Oluwatoyin Nathaniel and Kafilat Aderibigbe of G Elias & Co assess the options and framework for parties raising capital in Nigeria

Section 1 – Bank licences

1.1 What licences or approvals do lenders need to have if lending to a borrower in this jurisdiction if a) the lender is a bank or b) the lender is a not a bank?

Banks, finance and discount houses registered in Nigeria are by law prohibited from providing loans and other forms of finance without the requisite licences issued by the Central Bank of Nigeria (CBN). No CBN licence or authorisation is required of a foreign bank or other financial institution. A foreign bank or financial institution may advance loans to a Nigerian company.

1.2 Are any exemptions available and/or are any techniques typically used to structure around such requirements?

No. Any banking or other financial institution intent on carrying on business in (not with) Nigeria is required by law to have the relevant licences issued by the CBN.

Section 2 – Security interests

2.1 Can security be taken over the following asset classes and what documentation or formalities are required to create, perfect and maintain such security?

a) shares
b) bank accounts
c) receivables
d) contractual rights
e) insurance policies
f) real property
g) plant and machinery
h) intellectual property
i) debt securities
j) future/after acquired property
k) floating charges over all assets

Security is usually created by a security deed or other agreement which will specifically set out the nature of the security interest, the asset over which it is created and the tenor of the security, amongst others. Where the security is an equitable mortgage, for example, it can be created by a simple delivery of title deeds evidenced by a memorandum of deposit. Security can be created over all the asset classes by the following documentation:

a) shares: a pledge, charge or mortgage
b) bank accounts: an equitable charge
c) receivables: an equitable charge
d) contractual rights: a charge or an assignment
e) insurance policies: a charge or an assignment
f) real property: a fixed charge or mortgage
g) plant and machinery: an equitable charge or mortgage
h) intellectual property: a charge or assignment
i) debt securities: a pledge, charge or an assignment
j) future/after acquired property: an equitable charge
k) floating charges over all assets: an equitable charge

Upon the creation of the security, stamp duty and registration requirements have to be met. Instruments creating security interests are required to be stamped at the Federal Inland Revenue Service (FIRS) at a nominal or ad valorem rate. What is payable depends on the statutory provision for the particular instrument. Failure to pay the applicable stamp duty would render the instrument inadmissible in evidence in civil proceedings in a Nigerian court. Charges created over certain assets of a company (book debts, real property, plant and machinery) are also required to be registered at the Corporate Affairs Commission (CAC), the companies registry. The charge must be registered within 90 days of its creation. Otherwise, it would be void against the liquidator or other creditors of the company in the event of its insolvency.

With respect to the mortgage of real property, the consent of the governor of the state or the federal minister of housing and urban development must be sought and obtained. The mortgage would then be registered at the applicable state or federal land registry.

Where a security interest is not perfected as required the failure may affect its priority, as priority of security interests is determined by such factors as the time of creation or registration and its nature (whether legal or equitable). Primarily, priority depends on the time of creation, with older security interests ranking ahead of more recent ones. Where the interest is registrable, priority will depend on the time of registration. Where competing security interests have been registered, they will have priority according to their actual dates of creation.

2.2 Highlight any issues with securing obligations that may arise in the future.

In practice, security instruments are usually drawn up and executed to create security interests over the borrower's assets at the same time as debt obligations arise. Security instruments may, with the inclusion of a dragnet clause, secure future obligations in the event that the borrower obtains additional loans from the lender. Such obligations may be deemed a fraudulent preference if secured within three months prior to the borrower's insolvency.

2.3 Can a universal security agreement be used to grant security over all assets in this jurisdiction?

A universal security agreement (known as a composite security deed or all-assets debenture) may be used to grant security over all the assets of a company. However, there are situations when this method may not be optimal. It would be cumbersome to perfect a composite security deed that grants security over a wide range of assets such as an oil mining lease, land, and ships because distinct consent, registration and perfection regimes apply to the separate assets over which security is sought.

