Legal Aspects of Banking & Securities Management PDF

Access Bank Entry Level Training Program (ELTP) Student Manual Legal Aspects of Banking & Securities Management Name of Course Legal Aspects of Banking & Securities Management Course Description The course aims to teach bankers the basics of law regarding most of the daily functions of a banker. It focuses on the fundamentals issues in banking such as the legal nature of the Banker-Customer relationship, liability for acts within the civil and criminal framework of Nigerian law, law of negotiable instruments, and the lending process -from taking collateral securities, to perfection of securities and their enforcement in the event of a default. Course Duration 2 days Contents Name of Course 1 Course Description 1 Course Duration 1 Contents 2 Course Objectives 3 Introduction to Law 4 Basis of Banker/Customer Relationship 5 General Principles of Contract 7 Essentials of a Contract 7 Banker/Customer Relationship 10 Rights and Duties 10 The Banker/Customer relationship is based on agreement and it creates rights and duties for the parties. 10 Basic Criminal Law 16 Special Legal Circumstances 17 Negotiable Instruments 19 Customer Types and Required Documentation 25 General Principles of Secured Lending 31 Nature of Security/ Qualities of a Good Security 32 Review of Specific Legal Provisions Impacting Banking 33 Some Examples of Securities and Legal Documentation 41 Enforcement of Securities and Realization Challenges 51 Glossary 56 Course Objectives The course aims to teach bankers the basics of law regarding most of the day-to-day functions of a banker. It focuses on the fundamental issues in banking, such as the legal nature of the banker-customer relationship, liability for acts within the civil and criminal framework of Nigerian law, law of negotiable instruments, and the lending process - from taking collateral securities, to perfection of securities and their enforcement in the event of default. The primary objectives include - - To distinguish rules of law from other rules of conduct operating in society. - To understand the basic principles of law relating to banking - To appreciate the legal basis of the banker-customer relationship and the obligations arising therefrom. - To get introduced to the regulatory framework in banking - To learn the rudiments of granting credit facilities in the process of intermediation and the various types and structures of collateral securities documentation. - To review options for securities realization upon default by customers. Introduction to Law What is Law? There are different definitions based on the perspective from which the word is considered. “a body of rules of action or conduct prescribed by controlling authority, and having binding legal force. That which must be obeyed and followed by citizens subject to sanctions or legal consequence is a law” - Black’s Law Dictionary. “A set of rules created and enforceable by social or governmental institutions to regulate the behaviour of people.” - wikipedia From these definitions we can deduce the purpose of law. Other similar concepts which must be distinguished include - Morality: standards and rules of conduct in a society, a concept studied in ethics - Religion: a particular system of faith and worship, which includes morals and which speaks to a relationship between humanity and a supreme being or deity. Classification of Laws: The two main classifications are: Civil Law - The system of law regulating private relationships between individuals in a community or a society. Criminal Law - The system of law which punishes individuals for crimes or for flouting laid rules. Basis of Banker/Customer Relationship The relationship between a bank and its customer is contractual i.e it is based on contract. The contract document between a bank and its customer is the Bank Account Opening Forms. Bank Account Opening Forms typify a contract where the offeror pre- determines the terms of the contract which should be accepted by the offeree without any change. Such contracts are described as “standard form contracts”. There are two basic types of terms in a typical contract. Express Terms - These are issues between the parties to a contract that are specifically agreed. They could be written or oral but they are always unambiguous. Implied Terms - Implied terms will be included by the Court only where there are gaps in the contract. How do Courts fill in the gaps in contract? When there are gaps in a contract, the Courts do not arbitrarily fill them in but they draw mainly from sources outside the terms as agreed by the parties and stated in the contract, “to help parties achieve the objectives of the contract”. The Courts draw from the following sources outside the contract: - Laws relevant to the contract - Conventions - Actions of the Parties subsequent to the Contract In their interpretation of contracts, Courts are generally subject to rules and/or principles of interpretation. Some of these principles are contained in a set of Laws called the Interpretation Act 1964 (as amended in 2004) Laws of the Federation of Nigeria (LFN). Rules of Interpretation of statutes S.14- In an enactment- (a) words importing the masculine gender include females; (b) words in the singular include the plural and words in the plural include the singular. s.18(1) In an enactment the following expressions have the meanings hereby assigned to them respectively, that is to say- "land" includes any building and any other thing attached to the earth or fastened to any thing so attached, but does not include minerals; ▪ "regulations" in an enactment passed or made before the passing of this Act, includes rules and bye-laws; ▪ "to sell" includes to exchange and to barter and to offer or expose for sale; ▪ to “sign" in relation to a person who is unable to write his name, means to make his mark; ▪ "writing" and expressions referring to writing include printing, lithography, photography, typewriting and other modes of representing or reproducing words or figures in a visible form; General Principles of Contract A contract is an agreement with the following characteristics: ⮚ legally enforceable (i.e. which creates rights and imposes obligations on the parties) and ⮚ implies a meeting of the parties’ minds. (i.e. consensus ad idem) ⮚ must be free or voluntary i.e. not induced by duress, undue influence, mistake or misrepresentation. Usually, only parties to a contract can enforce the terms of the contract and/or enjoy the benefits that flow from the contract. This principle is known as Privity of Contract. Another important principle in contracts is the principle of Quantum Meruit. This principle stipulates that part-performance of a valid divisible contract attracts pro-rated payment thereon. Terms of a contract One way to classify terms of a contract is to categorize them based on their impact and the consequences of a breach. Conditions - A condition is another name for a fundamental term in a contract. A breach of a fundamental term strikes at the root of a contract and it is usually incurable or cannot be remedied such that it nullifies the contract. Warranties - A warranty is not a fundamental term of a contract. A breach of a warranty is less serious. It can usually be remedied and remedies lie in damages and/or any other monetary remedies. Essentials of a Contract The essentials of contract are the basic elements which make a contract, the absence of any of which will render an agreement unenforceable. Offer This is a proposition of terms. Where there is a request for an offer, the appropriate term is an invitation to treat. An “offer” is different from an “invitation to treat”. An advertisement is a good example of an invitation to treat. The term “offeror” describes the party who makes an offer in a contract while “offeree” is the party to whom an offer is made. When an offer is made, it can come to an end or be terminated by the following factors: Revocation - This occurs when the offeror after making the offer decides to cancel the offer. The principle is that such cancellation must be communicated to the offeree for it to be effective. It must also have been activated before acceptance by the offeree. Rejection or Renunciation - This occurs when the offeree rejects the offer. Lapse of time - Where the acceptance of an offer is time-bound, the offer expires and is terminated when the stated time elapses. Death of Parties - The death of parties terminates any offer in existence. This is particularly so where the terms of the offer can only be performed by the parties and also, where made by an individual and/or to an individual. Counter Offer - A counter offer occurs when the offeree responds to an offer with a proposal that is contrary to the terms stipulated by the offeror. Acceptance: This is the final and unqualified assent to the exact terms of an offer. It must be communicated to the offeror. Communication may be in any manner. Consideration Consideration is usually equated to money. However this may not always be so. Consideration is value given for value received. The value given does not have to match the value received. Thus the Courts, in determining if consideration has been granted, do not consider the adequacy of value but the sufficiency. Intention to create legal relations Parties must intend to create legally enforceable rights when entering into an agreement. The Courts will not enforce an agreement