Enforcement of loans, guarantees and security documentation in Nigeria

The common enforcement triggers for loans, guarantees and security documents are as follows:

• default in financial or other obligations under the facility agreement;
• failure of the borrower to pay any instalment of principal sum and interest, or the whole or part of the principal or any premium, owing under the security documents, within one month after it becomes due;
• any event where a creditor of the borrower initiates a process of execution against the security or commences proceedings for the winding up of the borrower by order of the court;
• the borrower suffers, after the issue of charges of the class concerned, losses or diminutions in the value of its assets which in the aggregate, an amount of more than half of the total owing in respect of charges of the class held by the charge holder who seeks to enforce its security and charges whose holder ranks before it for payment of principal or interest; and
• any circumstance occurs which entitles a charge holder which ranks for payment of principal or interest in priority to the charges secured by the general floating charges to realise its security.

Process for enforcement

What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?

In Nigeria, the common procedures for enforcement in event of default are:

• appointment of a receiver or a receiver and manager in respect of the security – this may be made by the court on application of the creditor once the debt is due or out of court;
• taking possession of the security;
• enforcement of claims vested in the company;
• exercising the power of sale to dispose of the security, subject to the leave of court;
• bringing a foreclosure action; and
• winding up the company.

Lenders must comply with the Companies and Allied Matters Act and the terms and conditions of the security document for valid enforcement.

Ranking in insolvency

In what order do creditors rank in case of the insolvency of a borrower?

Creditors will rank in the following order of priority in case of insolvency:

• creditors secured by way of a fixed charge;
• preferential creditors;
• creditors secured by way of a floating charge;
• secured but contractually subordinated creditors; and
• unsecured creditors.

Click here to view full article.