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Challenges of Enforcement of Securities in Nigeria PROF. YEMI OSINBAJO, SAN.

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Presentation on theme: "Challenges of Enforcement of Securities in Nigeria PROF. YEMI OSINBAJO, SAN."— Presentation transcript:

1 Challenges of Enforcement of Securities in Nigeria PROF. YEMI OSINBAJO, SAN

2 CREDIT THE LIFEBLOOD MODERN ECONOMIES DEPEND CONSIDERABLY ON THE FREE AND ADEQUATE FLOW OF CREDIT. EASY REALISATION OF CREDIT IS CRUCIAL TO CONFIDENCE IN LENDING FAILURE OF RULES OR ADMINSTATION OF JUSTICE IS A MAJOR ISSUE

3 LEGAL SYSTEM MUST SUPPORT COMMERCE 3 PILLARS OF MODERN SOCIETY THE ECONOMY RIGHTS SECURITY OF LIVES AND PROPERTY DEPEND ON THE JUSTICE SYSTEM

4 ENFORCEMENT OF SECURITIES

5 FORECLOSURES COURTS MORE INCLINED TO GIVE SEVERAL OPPORTUNITIES AS POSSIBLE TO THE MORTGAGOR TO REDEEM AS POSSIBLE. BETWEEN FORECLOSURE ORDER NISI AND ABSOLUTE…….PROCEEDINGS BECOME PROTRACTED

6 SALE BEFORE SALE POWER OF SALE MUST ARISE UNDER THE DEBT INSTRUMENT IT MUST ALSO BECOME EXERCISABLE. WHERE DEBT INSTRUMENT IS A LEGAL MORTGAGE, THE M/GEE MUST GIVE M/GOR NOTICE ( SEC. 19(1) CONVEYANCING ACT 1881, SEC.123(1) PCL) ) NOTICE MAY BE EXCLUDED BY AGREEMENT ( NHDS V MUMUNI 1977 2SC 57,GBADAMOSI VKABO TRAVELS 2000 8NWLR, PT 668 PG243 ) ABSENCE OF NOTICE DOES NOT VITIATE TITLE OF PURCHASER WITHOUT NOTICE

7 APPOINTMENT OF RECEIVER BY DEED BY COURT WHEN DEBT INSTRUMENT NOT UNDER DEED BUT INJUNCTIVE RELIEFS STILL GRANTED AGAINST RECEIVERS APPTD BY DEED

8 Security for Bondholders For borrowing by Govts, security for bondholders is paramount under the Investments and Securities Act (ISA), and is achieved by a number of devices: the creation of a specific sinking fund where a dedicated portion of the earnings/ receivables/ cash flow of the issuer is administered by a trustee; Issuance of Irrevocable Standing Payment Order (ISPO) from the statutory allocation from the Federation Account; Registration of securities in a Register is mandatory; Bond instrument transferable

9 Case Study (LASG Bond) LASG instituted a bond issuance program. The 1 st tranche of N75Billion was issued with tremendous success early this year. The legal Framework involved the enactment of a Bonds Law and a Debt Management Office Law. This was in compliance with constitutional requirements of appropriation and also ISA. The key provisions of the law are: Creation of a Consolidated Debt Service Account (CDSA) which required LASG to save 15% of its IGR monthly for debt servicing, as security for borrowing. It is from this CDSA that individual sinking funds for any bond issuance will be created. Trustees required to manage the CDSA; Proceeds of CDSA to be invested only in FG Bonds

10 LASG- Trust Deed Under the Trust Deed entered in respect of the bonds, the Trustee is required to commence enforcement proceedings upon default of any interest or principal payment. The 1 st recourse is to the ISPO, after which such other proceedings may be commenced as required by SEC Rules. It starts with conciliation, then arbitration, then referral to SEC and then the Investments and Securities Tribunal (“IST”). Individual Bondholders may only commence action where the Trustee fails to do so, and in a representative capacity. Under a negative pledge, the Government undertook not to encumber the CDSA or Sinking Fund to prioritise any interest above the bondholders’.

11 Syndicated Loan A loan offered by a group of lenders (called a syndicate) who work together to provide funds for a single borrower. The borrower could be a corporation, a large project, or a sovereignty (such as a government). The loan may involve fixed amounts, a credit line, or a combination of the two.