which is devoid of such an intention. The Courts would generally presume such intention in business agreements but would require proof of such intention in domestic agreements. Legality An agreement based on illegal actions or terms is unenforceable. The legal term for such an agreement is ‘null and void’. Compliance with formality Contracts can generally be made in any form and thus referred to as Simple contracts. Most contracts are Simple Contracts. Sometimes it is legally required that contracts be in a particular format. Such contracts are known as Formal or Specialty Contracts. Examples of Formal or Specialty Contracts include contracts of Guarantee, land transaction contracts, Bills of Exchange contracts, contracts of hire purchase etc. The law requires that these contracts must be in writing. Failure to comply with the legally required format for a contract renders the agreement unenforceable. Contractual Capacity/Personality This is the legal competence or legal recognition of an entity or person to undertake obligations and acquire rights in contract is described as contractual capacity and it imports the concept of personality. It follows therefore that an entity not so recognized cannot be described in law as a “person”. Consequently, a human being cannot rightly be described as a person in law if he suffers from a recognized defect that robs him of that ability but an inanimate entity would qualify as a person if the law arrogates contractual capacity to it. Being human does not, therefore does not necessarily confer personality on an individual. Examples of non-persons, in law, include: Insane Individuals, bankrupts, companies in liquidation and minors (subject to the legal ability to enter into contract for necessaries of life and beneficial contracts of service in respect of which they are liable as adults). Banker/Customer Relationship Rights and Duties The Banker/Customer relationship is based on agreement and it creates rights and duties for the parties. 1. Banker’s duties owed to their customers include - To receive cash directly into the customer’s account and accept cheques and other negotiable instruments for clearing. To honour drawings on demand during the advertised banking hours and in a branch where the customer’s account is domiciled or any other branch of the same bank by arrangement. To inform a customer of fraudulent activities on his/her account. To honour commitments made by its authorized officials. To give reasonable notice prior to account closure. To keep accurate records of customers’ accounts and issue periodic statements of accounts. To maintain secrecy (confidentiality) on the customer’s account and affairs with the bank. A bank is not legally obliged to respond to enquiries made to it about its customer because the bank owes its customer a duty of confidentiality or secrecy. General exceptions to the duty include: ○ Customer’s Consent - Banks can respond to any enquiries which the customer consents to. Customer consent must be granted in a manner which the bank can verify and in accordance with the customer’s mandate on the account. ○ Threat to the interest of the bank- A bank’s duty of confidentiality is qualified by the bank’s need to protect itself from threats to its interest. ○ Bank acting under a public duty - Public interest outweighs the bank’s duty of confidentiality. ○ Bank acting in discharge of a statutory obligation - The bank is obliged to disclose customer information by virtue of adherence to certain laws e.g. Anti-Money Laundry legislations. Where the bank decides to respond to an enquiry, it must Exercise great discretion and not disclose more than is necessary. Express only an opinion and not give an undertaking. Avoid making a negligent misstatement. Add a “disclaimer” or “liability exclusion” clause (this will not however protect a bank from liability in respect of a statutory obligation). 2. Banker’s Rights Some rights of Bankers include - Right of Set off The banker can exercise the right of set -off by netting off the customer’s credit balance against his overdrawn account provided both accounts are held in the same right. Right of lien This is the right of the Banker to retain or claim possession on a customer’s property (movable or fixed) usually in the ordinary course of extending credit. Right to Commission The Banker has the right to receive reasonable commission or charge for services rendered to its customers in line with the banker’s tariff administered by the Central bank of Nigeria. 3. Customer’s Duties A customer has the duty of Exercising reasonable care and diligence when drawing cheques. Deposit cash in his account and repay overdrafts on demand Informing the Bank of fraud attempts on his account. when drawing cheques 4. Customer’s Rights ▪ To be issued with a statement of account. ▪ To be paid from his account as he may demand provided his instruction is made in proper form, his account is funded and there is no legal bar to his demand. ▪ To determine which of his accounts he desires to deposit or withdraw from. Different Forms of the Banker/Customer Relationship The Banker/Customer relationship can take different forms including: 1. Debtor/Creditor When the bank acts as the lender, the customer is the debtor. Where the customer is non-borrowing, the bank is the debtor and the customer is the creditor (provided the customer account has a credit balance). 2. Bailor/Bailee This exists where there is a safe custody arrangement between the bank and the customer. Customer is the bailor, the bank is Bailee. 3. Principal/Agent A principal is a major party to a contract who is personally liable on the contract. An agent or attorney is one employed by a “principal” to act on his behalf as directed. Principal becomes liable for the legal consequences of his agent’s activities and also the benefits. A typical example is when a bank represents the interest of its customers e.g. procurement of foreign exchange from CBN. 4. Mortgagor/Mortgagee Customer applies and obtains bank mortgage. Customer is the mortgagor while the bank is the mortgagee. Termination of Banking Contract A contract can generally be terminated by either party, but where termination of a contract is a breach of the contract, there is a cost against the breaching party. The banking contract may be terminated or customer’s mandate to the bank suspended in various ways including: 1. Notice of death of Customer. 2. Insolvency of an individual or company. 3. Notice from either party. 4. Notice of Insanity. 5. Operation of Law including Court Orders. Remedies for a breach of Contract Damages - This is monetary compensation awarded for a breach of contract. Rescission - Termination; usually for fundamental breach Order of Injunction - A Court Order specifying actions which should do or stop doing. Order of Specific Performance - A Court Order requiring a party to perform a specific action. Bankers’ Due Diligence and Duty of Care (Law of Torts) Generally, every person owes a duty of care to everyone else who may be affected by that person’s acts. Duty of care compels due diligence to avoid any type of injury to others. If injury could have been foreseen by a reasonable man, liability is established. Due diligence requirement derives from Law of Tort but may arise from a Contract as in the case of bankers. The scope of the duty of care was articulated in an English case named Donoghue vs. Stevenson wherein the court formulated what is known as the “Neighbour principle” as basis of liability. The court established the scope of the duty of care in that case by defining the term “neighbour” as: “persons so closely and directly affected by my act that I ought reasonably to have them in contemplation when directing my mind to the act or omission called in question” What is tort? It establishes another kind of civil liability as opposed to criminal liability and it is not necessarily based on a contractual relationship or geographical proximity. For every injury caused, the victim is entitled to compensation. To establish a claim in Court under tort, the 3 elements of tort must be proved. Duty imposed by law. Breach of that duty. Injury resulting from the breach. Some important Torts Negligence: Omission to do something which a reasonable man would do or doing something which a reasonable man would not do in a situation. Conversion: Any unjustifiable interference with any person’s chattel (thing) in a manner that deprives him of the use and possession of it. Defamation: A statement which injures the reputation of the person to whom it refers and which exposes him to hatred, contempt, ridicule, fear, dislike or disesteem. Occupier’s liability: Liability for injury caused to lawful entrants onto one’s property through the use of such property. Nuisance: Liability arising from injury done to a neighbor’s possession and enjoyment of his land through the use of one’s land. General principle applicable to tort *Vicarious Liability Principle: Liability of one person for the tort of another who is subject to him in the exercise of his duty even if that other person is carrying out that duty in an improper way not expressly approved by the principal. Due diligence & banking risk evaluation Since due diligence is about exercising due care in a given context, the exercise of discretion by a banker always involves a risk evaluation. ▪ Decisions must be taken also in light of prevailing circumstances. ▪ The test is