of physical force and intimidation is expressly prohibited and an officer of the law such as a policeman or public official should not accompany the creditor when exercising enforcement rights through self-help.196 Such is the importance of this option that it was typified in favour of the secured creditor based on the mandatory requirement to specify the availability of self-help which must be boldly stated, in upper case, in the security agreement.197 Additionally, if the collateral cannot be recovered by peaceful means, judicial process would need to be instituted by the secured creditor.198 However, if the collateral is in the possession of a third party and the secured creditor has a higher ranking priority as against right of the third party, the collateral must be conveyed back to the secured creditor for enforcement, and during this period, no other creditor may request the possession of the collateral.199 _{In actuality, it may not always be reasonable to} resort to self-help where the collateral involved pertains to things which are necessities for survival, for instance, beasts of burden for farmers, or medical equipment for an invalid. Pursuant to the Nigerian Bankruptcy Act 1979 as amended, it specifies that the grantor, who in this situation may already be an undischarged bankrupt, should not lose possession of certain established properties worth up to a certain amount, which himself and his family depend on for survival.200

Collateral may be sold by the secured creditor regardless of whether the grantor has possession and the buyer will take the property free of the grantor’s right of possession.201 All reasonable expenses incurred during repossession, and up to the full amount owed, may be paid to the secured creditor to redeem the collateral at any time before its sale.202 Upon fulfilling this obligation, the secured creditor must stop any enforcement procedure and return the collateral to the grantor.203 Where the grantor is unable to redeem the collateral as a result of default, the sale or disposition must be commercially reasonable, and such disposition may be through publicised auction, sale in an open market, or under any other

195 _{Draft Law, para 60.1.} 196 _{Draft Law, para 60.2 – 60.3.}

197 _{‘IN CASE OF DEFAULT, THE CREDITOR MAY USE SELF-HELP IN TAKING POSSESSION OF}

THE COLLATERAL’, see Draft Law, para 60.4.

198 _{Draft Law, para 64.}

199 _{Draft Law, para 61.1 – 61.2.}

200 _{Bankruptcy Act (Nigeria) 1979, s 41 (2) (b), as amended by Bankruptcy Amendment Decree 1992, ‘the} tools (if any) of his trade and the necessary wearing apparel and bedding of himself and his family dependent on and residing with him, to a value, inclusive of tools and apparel and bedding, not exceeding N1000 in the whole.’

201 _{Draft Law, para 62 and 66; 73.1 – 73.2.} 202 _{Draft Law, para 63.}

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commercially reasonable circumstance.204 The enforcement must be undertaken and concluded within a reasonable time scale, and unless agreed otherwise between the parties, the secured creditor is prohibited from purchasing the property.205 After exercising enforcement rights and the secured creditor is unsure as to whether another creditor is entitled to payment from the surplus, the secured creditor is required to remit the surplus to a competent authority or a deposit fund.206 The position of the secured creditor may later become ‘unsecured’ where the fixed proceeds, as agreed in the security agreement, after enforcement are not sufficient to pay the entire indebted sum, and of course the grantor would remain liable for the remaining sum.207

Upon completion of the sale, the proceeds shall be applied first to the expenses resulting from the maintenance, repossession, or preservation of the collateral, then payment of the capital and interest on the obligation secured by the senior security interest whether it became due or not, and afterwards, surpluses would be distributed to the other secured creditors in the order specified in Part III of the Draft Law pertaining to the date and time of registration even if their secured obligation has not become due.208 An unsecured creditor would only receive payment only if a secured creditor has been paid in full.209 Where the secured creditor and grantor have fraudulently connived to alter the order of distribution of the proceeds, such distribution would be void, except where subordination agreements have been agreed between secured creditors.210 The remainder of the proceeds must be turned over to the grantor or its representative within three calendar days, and if payment cannot be performed, then the payment must be deposited at a bank account and the grantor must be informed immediately.211

Security on bank deposit can be enforced after the grantor has defaulted, and the secured creditor has notified the financial institution on its intent to draw from the deposit account.212 A copy of the secured agreement must be attached to the notice and the secured creditor will need to instruct the institution on the amount to withdraw.213 Upon providing notice, the institution would then need to verify that the security interest has been registered

204 _{Draft Law, para 65.1 – 65.3.} 205 _{Draft Law, para 68 – 69.}

206 _{Draft Law, para 72; ST Guide, Chapter VIII, para 152 – 155; Recommendation 153.} 207 _{Draft Law, para 70.}

208 _{Draft Law, para 74.1 – 74.2.} 209 _ibid.