2.4 Can security be granted for the benefit of different classes of creditors under the same security agreement and if so, are there any issues that creditors should be aware of in adopting this approach?

Security can be granted for the benefit of different classes of creditors under the same security agreement. However, it is optimal to have a security trustee hold the security interest for and on behalf of the different classes of creditors. An intercreditor agreement or deed would also be executed to set out the nature of the different interests, the mechanism for enforcement and the order of priority.

2.5 Can security trustee or security agent structures be used in this jurisdiction to secure obligations that are owed to fluctuating creditor classes?

Yes. Please see answer to question 2.4.

2.6 Briefly outline any issues to consider when transferring loans and accompanying security interests between lenders.

Facility agreements usually provide that a lender may assign or transfer any of its rights, obligations or security interests upon prior notice to the borrower. The transfer of security interests without more does not release a lender from its obligations under the loan agreement. The method of transferring a loan with accompanying security interests should be carefully considered. Sub-participation would not affect the security interests created for a loan. Novation would, by its nature, require the creation of new security interests over those assets. However, where the security is held by a security trustee on behalf of all the lenders (existing and future) a new security agreement will not be required.

2.7 Can security be granted by third parties? Are there any rights of contribution, subrogation or similar that might arise as a result of granting/enforcing third party security that ought to be/can be waived?

Individuals and corporate entities alike may grant third party security in favour of a lender to secure the obligations of a borrower. The third party may, in separate documentation, require a counter indemnity or rights of subrogation from the borrower.

2.8 Briefly outline the registration requirements, if any, applicable to security interests created in this jurisdiction, including considerations such as the timing, expense and the consequences of non-registration.

Charges created over certain assets by a company are required to be registered with the CAC within 90 days of their creation. These include charges on ships or aircraft, goodwill, patent, trade mark, copyright and related licences and book debts. Charges or mortgages over shares are not required to be registered. The registration fee is 1% of the loan amount secured in the case of a private company and 2% for a public company. An unregistered security instrument will be void against any liquidator and other creditors in the event of the company's insolvency. The underlying debt obligation is, however, not prejudiced as the debt becomes immediately payable. Mortgages over land created by a company are also required to be registered at the relevant state or federal land registry. The consent of the governor of the state or (federal lands minister) is also required for a valid mortgage.

2.9 Briefly outline any regulatory or similar consents that are required to create security (other than board/shareholder approvals).

A mortgage of an oil-mining lease, for example, would require the consent of the minister of petroleum resources. A mortgage of land in a state would require the consent of the governor of the state in which the land is situated.

Section 3 – Guarantees

3.1 Briefly explain the downstream, upstream and cross-stream guarantees available, with reference to any particular restrictions or limitations.

In practice, lenders sometimes require parent companies, subsidiaries and affiliates to provide guarantees for loans granted to one of them. Lenders often prefer to lend directly to the parent company or alternatively request a parent company guarantee unless the subsidiary has a large asset base or is of significant credit quality. Lenders request upstream guarantees where the lending is to finance the operations of the subsidiary. Cross-stream guarantees are also common where the sister company has a good credit rating or is involved in businesses deemed to be as, or more, profitable than that of the borrower company.

A company is statutorily prohibited from providing financial assistance for the purchase of its shares. Therefore, a target company cannot provide a guarantee in respect of a loan for the purchase of its shares.

3.2 What regulatory or other consents are required to grant downstream, upstream and cross-stream guarantees (other than board/shareholder approvals)?

There are no additional regulatory or other consents required for this purpose except for board and shareholder approvals as necessary.

3.3 Briefly outline any enforceability concerns associated with the granting of downstream, upstream and cross-stream guarantees that lenders should be aware of (e.g. any exchange controls or similar obstacles).

A guarantee is as good as the credit quality of the guarantor. Difficulties arise where a guarantor has become insolvent. In such a scenario, the lender becomes unsecured and will rank pari passu with the claims of other unsecured creditors of the guarantor.