objective. It is not a measure of what appears reasonable to the person doing an act but whether a “reasonable banker” in that person’s shoes would act in the same way. ▪ Where a banker acts contrary to common sense, he will be exposed to liability, and so will his bank. Basic Criminal Law A crime is an act or omission prohibited by the state and an offender is liable to be punished by a fine, imprisonment or death. Almost all crimes (except strict liability crimes) consist of “an act” and a “state of mind”. A financial crime is one that relates to the use of money or other valuables and it attracts punishment under the law. Crimes generally are created and punished under several laws. One of the principal laws is the Criminal Code Act. The Banks & Other Financial Institutions Act basically regulates the practice of banking and creates several obligations and offences relating to banking practice and lending. Examples of financial crime. Stealing (s. 383 Criminal Code Act: Cap. 77, Laws of the Federal Republic of Nigeria) Obtaining By False Pretenses (s. 419 Criminal Code Act: Cap. 77, Laws of the Federal Republic of Nigeria) Forgery (s. 465 Criminal Code Act: Cap. 77, Laws of the Federal Republic of Nigeria) Counterfeiting Currency (s. 1, s. 5 COUNTERFEIT CURRENCY (Special Provisions) ACT, Cap 74. General Rules of Law applicable to Crimes ATTEMPT TO COMMIT A CRIME. Section 4 - When a person, intending to commit an offence, begins to put his intention into execution by means adapted to its fulfilment, and manifests his intention by some overt act, but does not fulfil his intention to such an extent as to commit the offence…… ……….he is said to attempt to commit the offence. It is immaterial that he chose to desist and not complete the crime. PRINCIPAL OFFENDERS Section 7 – Every person is deemed to have taken part in committing an offence and to be guilty of that offence, who actually does the act or makes the omission which constitutes the offence; or who counsels, aids or enables another person to commit the offence. ACCESSORY AFTER THE FACT OF A CRIME Section 519 - Any person who receives or assists another, who to his knowledge is guilty of an offence in order to enable him escape punishment commits a crime. CONSPIRACY TO COMMIT A CRIME Section 516 - Any person who conspires with another to commit any felony, or to do any act in any part of the world which if done in Nigeria would be a felony, and which is an offence under the laws in force in the place where it is proposed to be done, is guilty of a felony and liable to imprisonment. Special Legal Circumstances All Court processes must be handled urgently because response expected in each circumstance is time limited. For example, an Order to freeze an account is expected to operate immediately upon service and if the funds are moved by the customer after the service, then the bank is liable to pay what should have been paid by the customer to the beneficiary of the Order. An officer of a bank who receives any court process must ensure that it is immediately referred to the Legal Department. Administration of Estates When a man acquires assets, he is said to have an estate and when he dies, his estate has to be administered by someone living, until the estate is wound up or has been fully distributed. All debts of the deceased must be paid before distribution of his estate. At the time of death: ➔ If a man had written a Will (testamentary disposition) stating how his estate should be managed or distributed, he is said to have died “Testate”. ➔ If otherwise, he died “Intestate”. The Administration of either estate is subject to approval by the Court through the issuance of “Letters of Probate” to the persons named as Executors in a Will; and the issuance of “Letters of Administration” upon a death intestate. The main difference is that where a Will exists, the Testator has the privilege of determining who inherits from him and also whom he trusts to carry out his wishes. In either case, the Administrators or Executors are empowered to initiate and defend suits relating to the estate instituted by third parties including banks. Mental Incapacity or Infirmity A mentally infirm is one who has lost his ability to comprehend issues. From that point he is considered unable to give reasoned instructions to his bank. If, however, he still has an estate which may include credit balances in bank accounts, this has to be managed for his benefit. The implementation of this lies in the appointment of someone closely related to him, usually family, or a court-appointed person, as his “Guardian” to administer his affairs. This Guardian operates like an Administrator of an Intestate Estate and can make withdrawals from the account of the insane to meet the ward’s needs. Minors A minor is an underaged child (under 18 years?) in the eyes of the law. He is liable to be cheated and thus needs legal protection. He is also deemed not to understand the nature of an obligation in contract and therefore needs someone who does to answer for him. A “Guardian” is appointed to take charge and manage his assets. The guardian is in a fiduciary relationship (trusteeship) with the minor and is liable for abuse of the minor’s assets. A guardian may not benefit from the arrangement unless he is specifically authorized to do so. Illiterates and Blind Persons These categories of persons are also liable to be cheated, especially in Contract due to their deficiencies. The law protects them by directing that the contents of a contract they are about to enter into must be read to and explained to them in a language that they understand before they affix their mark indicating that they agree to the contract terms. The process is undertaken before a Magistrate with an endorsement to that effect naming the interpreter and countersigned by the Magistrate. The closing statement which captures the entire process and is endorsed on the document is described as a JURAT. NATURE AND USE OF AFFIDAVITS Sworn statement in writing made especially under oath or on affirmation before an authorized magistrate or other officer. E.g. Notary Public. It verifies facts. Used in a variety of situations including age declaration, attestation to a marriage, litigation and other official circumstances. Negotiable Instruments Bills of Exchange/Negotiable Instruments S.3 Bills of Exchange Act, (Cap 35, Laws of the Federation of Nigeria 1990) defines a bill of exchange as…. “an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of a specified person or to bearer”. A bill of exchange is a non-interest-bearing written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined future date. A bill of exchange is a negotiable instrument. A negotiable instrument is a financial instrument representing value which is used in commercial transactions and which can be transferred to another person by mere delivery or by endorsement plus delivery. Examples: Cheques, Dividend Warrants, Treasury Bills and Promissory Notes and bearer bonds. Negotiation is a legal term which means transfer of the entire rights in a negotiable instrument to a transferee for value who acquires all the rights of the transferor. Negotiation is achieved through an endorsement which is a valid instruction written on the back of a bill and which when signed transfers the total value of the bill to the endorsee. An endorser is deemed to be giving an undertaking to the endorsee that: ★ Instrument is genuine ★ He has a good /transferable title ★ Not aware of any defect at time of endorsement These are known as the warranties of an endorser. Parties to a Negotiable Instrument Drawer – Person who writes and signs the payment instruction on it. Drawee – Person to whom the instruction is addressed. Payee – Person named on the instrument and is thus entitled to receive value on it. Endorser – A payee who signs an instruction on the back of the instrument through which he transfers the value due to him to be paid to another named person. Endorsee – Person in favour of whom the transfer instruction is made Processing Cheques A cheque is a bill of exchange (written instruction to pay) drawn on a bank and payable on demand. An incompletely filled-out bill is described as an inchoate bill e.g when the drawer signs and leaves all other details unfilled. When a cheque is crossed, a banker should not pay cash on it unless the cheque is opened by the drawer. Crossing is either General or Special. General-Two transverse lines across the face of the cheque. Sometimes, phrases such as “A/c payee only” or “Not Negotiable” are written between the lines. Special - Name of a bank stamped on the face of the cheque. A paying bank must be careful not to pay on a forged cheque because it will not enjoy protection if it pays one except it can prove that he made the payment in good faith, without negligence and in the ordinary course of business. A clearing bank should collect or clear cheques only for the true owner of the cheque or it may be liable in conversion to the owner. When a bank takes the risk of clearing 3rd party cheques for its customer, it should at a minimum protect itself by obtaining an Indemnity from such customer Dishonored Cheques Under the Dishonoured Cheques (Offences) Act, (Cap. 102 Laws of the Federation), it is an offence to issue dud cheques. Section 1 provides that any person who- (a) Obtains or induces the delivery of anything capable of being stolen either to himself or any other person, or (b) Obtains credit for himself or any other person by means of a cheque that, when presented for payment not later than three months after the date of the cheque, is dishonoured on the ground that no funds or insufficient funds were standing to the credit of the drawer of the cheque in the bank on which the cheque was drawn, shall be guilty of an offence and on conviction shall be sentenced to 2 years imprisonment (and if a company, to over N5000 fine). In CBN circular, BSD/DIR/GEN/LAB/08/016 of March 31, 2015 effective April 1, 2015 banks are directed to carry out the following activities as regards issuance of dud cheques: Recall/cancel all unused cheque books issued to serial issuers of dud cheques Bar the affected customers from use of the clearing system for a period of five (5) years. Forward the names of Dud Cheque offenders to the three (3) Private Credit Bureaux [i.e. CRC Credit Bureau, XDS Credit Bureau, and CR Services Credit Bureau (Pioneer) and the Credit Risk Management System (CRMS) which will list such names on their database for a period of five (5) years from the date of submission, after which offenders' names will be eligible for removal. However, if the offender is found wanting after the name is removed, such an offender shall be permanently reinstated in the data base of both the three (3) Credit Bureaux and the CRMS. Bar the serial issuers of dud cheques from accessing credit facilities from the banking system for a period of five (5) years. No institution shall, EXCEPT with the prior written approval of the CBN, remove such a person’s name from the three Credit Bureaux and the Credit Risk Management System (CRMS). Perform status check on a potential customer from CRMS and at least two Credit Bureaux BEFORE lending to a customer. Sanctions for non compliance A financial institution that fails to report a serial dud cheque issuer to the CBN, CRMS and the Private Credit Bureaux as required is liable to be penalized in accordance with the relevant provisions of the Banks and Other Financial Institutions Act. The Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Compliance Officer (CCO) and Chief Risk Officer (CRO) shall also be liable to sanctions under the same law. Regulation and Supervision of Banks. The CBN is the primary direct regulator of Banks, but it shares this responsibility with the Nigeria Deposit Insurance Corporation (NDIC). There are other agencies which also regulate banks indirectly. e.g. EFCC, NDLEA, CAC etc The regulatory powers of CBN are detailed in the CBN Act (No. 55 of 2007) and in Banks & Other Financial Institutions Act (BOFIA) and when exercised result in the issuance of Regulations, Circulars, Letters and Administrative Directives. These are binding on banks. The objective and impact of effective regulation and supervision is to ensure a safe, sound and stable operating environment. In exercise of these powers, the CBN Governor, over time, has issued several Regulations and Guidelines which constitute law and through which it regulates banking practice. Current Banking Regime In exercise of his powers, the CBN Governor under Sec.57, BOFIA, enacted the Regulation on The Scope of Banking Activities & Ancillary Matters, No. 3 of 2010 which contracted the scope of “banking business”. Section 2, repealed the Universal Banking Guidelines then in force and provided a penalty for anyone carrying on banking business without a valid banking license issued under the Banks & Other Financial Institutions Act (BOFIA). The Regulations, in Section 3, re-defined “banking business” as follows: “Banking Business" means the business of receiving deposits on current account, savings account or other similar account, paying or collecting cheques, drawn by or paid in by customers; provision of finance or such other business as the Governor may, by order published in the Federal Gazette, designate as banking business. Permitted Bank Types Section 4(1) From the effective date, the only types of banks that will be permitted to carry on banking business in Nigeria shall be limited to the following types as contemplated under BOFIA: (a) Commercial banks; (b) Merchant banks; and (c) Specialised banks, which include non- interest banks, microfinance banks, development banks and mortgage banks. Sub sections (3) & (4) empower the CBN to licence banks to carry on banking business on regional, national or international basis in accordance with rules that the CBN might issue from time to time. Section 5(1) – Compels banks to divest from any Related Enterprise i.e. subsidiary or associate controlled by the bank. Section 5(2) - banks may not acquire real estate except for purposes of their banking business and may not give loans or gifts for any political purpose. Customer Types and Required Documentation Customer Types, Legal Status and KYC Documentation KYC principles require that banks know their customers, therefore, we must verify their identity before opening or operating accounts for them. [Section 3, Money Laundering (Prohibition) Act, 2011]. Established categories of customers include Individuals, Sole Proprietors, Partnerships, Incorporated Companies, unincorporated Associations and Trusts. Documentation required is determined by the legal nature of each customer type we bank but adequate documentation is mandatory. Sole Proprietorship A sole proprietor is an individual who carries on a business, trade or profession for profit and who is required to be registered with the Corporate Affairs Commission if business is carried on in a name other than the actual names of the proprietor. He has no separate legal existence distinct from his business. A credit facility to his business is a facility to him in person. Sole proprietorship account opening package with similar details as for the individual is required but where the business is registered, a certificate of registration is required to be submitted to the bank alongside Form II which is a certified copy of the application form submitted to the CAC for registration. The usual description for account opening and other transactions is the name of the proprietor followed by the trade name e.g. Dickson James Trading as Dickson Enterprises Partnership This comprises two or more persons engaged in business for profit with membership limited to 20 (except for lawyers, accountants & co-operative societies. Section 19, CAMA) Regulation by a Partnership deed is not a statutory requirement. The partnership will be regulated by the applicable Partnership Law where there is no deed. Under that law, the death of a partner ordinarily dissolves a partnership unless they have a deed that provides otherwise. A partnership is not a legal person and so it cannot sue or be sued in the partnership name unless it is incorporated as a Limited Liability Partnership under Part C of CAMA (Sec. 746). Every general partner has authority to bind the partnership when acting in the ordinary course of the partnership’s business and liability of each general partner is joint and several for all the debts and obligations of the business incurred while that person was a partner. Liability of a Limited Partner is however restricted to the loss of the amount he has invested in the business. Requirements for opening an account include; identity documents of each partner, Partnership deed (if any), registration certificate, Form II and a completed account opening package. All partners must sign the account opening forms but they may thereafter designate signatories to the account. Incorporated Companies Section 18 CAMA - (1) As from the commencement of this Act, any two or more persons may form and incorporate a company by complying with the requirements of this Act in respect of registration of the company. (2) Notwithstanding subsection (1), one person may form and incorporate a private company by complying with the requirements of CAMA in respect of private companies. A company is an association of persons formed under the CAMA usually for a common economic objective. The members of the company are called shareholders or members who do not own the company but own shares in such company. A company has perpetual legal existence and is distinct from the individuals that comprise it (i. e. shareholders). It can own property, sue and be sued in its corporate name. It is administered by a Board of Directors but by virtue of Section 283, a minor, lunatic or insane, a corporation, bankrupt or convict cannot be directors. Directors' decisions are taken by Resolutions. Section 21 of Companies & Allied Matters Act, 2019 (CAMA) creates different types of companies, namely, Unlimited liability companies Companies limited by Guarantee Companies limited by shares, Liability of members is determined by company type.” Companies Limited by Shares Private Company This is a company which is stated in its Memorandum & Articles of Association to be a private company limited by shares and which is incorporated with a minimum authorized share capital of N100,000. A private limited liability company is restricted as follows and must state these in its Memorandum & Articles of Association, namely; ▪Transfer of its shares. ▪Membership, to 50 persons. [Excluding staff and ex-staff]. ▪Cannot invite the public to buy its shares or debentures Public Company This is a company which is stated in its Memorandum and Articles as such i.e a public company. Minimum authorized share capital permitted is N2,000,000. Both types of companies