210 _{Draft Law, para 74.4 – 75.1.} 211 _{Draft Law, para 74.3.} 212 _{Draft Law, para 76.1.}

213 _{The Draft Law did not specify the method of effecting notice, but presumable, it should be in writing since}

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in the online register, ascertain its priority ranking, and check that the identity of the grantor correlates with that held in the institution’s records.214 _{Once these conditions have been} fulfilled, the institution may continue to accept deposit orders to the account but payment orders would be dishonoured after receiving notice from the secured creditor, after which the secured creditor would be paid from the deposit.215 Where another creditor has a higher priority in accordance with the provisions of this Draft Law, the institution must give the sums held in the bank account to the creditor with the highest ranking whose debt has not been paid.216

Further, the secured creditor has a right to sell the goods represented in a negotiable document of title pledged as security, and the proceeds may be distributed to offset the debt owed by the grantor.217 _{An enforcement claim may be brought by the secured creditor} against the endorsers or guarantors of the negotiable document if it remains unpaid.218 Similarly, an assignee of account receivables may use reasonable means to take possession of documentation of the receivables and collect the receivables that constitute the security, or transfer or assign to another person the right to receive payment that constitute the security up to the amount of the obligation, and the surplus would be returned to the other creditors.219 When receivables are assigned, the assignee must take steps to notify the account debtors, and the registered notice must specify the amount payable, the identity of the assignee, and the method and place of payment.220 Payment would then be made to the assignee, but the account debtors may request proof of the assignment (a copy of the assignment’s filing in the register should be sufficient), and if the assignee is unable to provide such proof, the account debtors may continue to pay the assignor.221

Pertaining to insolvency, the security interest of the secured creditor will not be postponed regardless of whether the business of the grantor is being wound up or bankruptcy proceedings have begun.222 After all requirements of registration and publicity has been satisfied in accordance with the Draft Law, the secured creditor may request the trustee in

214 _{Draft Law, para 76.3.} 215 _{Draft Law, para 76.4 – 77.1.} 216 _{Draft Law, para 76.4.} 217 _{Draft Law, para 78.1.} 218 _{Draft Law, para 78.2.}

219 _{Draft Law, para 79. The Draft Law explains ‘account receivable’ to mean the rights to receive payment for}

goods sold or services rendered, excluding portfolios of bank loans. See Draft Law, 5 – 6. As of this moment, Nigeria is not yet a signatory to the United Nations Convention on the Assignment of Receivables in International Trade 2001. <https://treaties.un.org/Pages/ViewDetails.aspx?src=IND&mtdsg_no=X- 17&chapter=10&lang=en> last assessed 2 December 2016.

220 _{Draft Law, para 80.1.} 221 _{Draft Law, para 80.3 – 80.4.} 222 _{Draft Law, para 80.5.}

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bankruptcy to allow him take possession of the collateral.223 The trustee in bankruptcy may then order the liquidator or manager, depending on the legal personality of the grantor, to give possession to the secured creditor.224 Upon taking possession, the secured creditor may exercise his security right without intervention from the trustee in bankruptcy, liquidator or manager.225 The secured creditor is required to disburse any surplus through the liquidator or manager in favour of the debtor.226 Failure to abide to the above provisions regarding reasonable enforcement will normally be met with penalties, for example, indemnifying the grantor for damages for wrongful possession, or forfeiting up to thirty percent of the amount of the debt.227