12 Case Study- MegaCorp Syndicated Funding arrangement for MegaCorp for the purpose of share buy-out of privatised company; A number of banks with varying funding obligations and interests; Issues with default of payment obligations and legal challenge by lender on the ground of modification of initial agreement.

13 Legal Issues of Enforcement Issues of corporate governance and conflict of interest- cross-directorship in banks and Megacorp- does this affect the bargaining balance of Megacorp in a consideration of undue onerous terms regarding setting aside in litigation/arbitration? Lead Financer at cross-purpose on mode of enforcement with other financers; Security Trustee, a subsidiary of one of the lenders; Political implications of enforcement of security.

14 Lessons Arms’ length objective tripartite relationship between Lender/ Borrower/ Security Trustee; Whenever renegotiation process of loan is considered, clarity of terms of enforcement should be considered.

15 Challenges of Enforcement of Securities in Nigeria Statutory Restrictions oThere are statutory restrictions where the debtor is a government agency or corporation or where the funds to be attached is in custody of a government official in his official capacity.  No property of the Nigerian National Petroleum Corporation can be subject to attachment or execution. ( Section 14 NNPC Act Cap N ); NNPC V. AIC Ltd (2001) 1 NWLR (Pt. 695)  No funds in custody of a government official can be liable to attachment by garnishee proceedings except by the consent of the Attorney-General of the Federation or a State respectively ( Section 84 Sheriff and Civil Process Act )

16 Challenges of Enforcement of Securities in Nigeria (Contd) Perfection of Security Instrument  Pre-securitization perfection oObtaining Governor’s consent prior to delivering a legal mortgage instrument. Without Governor’s consent, transaction is void and unenforceable. Sections 21, 22 and 26 of the Land Use Act Cap L5 LFN 2004; Savannah Bank V. Ajilo (1989) All NLR; UBN Plc V. Ayo Dare & Sons (Nig) Ltd (2000) 11 NWLR (Pt. 679). Where Governor’s consent was not obtained before mortgage, the entire transaction is void. oSecurities investments of a public company or collective investment scheme must be first registered with the Securities and Exchange Commission before they are issued, transferred, sold or offered for subscription to the public. Section 54 Investment and Securities Act 2007 oWhere the borrower is a Government, there must be an enabling Appropriation Legislation permitting the Government to charge its funds or spend it in specific manner consistent with the issuance of the securities instrument. Sections 80 and 120 Constitution of the Federal Republic of Nigeria 1999

17 Challenges of Enforcement of Securities in Nigeria (Contd) Post-Securitisation Perfection oLegal Mortgages must be registered at the Land’s Registry.  Registration gives notice to subsequent and prospective encumbracers of the existence of the charge  Failure to register results in lose of priority of claim to subsequent registered charges.  The mortgagee, where he fails to register the security, loses any right of claim against a subsequent bona fide purchaser of title in the security without notice. Dearle V. Hall (1828) 3 Russ 1  Where the chargor is a Company, failure to register the charge within 90 days of creation of the charge voids the securitization transaction. The charge can thereafter only proceed against the chargor on the chargor’s personal undertaking. Section 197 Companies and Allied Matters Act Cap C20 LFN 2004

18 Challenges of Enforcement of Securities in Nigeria (Contd) Technical Objections in Court  Jurisdictional challenge  Third party interest e.g. where root of title of land (security) is a Federal Government grant, the State Government may declare interest in and lay claims to the reversion: Nitel V. Onikoyi dispute, Federal High Court V. Donald Duke etc  Non-compliance with statutory provisions e.g. Sheriff and Civil Process Act, Rules of Court  Allegations of fraud in the conduct of sale  Proceedings to set aside sale  Objections of a 3 rd party bona fide purchaser of security without notice

19 Challenges of Enforcement of Securities in Nigeria (Contd) Technical Objections in Court  Jurisdictional challenge  Third party interest e.g. where root of title of land (security) is a Federal Government grant, the State Government may declare interest in and lay claims to the reversion: Nitel V. Onikoyi dispute, Federal High Court V. Donald Duke etc  Non-compliance with statutory provisions e.g. Sheriff and Civil Process Act, Rules of Court  Allegations of fraud in the conduct of sale  Proceedings to set aside sale  Objections of a 3 rd party bona fide purchaser of security without notice


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