being limited by shares enjoy limited liability i.e. upon insolvency, the liability of their members is limited to the value of shares owned in the company. Members are thus not personally liable for any obligations of the company. Memorandum of Association Constitution of the company and it states the following: ▪ Name of the company & its Objects (Powers and nature of business) ▪ That the registered office of the company is situate in Nigeria ▪ The nature of the company i.e. Private or public ▪ Authorized capital & Liability of its members ▪ Subscription clause executed by subscribers CAMA holds directors of a company personally liable for any loss or obligations created when the directors have authorized the company to engage in a business activity not listed in its Memorandum of Association. Articles of Association Contain rules and regulations governing the internal workings of the company. It is a contract between the subscribers inter se and relates to issues such as: ▪ Shareholding, classes and restrictions on transfer ▪ Meetings ▪ Appointment of Directors /secretaries ▪ Borrowing powers and accounts ▪ Auditors ▪ Winding up ▪ Company seal Account opening requirements include: Certificate of incorporation, Certified copy of the Memorandum & Articles of Association, Resolution of the company appointing the bank as its banker, Particulars of Directors (CAC 7), Statement of Share capital Form (CAC 2), Account opening package identifying the signatories, Reference forms, Passport photographs and Identity documents of the signatories. Company Directors: CAMA provisions Sec. 269. Directors of a company registered under this Act are persons duly appointed by the company to direct and manage the business of the company. Sec. 271. Every company shall have at least two directors and must appoint a new one if the number falls below that statutory minimum. Sec. 272. The first directors are determined in writing by the subscribers of the Memorandum of Association or a majority of them or the directors may be named in the articles. Sec. 273. Subsequent Appointments of Directors (1) The members (shareholders) at the annual general meeting shall have power to re-elect or reject directors and appoint new ones. Sec. 274. Casual Vacancy (1) The Board of directors shall have power to appoint new directors to fill any casual vacancy arising out of death, resignation, retirement or removal subject to the approval of the shareholders Sec. 305.- Duties of Directors (3) A director shall act at all times in what he believes to be the best interests of the company as a whole so as to preserve its assets, further its business, and promote the purposes for which it was formed, and in such manner as a faithful, diligent, careful and ordinarily skillful director would act in the circumstances. Section 308. – Duty of Care and Skill (1) Every director of a company shall exercise the powers and discharge the duties of his office honestly, in good faith and in the best interests of the company, and shall exercise that degree of care, diligence and skill which a reasonably prudent director would exercise in comparable circumstances. Company Directors: Code of Corporate Governance provisions Compliance with the CBN Code of Corporate Governance for Banks in Nigeria effective April 3, 2006 is mandatory for all banks. “corporate governance” refers to the rules, processes, or laws by which institutions are operated, regulated and governed and it was developed to promote a transparent and efficient banking system that will engender the rule of law and encourage division of responsibilities in a professional and objective manner. (CBN Circular FPR/DIR/CIR/GEN/01/004 of 2014) Tenure of Bank Directors (Revised in 2022) Every Executive Director (ED), Deputy Managing Director (DMD) and Managing Director/CEO (MD/CEO) will hold their positions in accordance with their terms of employment for a maximum period of 10 years. Where a DMD becomes MD/CEO of a bank or another bank before the end of his tenure, he/she will serve for a maximum tenure of 12 years. When an ED becomes DMD of a bank or of any other bank his cumulative tenure shall not exceed 12 years. For Non-Executive directors (NED), (except Independent Directors) their cumulative tenure shall not exceed 12 years divided into 3 terms of 4 years each. An ED, DMD or MD who exits from the Board of a bank before or at end of their tenure shall serve a “cooling off” period of 1 year before being eligible for appointment as NED to the Board of any other bank. Tenure of External Auditors: A maximum of ten (10) years and firm shall not be reappointed in the bank until after a period of another 10 years. UNINCORPORATED ASSOCIATIONS These include religious bodies, charities, clubs, societies and trade unions and they are not juristic persons. They do not enjoy limited liability and cannot be sued in their registered names. They are usually administered by a Board of Trustees (also called Incorporated trustees when incorporated) which exercises all the legal powers of and can sue or be sued on behalf of the association as soon as it is registered. In addition to a completed account opening package, the bank should obtain copies of their certificates of registration, Constitution and Minutes of the meeting where the trustees were appointed and identification papers of the Trustees. The association’s Constitution will contain, inter alia, its aims and objectives, procedure for appointment and removal of trustees and their powers and duties. JOINT ACCOUNT is an account operated together by two individuals who are usually, but not always husband & wife. Most banks insist that only a married couple can operate a joint account. A bank must receive a written mandate signed by both and in the absence of contrary authority, the banker should only honor transaction instruments signed by both. The mandate may be revoked by either party at any time. Bankruptcy, insanity or death of one revokes the mandate and in the absence of a contrary instruction in the mandate, the survivorship principle applies such that the survivor becomes wholly entitled to the balance on the account. TRUST ACCOUNT is one operated by one person for the benefit of someone else such that the “trustee” holds the legal right to money in an account for the use of a “beneficiary”. A bank must not knowingly be part of a breach of trust but it must also not prevent the trustee from performing his duties under the trust. Trustees generally do not have power to borrow or invest trust funds in the name of the trust unless the Trust terms permit. General Principles of Secured Lending Loans constitute part of the assets of a bank. They are referred to as “risk assets”. The objective of lending is profit but lending may result in a loss if the risk of loss is not mitigated. A prudent banker will not lend against security but against a sound credit proposal submitted to it by the customer and in accordance with the credit policy of his bank. To safeguard the bank’s position the Legal Department works closely with the Risk Management Department of the bank. Banks lend other people’s money thus they need to protect the funds from loss by taking security. Bankers are also required by law to take security. (BOFIA). Nature of Security/ Qualities of a Good Security Security in the banking context, is a resource given by a debtor to his bank in order to assure the repayment of his debt thus relieving the bank’s anxiety of possible financial loss. All securities are required to be documented and when this is achieved such securities are described as “Perfected”. Perfection means full documentation of the security asset so as to preserve the bank’s priority over any other claimant. Perfection entails: 1) Preparation of legal documents 2) Execution 3) Processing (e.g. Governor’s consent to land transactions) 4) Stamping 5) Registration An unperfected security fails and that constitutes an offence under the Banks and Other Financial Institutions Act (BOFIA) where security is required. Qualities of a good security asset ▪ It must be identifiable and available i.e. an assured, undisputed and unencumbered title. ▪ It must be readily realizable. ▪ It must have an ascertainable value which must exceed the facility value. ▪ It should be perfected. Any security deficient in any of these values is potentially unrealizable. Review of Specific Legal Provisions Impacting Banking ▪ BOFIA (Banks and other Financial Institutions Act),2020 ▪ Failed Banks Act (2004) ▪ Prudential Guidelines for Banks in Nigeria (2010) ▪ Land Use Act, (1978) Banks and Other Financial Institutions Act, (2020) (BOFIA) (Cap. B 3, Vol. 2, Laws of the Federation of Nigeria, 2021) This is the principal legislation that regulates the business of banking. Section 6 - CBN written approval to be obtained before opening and closing any branch within or outside Nigeria. Section 7 – Merger, reconstruction or acquisition only with CBN Governor’s approval. Section 8 – No foreign bank may operate in Nigeria without CBN licence. Section 9 – CBN may prescribe minimum paid-up share capital of banks and banks must comply or face sanctions. Section 13 –CBN may prescribe minimum capital ratio (unimpaired by losses to be maintained by banks, failing which they may be barred from certain strategic banking activities. [Capital adequacy ratios (CARs) are a measure of the amount of a bank's core capital expressed as a percentage of its risk weighted