Section 4 – Enforcement

4.1 Do the local courts generally recognise and enforce foreign-law governed contracts?

Nigerian courts generally recognise and enforce the choice of foreign law to govern the transaction documents to which a Nigerian entity is party. Nigerian courts also give judgment in US dollars.

4.2 Will the local courts generally recognise and enforce a foreign judgment that is given against a domestic company in foreign courts (particularly the New York or English courts) without re-examining the merits of the decision?

Nigerian courts would recognise and enforce a final and conclusive judgment or order of an English court in respect of any claim under any transaction document, subject to the provisions of the Reciprocal Enforcement of Judgments Act (1922) and the Foreign Judgments (Reciprocal Enforcement) Act (1960). However, a final and conclusive judgment obtained from a New York court may form the basis of a cause of action in the courts of the Federal Republic of Nigeria.

4.3 Will the local courts recognise and enforce an arbitral award given against the company without re-examining the merits of the decision?

The courts of Nigeria enforce foreign arbitral awards without re-examining the merits of the decision subject to the terms of the Convention on The Recognition and Enforcement of Foreign Arbitral Awards (1958). However, as set out in the Arbitration and Conciliation Act (1988), a Nigerian court will not enforce an arbitral award where, inter alia: (i) there is no agreement or provision in relation to the arbitration; (ii) the award is contrary to public morals or public policy; (iii) the subject matter of the dispute is neither commercial nor civil; or, (iv) one of the parties has not been duly represented before the arbitrators and has not provided express consent to the proceedings thereafter.

4.4 When enforcing security, what factors significantly impact the time such enforcement takes and the value of the proceeds received from such enforcement? For example, are there any statutory requirements such as (a) holding a public auction; (b) court involvement; or (c) obtaining regulatory consents?

There are no statutory restrictions on the enforcement of security. Typically, the transaction documents will set out the terms and conditions that will trigger the enforcement of the security. A sale may be conducted by public auction or private treaty. Statutory consents will also be required for the sale of realty, rights and interests in oil mining leases or the shares of the holder of an oil-mining lease. Depending on the nature of the security interest and the asset involved, the intervention of a court may be required for enforcement to proceed. In others (a legal mortgage, for example), enforcement can be carried out without the intervention of a court.

4.5 Are there any restrictions that apply specifically to foreign lenders when taking enforcement action?

There are no restrictions which apply specifically to foreign lenders when taking enforcement action. Foreign and local lenders are bound by the same body of local laws. However, a foreign lender must produce a certificate of capital importation (CCI) (which evidences the initial importation of foreign capital into Nigeria) for them to freely repatriate the enforcement proceeds out of Nigeria.

Section 5 – Bankruptcy and insolvency proceedings

5.1 Briefly, outline the main bankruptcy/insolvency processes in this jurisdiction, including any control or influence that creditors can exert on the process, the timeframes usually involved and any mandatory filing requirements.

A company may be wound up: (a) compulsorily (by the court); (b) voluntarily (by its members); or (c) subject to the supervision of the court.

A creditor may present a petition for the winding up of a company to the Federal High Court where a company is unable to pay debts in excess of N2,000 ($10) within three weeks of a demand for payment. The court may also wind up a company where the court is satisfied that the company is unable to pay its debts, taking into account any of its contingent or prospective liability.

Where the assets of the company are in jeopardy after the presentation of the petition but before its hearing and the making of a winding-up order, a creditor may apply to the court for the appointment of a provisional liquidator. On commencing a winding-up order, the company must forward a copy to the CAC, which will make a minute in its books. A statement of the affairs of the company (of which the creditors are entitled to inspect and make copies) must be delivered to the official receiver within 14 days. The official receiver must submit a preliminary report to the CAC, and within one month, summon a meeting of creditors and contributories for the purpose of determining whether an application for the appointment of a liquidator, in place of the official receiver, and a committee of inspection (made of representatives of creditors and contributories) to act with the liquidator should be made. The liquidator is empowered to sell the assets of the company and with the sanction of the court or committee, pay any creditors in full. On registration of the final accounts and application by the liquidator to the CAC, the CAC will order the dissolution of the company. Otherwise, it is deemed to be dissolved three months after registration.