assets]. (investopedia.com) Sections 15 & 16 – Banks to maintain reserve funds and may only declare dividend from their net profit after provision for tax, expenses and losses including contingent losses. Sections 17 – Directors, Managers or officers of a bank must disclose any interest they have in a credit facility and any lending must be in accordance with the Rules and Regulations of the bank; and where adequate security is required by such rules and regulations, it must be taken. Section 18 – a bank cannot re-employ any person who has been convicted by a court for any offence involving fraud or dishonesty or professional misconduct. Section 19 (1) A bank shall not without prior approval in writing of the CBN; (a) grant any credit facility to any person in excess of 20% of its shareholders’ fund unimpaired by losses. (b) grant any advance against the security of its own shares or any unsecured advances…unless authorized by the bank’s rules and adequate security taken where the rules state that security is to be taken. Section 19(3)(a) forbids a bank from granting a credit facility in excess of N1,000,000 to any of its directors without security except with CBN’s written approval. Section 19(3)(c) precludes a bank from giving forbearance on credit to any of its directors without CBN approval. Section 19(8)(d) requires a bank to have CBN written approval before purchasing, selling, disposing, acquiring or leasing any real estate for whatever purpose. Section 22 requires every bank to display at its offices its lending and deposit interest rates. Section 23 – Every bank shall cause to be kept proper books of account with respect to all the transactions of the bank and failure to do so is a crime. Section 29(4) - provides that every bank shall produce to the examiners at such times as the examiners may specify, all books, accounts, documents and information which they may require. Section 33 - Special Examination The Governor shall have power to order a special examination or investigation of the books and affairs of a bank where he is satisfied that: a. it is in the public interest so to do; or b. the bank has been carrying on its business in a manner detrimental to the interest of its depositors and creditors; or c. the bank has “insufficient” assets to cover its liabilities to the public; or d. the bank has been contravening the provisions of this Act; e. or an application is made therefor by - – a director or shareholder of the bank; or – a depositor or creditor of the bank; Provided that in the case of paragraph (e) of this subsection, the Governor may not order a special examination or investigation of the books and affairs of a bank if he is satisfied that it is not necessary to do so. For the purpose of subsection (1) of this section, the Governor shall have power to appoint one or more qualified persons other than the officers of the Bank to conduct special examination or investigation, under conditions of confidentiality, of the books and affairs of the bank. (At the bank’s expense) Section 34. Failing Bank Where a bank informs the Bank that - it is likely to become unable to meet its obligations under this Act; or it is about to suspend payment to any extent; or it is insolvent; or where, after an examination under section 33 of this Act or otherwise howsoever, the Bank is satisfied that the bank is in a grave situation as regards the matter referred to in section 33(1) of this Act, the Governor may by order in writing exercise any one or more of the powers specified in subsection (2) of this section which include prohibition of the bank from certain activities including and forex activities. It may also appoint or remove directors and the composition of the new Board shall not be affected by any limitations contained in the bank’s Memo & Articles. Section 47(1) - No person may be appointed as Director or chief executive of a bank without CBN’s prior approval. Section 47(3) - prevents a person related to non-performing credit from being considered as a director in any bank. Section 46 - Directors and employees of banks are prohibited from receiving commissions gift, employment, service, gratuity, money, property or thing of value for themselves or their relations from any person for rendering any banking service. Penalty for breaches include fines, imprisonment or both plus forfeiture of the gain to the Federal Government. Section 47(2)(a) - No person shall be appointed or shall remain a director, secretary or an officer of a bank who- is of unsound mind, bankrupt, convict for dishonesty or serious misconduct in relation to his duties; Section 47(2)(f) or in the case of a person possessed of professional qualification, is disqualified or suspended (otherwise than of his own request) from practicing his profession in Nigeria by the order of any competent authority made in respect of him personally. Failed Banks (Recovery of Debts) and Financial Malpractices In Banks Act, 2004 (Vol.6, Cap F2 LFN) This is generally an Act to provide for recovery of debts owed to failed banks and punishment of persons found guilty of financial malpractices in Banks and Other Financial Institutions. Section 12 – (1) Where (a) the information and details on the security pledged for the loan and filed before the court is impossible to locate; or (b) no security is pledged at all; or (c) the identity of the debtor is difficult to locate; or the debtor is difficult to locate; or (d) the debtor is found to be non-existent, fake or fictitious or in any way unidentifiable, the Court shall hold liable, for the outstanding loan and interest thereon, the directors, shareholders, partners….managers officers and other employees of the failed bank who in the pursuance of their duties were found to have been connected in any way with the granting of the loan which has become irrecoverable. (2) …unless the Court is satisfied that the debt was incurred without the consent of such officer. Section 13 – Laws of Limitations shall not apply to the provisions above. Sect. 15 (1) – Any director, manager or officer or employee of a bank who: (a) knowingly, recklessly, negligently, willfully or otherwise grants, approves the grant or is otherwise connected with the grant or approval of a loan or advance….or credit facility to any person (i) without adequate security contrary to the accepted practice or the bank’s regulations or (ii) with no security or collateral where such security… is normally required in accordance with the bank’s regulations or (iii) without perfecting through his negligence or otherwise a security or collateral obtained or (b)….connected with granting a loan above his limit or (c) ….in contravention of a law or regulation in force….or (d) receives personal gratification …or (e) Grants an interest waiver when the debtor has capacity to pay ….is guilty of an offence under the Act and liable to imprisonment without an option of fine. (Section 16) Note that liability is personal and an explanation that the officer was obeying the instruction of a superior officer will not necessarily terminate personal liability. The value of the facility granted by such officer is also immaterial Economic and Financial Crimes Commission Act (2004) Section 7 – (1) The Commission has power to- (a) cause investigations to be conducted as to whether any person, corporate body or organization has committed an offence under this Act or other law relating to economic and financial crimes; (b) cause investigations to be conducted into the properties of any person if it appears to the Commission that the person's life style and extent of the properties are not justified by his source of income. (2) In addition to the powers conferred on the Commission by this Act, the Commission shall be the coordinating agency for the enforcement of the provisions of- (a) the Money Laundering Act 2004; 2003 No.7. 1995 No. 13; (b) the Advance Fee Fraud and Other Related Offences Act 1995; (c) the Failed Banks Act (d) the Banks and Other Financial Institutions Act 1991, as amended: etc Prudential Guidelines for Banks in Nigeria (July 2010) 3.0 RISK MANAGEMENT 3.1 Credit policy to be duly approved by board of directors: Banks should prepare a comprehensive credit policy duly approved by their Board of Directors, which should cover loan administration, disbursement and appropriate monitoring mechanism and review same at least once every three (3) years. 3.2 Limit on exposure to a single obligor/ connected lending (a) The total outstanding exposure by a bank to any single person or a group of related borrowers shall not at any point in time exceed 20% of the bank’s shareholders fund unimpaired by losses. (c) The total outstanding exposure ….by a bank to all tiers of government and their agencies shall not at any point in time exceed 10% of the total credit portfolio. 3.3 Credit Concentration Policies (a) Banks should put in place effective internal policies, systems and controls to identify, measure, monitor, and control their credit risk concentrations. (b)The policies should be approved by the Board of Directors and should cover the different forms of credit risk concentrations to which a bank may be exposed. (c) A bank’s management should conduct quarterly stress tests of its major credit risk concentration, review, identify and respond to anticipated potentially adverse impact. (g) CBN to review compliance with the bank’s policy on credit concentration and if it finds inadequacies can invoke its supervisory powers and impose sanctions as may be necessary. 3.4 Exposures to Directors and their related interests (a) A significant shareholding is defined as a holding of at least 5% (individually or in aggregate) of a bank’s equity. (b) Director, insider and significant shareholder credit exposure should be fully disclosed by banks in their financial statements and returns prescribed by the Central Bank of Nigeria. (c) Insiders include directors, significant shareholders and employees. According to BOFIA, the term “director” includes director’s wife, husband, father, mother, brother, sister, son, daughter and their spouses. (d) Banks should ensure that their credit policies specifically address lending to directors as part of related parties or insiders lending policies. 3.7 Basic Information on Borrowers: (a) Banks shall not approve and/or provide any exposure (including renewal, enhancement and rescheduling/restructuring) in respect of a loan unless and until all such information the bank may require to evaluate the application has been obtained and considered. (c) All banks must show evidence of making enquiries or obtaining credit reports from at least two (2) private credit bureaus before granting any facility to their customers. (d) All banks must conduct a search on the borrower in the CBN’s Credit Risk Management System (CRMS) database. Note: Other private Credit Bureaux in Nigeria are: CRC Credit Bureau (established by 11 banks & foreign partners), XDS Credit Bureau (now known as First Central Credit Bureau Limited), and CR Services Credit Bureau (Pioneer) 3.9 Minimum Contents of Credit files: (a) Every bank shall maintain credit files whether in electronic, print or other form, on all its borrowers which shall contain adequate and timely information on the credit-worthiness of the borrowers: (i) to enable proper and effective monitoring of credit facilities extended by the bank; and to enable examiners, as well as the bank’s internal and external auditors, to have immediate and complete factual information from which they can form an objective appraisal of the quality of the credit facilities. (b) A bank shall maintain basic information …. to enable an objective evaluation of the quality of each facility, the borrower; the credit facility; the appraisal of the credit application; the conduct and status of the account; an offer letter containing conditions for draw down; and evidence of acceptance of offer by the borrower. 3.10 Margin lending: All banks involved in margin lending shall comply with the guidelines issued by the CBN/Securities and Exchange Commission (SEC) on Margin Lending for banks, brokerage firms, asset managers and other financial institutions. (A margin loan is a loan that is secured by a portfolio of shares). 3.21 Policies and procedures for write-off of fully provided credit facilities: Fully provided for & kept in the books for at least one year after, Board Approval, and CBN Approval if facility relates to an Insider or Related party The fully provisioned facility must be appropriately disclosed in the audited financial statement of the bank. Land Use Act (Cap. 202, Laws of the Federation, 1990) This law became effective on March 29, 1978. Its essence as captured in its preamble is to vest all land comprised in the territory of each state (except land vested in the Federal Government or its agencies) solely in the governor of the state, who would hold such land in trust for the people and would be responsible for the allocation of land in all urban areas to individuals resident in the state and to organizations for residential, agricultural, commercial and other purposes while similar powers with respect to non-urban areas are conferred on Local Governments. S.3 - The governor may, by gazette, designate parts of state land as urban area. S.5 - The Governor can grant Statutory rights of Occupancy (R of O) in respect of land, whether or not in an urban area to any person for all purposes, charge rental and/or impose penalties for breaches. S.6 - Local Governments may grant customary rights of occupancy in non-urban area for agricultural (limited to 500 hectares), residential and other purposes including for grazing (limited to 5000 hectares). S.9 - The Governor is empowered to issue a Certificate of Occupancy to anyone who has been assigned a right of occupancy over land in urban or non-urban areas. S.22 - A holder of a statutory right of Occupancy cannot alienate his right by assignment, mortgage, transfer of possession, sublease or otherwise howsoever without the prior consent of the Governor. S. 28 - It shall be lawful for the Governor to revoke a right of Occupancy for overriding public interest , defined as when the land is required by a government for public purposes, or for mining, oil pipelines etc. S.29 - Rights of occupancy revoked for overriding public interest will attract compensation “for the value at the date of revocation of their unexhausted improvements”, or, S. 33 ….resettlement in case of revocation Some Examples of Securities and Legal Documentation Classification of Securities Security may be Personal (Intangible such as Guarantee or Indemnity) or Real (Tangible) and this determines the mode of realization. Real Security may be divided further into: ▪Mortgage Securities whereby the bank obtains ownership rights over tangible security assets without possession. ▪Pledges or Possessory liens whereby the bank takes physical possession of the security asset without ownership. ▪Charges & Non–possessory liens whereby the bank neither obtains ownership or possession rights over the asset. In essence, taking real security gives the lender direct rights over the pledged asset while personal security only gives the lender a right to sue for the default on a Guarantee or Suretyship. MORTGAGES a) Legal Mortgage A legal mortgage is created by a complete transfer of an interest in land to the bank on the condition that it will be re-conveyed to the mortgagor when the debt owed is fully repaid. b) Equitable Mortgage An equitable mortgage is created without much formality through any step which in concrete terms demonstrates the intention of both the bank and the customer to appropriate the land as security for the loan. Examples: Deposit of the original title document to the bank with or without a Memorandum of Deposit, provided it is clear that the deposit is made as security for the loan. Legal Mortgage vs. Equitable mortgage A legal mortgage gives the bank a right against the property itself, thus the bank can sell the property without having to sue or obtain a court Order. On the other hand, an equitable mortgage only gives the bank a right to sue the mortgagor. A legal mortgage takes priority over any other interest but an existing equitable mortgage can be overtaken by a subsequently created legal mortgage. DEBENTURE This is a document issued by an incorporated company acknowledging its indebtedness and usually it constitutes a charge over the assets of the debtor company. It may be: (a) Fixed Debenture – a specific charge over a specified company asset. (b) Floating Debenture - does not affix to any specific asset but hovers over the company's floating assets which could be used up in the course of the trading activities of the company. The charge affixes unto the existing products only at the point of default. Where the assets covered by a debenture includes a company’s land, it is described as a Mortgage Debenture. While a mortgage transfers ownership of the property to a lender subject to a right of redemption, a charge only gives the chargee (lender) limited rights over the property. RIGHT OF SET-OFF/LIEN Right of Set-off is a bank's legal right to seize a borrower's any account balance (except a sub-account balance) in the same bank to apply it toward the borrower's any loan in arrears, or in anticipation of a default. (Investopedia.com) Unlike a right of set-off, a “lien” is a right of retention. It is exercised by the creditor in possession of a debtor’s property when he retains the property and makes its release conditional on receiving payment of the debt. It can only be exercised if the property of the debtor falls into the creditor’s hands in the normal course of business. Rules to follow when applying the Right of Set-Off & Lien Like a pledge, the right of lien depends entirely on the creditor being in possession of the asset. If the creditor exercises his right of sale, then he must obtain fair market price and refund any surplus to the debtor after deducting his debt. Prior notice to the customer is not necessary for the exercise of the right but its exercise may be excluded by contract. The right cannot be exercised if accounts are held in different rights e.g. a trust account of which a banker is aware. Also, it has not been judicially determined whether accounts maintained in foreign currency may be combined so it is safer for the bank to obtain a contract reserving such right. GUARANTEE This is an indirect personal security given by an individual (Guarantor) promising to be liable for the debt of another person (principal debtor), if that other person defaults. A guarantor’s liability crystallizes upon default by the principal debtor and so also his obligation to repay the guaranteed sum. A Guarantee may be expressed by the parties as payable on demand (demand guarantee) or subject to a pre-agreed condition (conditional guarantee). The value of a guarantee or