5.2 Are there any preference, fraudulent conveyance, clawback, hardening periods or similar issues or preferential creditor rights that lenders should be aware of?

All the following rank higher than all other debts and equally amongst themselves, and must be paid in full where the assets are sufficient to meet them: taxes assessed on and due from the company; deductions under the National Social Insurance Trust Fund Act; wages and salaries of clerks, servants and workmen; all accrued holiday remuneration payable on termination of employment; workmen's compensation. Where the assets available for the payment of general creditors are insufficient, these preferred debts will have priority over the claims of floating charge holders.

Any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property of the borrower within three months of the presentation of a petition for its winding up will be deemed fraudulent preference of its creditors and therefore void. The creditor will become unsecured and must prove for its whole debt.

5.3 Do bankruptcy/insolvency processes provide for any kind of stay/moratorium on enforcement of lender claims? If so, does the stay/moratorium apply to the enforcement of security interests?

Where a petition for the winding up of a company has been presented and an action against the company is instituted or pending in another court, any creditor may apply to that other court for a stay of its proceedings. On the making of a winding-up order or the appointment of a provisional liquidator, no action against the company can be instituted or continued without the leave of court. Any disposition of the company's assets is void unless the court otherwise orders. The assets of a company secured by security interests are not affected by any stay or moratorium.

Section 6: Your jurisdiction

6.1 In no more than 200 words, outline any cross-border financing trends specific to your jurisdiction.

Parties to a large loan agreement may agree to stamp and, where applicable, register the transaction documentation to cover only a specified part of the loan amount (not the entire loan amount). The security interest created thereunder will only extend to the amount of the loan secured by the stamp duty paid. As such, any enforcement and recovery against the assets would be to the extent only that it is sufficient to cover the loan amount secured. This practice has arisen as a result of prohibitive stamp duties and companies' charges registration costs.

Additional stamp duty, or upstamping, of the transaction documentation may be paid or undertaken in the future. The security interest will then cover the upstamped sum in relation to the loan amount sought to be secured.

There have been a number of refinancings and restructuring of cross-border loans, particularly in the oil and gas sector. This, in part, has been due to falling crude oil prices and dwindling foreign exchange revenues. Recently, the CBN prohibited access to foreign exchange at the Nigerian foreign exchange market for the purchase of eurobonds. Creative financing transactions such as securitisations, repurchase agreements, securities lending and forward sale financings have also taken root and are becoming common.


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Oluwatoyin Nathaniel
G Elias & Co

About the author

Oluwatoyin Nathaniel is an associate at G Elias & Co, one of Nigeria's leading business law firms and has been in practice for seven years. She is experienced in banking and finance transactions, and advised lenders on the $420 million syndicated facility for the rehabilitation of the Lekki-Epe Toll Road project, Nigeria's pioneering toll road project. She was part of the team that recently advised lenders on a $1.5 billion Nigerian National Petroleum Corporation (NNPC) forward sale financing and the $1.2 billion NNPC/Chevron project financing.

Nathaniel holds a Masters in Law (with distinction) from University College, London.

Kafilat Aderibigbe
G Elias & Co

About the author

Kafilat Aderibigbe is an associate at G Elias & Co and holds a Bachelor of Laws degree from Lagos State University (with first class honours). She was called to the Nigerian Bar in 2013.

Aderibigbe was part of the team that advised a consortium of both foreign and Nigerian lenders on the $250 million acquisition financing of an oil-acreage owning entity. She also advised a security trustee on taking security for the financing of working capital requirements for the construction and operation of a data centre.