indemnity depends on the guarantor’s ability and willingness to pay, so his integrity and net worth are key considerations. A guarantee is required by law to be in writing. INDEMNITY This is a personal security whereby a person undertakes a Direct personal liability for an obligation of another which results in a loss. A “Counter-Indemnity” allows an indemnifier to seek reimbursement from the primary obligor in the event that he has to pay any part of a claim he guaranteed in a primary contract upon the default of that primary obligor. Enforcement of guarantees Once a debtor defaults, the bank must issue a demand notice to the guarantor to pay. Upon receipt of notice of death of a guarantor by the bank, guarantor’s liability ceases in respect of subsequent transactions with the customer if allowed by the bank. The guarantor's estate is liable for the debts incurred up to his death. Guarantee vs. Indemnity While liability under a guarantee is triggered by the default of the principal debtor, an indemnity is triggered by a loss howsoever arising on the part of the creditor. Liability is primary under an Indemnity but secondary under a Guarantee. Banks generally combine the two liabilities in one single document referred to as “Deed of Guarantee & Indemnity”. The main difference between the two lies in their wording. COMPANY SHARES AS SECURITY Another term for this is margin lending i.e lending against a portfolio of shares as security. The Bank would firstly confirm ownership of shares and verify the signature of the owner on the share certificates or documents. The Bank then confirms the shares’ value and lends against it subject to a shrinkage margin. Where shares are listed on CSCS, a lien is placed on the shares by the CSCS at the instance of the parties. Advantages of using shares as security ➔ Value is readily ascertainable ➔ Transfer process is streamlined ➔ Simplified realization process upon default Disadvantages of using shares as security ➔ Fluctuating value ➔ Restriction on transfer of shares of private companies ➔ Limitation on number of shareholders to 50 for private companies as required under CAMA ➔ Restriction in BOFIA that banks cannot lend on the security of their own shares without CBN’s prior approval EQUIPMENT LEASE An equipment lease is a contract between a lessor (bank) and lessee for the hire of a specific asset required by the lessee (Borrower) but financed by the bank. The bank retains ownership of the asset while the borrower has possession and use of the asset on payment of agreed rentals over a period. There are two main types: Operating Lease – cost of the asset is not fully amortized during the period of such lease and the lessor bears all the economic risks such as maintenance and insurance. Finance lease – involves payment over an obligatory period, of specified sums, sufficient in total to amortize the capital outlay of the bank together with interest and other costs. The lessee (Borrower) in a Finance lease assumes all economic risks of ownership. The bank retains ownership of the asset as its security until full repayment whereupon it transfers ownership to the lessee. Consequently, the arrangement has the same structure as a Hire Purchase contract. LETTER OF COMFORT (a.k.a Letter of Intent) A letter of comfort is an assurance about a debt, short of a legal guarantee, given to a bank by a third party. When issued by a holding company in favour of its subsidiary, the parent company cannot be sued successfully by a lender upon default. The remedy lies in a suit against the borrowing subsidiary. A letter of comfort does not create binding obligations or rights and thus cannot be enforced. HYPOTHECATION/PLEDGE This is simply a charge on specific goods (usually when their acquisition is funded by a lender). There are two species of hypothecation: Pledge is that species of hypothecation which is contracted when the debtor delivers to the creditor, the things (goods) hypothecated subject to re- delivery upon repayment of a loan. Hypothecation (properly so called), is that which is contracted without delivery of the goods hypothecated. (Bell's Com. 25, 5th ed.) The obvious distinction here is about who has physical control of the goods. BANK BONDS & GUARANTEES A Bond is basically an undertaking to answer for an obligation arising out of the default of another in a contractual relationship. It is therefore a kind of Guarantee. Bonds are used essentially to secure satisfactory performance of contracts and they come in different forms including Advance Payment Bond, Tender or Bid Bond, Performance Bond etc. A bond issued by a bank is a deed by which the bank binds itself to the bond holder for the payment of a specified sum of money where a party to a contract fails to perform on a contractual obligation. It is in the bank’s interest to ensure that the basis of its obligation under the bond is clearly stipulated and its obligation limited to a specific sum. LIFE & ENDOWMENT INSURANCE POLICIES An endowment policy usually provides for the sum assured to be payable at an agreed date or at death whichever comes earlier. It is preferred to a Whole life policy by the assured because it provides an opportunity to the assured to enjoy his savings in his life time. A whole life policy provides for the sum assured to be payable on the death of the assured whenever it occurs. Assurance policies must have a current value to be acceptable as security. That present value is known as the “surrender value”. Features of insurance policy as a security for facilities: ▪ The value may be easily ascertained and surrender value increases as additional premiums are paid. ▪ Realizing a life policy is not expensive but a policy may be unrealizable if assured commits suicide or has made a false declaration in his proposal form. ▪ The insurance company must be viable, the policy must still be in force and assignable at time of accepting it as security, and the bank must be noted thereon as loss payee or beneficiary. NEGATIVE PLEDGE A negative pledge clause is a negative covenant in an indenture stating that a corporation will not pledge any of its assets if doing so gives the lenders less security. It is also referred to as a "covenant of equal coverage." (investopedia.com) Since this document is generally not registrable, the borrower can, de facto create such an interest because a subsequent lender will not have notice of the interest even if it had conducted a title search. In a non-secure loan agreement, negative pledge clause is added to prevent a borrower from obtaining any secured loan without an unsecured lender’s permission. This restricts the borrower from pledging any property to another lender because it will result in less security to the unsecured lender. It is usually expressed to attach all of the debtor’s present and future assets. If this undertaking is breached, the only remedy of the bank is to sue. DOMICILIATION OF RECEIVABLES Payments due under contracts may be domiciled as security for the facility usually in LPO [Local Purchase Order] financing. The borrower initiates a commitment from a third party with whom he is in contract that the 3rd party will forward proceeds of the contract to the lender upon its completion. Major downside to this is that the arrangement fails if the borrower defaults in the performance of the contract. If payment is not due to him for that reason then the 3rd party has no obligation to pay to the lender unless a clause had been added to the Agreement to establish that party’s liability in such circumstance. Some companies also decline to enter into domiciliation Agreements. Capacity of the principal to pay and integrity are key issues for consideration. LENDING TO GOVERNMENT As required for granting any facility, a proposed facility to any government also has to be properly appraised and approved. A Resolution of the Executive Council of the appropriate level of government stating the purpose of the loan, approving it, indicating the terms of repayment and designating the signatories. Thereafter, the state or its agency will enter into a loan agreement which is notified to the Accountant General who issues an Irrevocable Standing Payment Order (ISPO) to enable direct deductions from the revenue allocation to that government. It is therefore a guarantee of periodic payments from a specific account until the facility has been fully repaid. The ISPO terminates only after the facility is fully repaid. Governments sometimes also designate the bank as official collector of rates and taxes and authorize the bank to deduct its loan repayment from the collection accounts. It is dangerous to lend to a government while there is a pending suit challenging the election of the incumbent Chief Executive or offering the loan when it is close to the end of such an officer's tenure. Debt Management Act, 2003 The Debt Management Office (Establishment etc.) Act was passed in 2003 but deemed to have come into effect in August 2000. In exercise of its powers, the Board has issued Guidelines to banks directing that they do not lend to any Government or any of its agencies without the prior approval of the Minister of Finance. Section 24 provides that: “All banks and financial institutions requiring to lend money to the Federal, State and Local Governments or any of their agencies shall obtain the prior approval of the Minister.” PERFECTION PROCESS Deciding on and documenting the chosen security is a step in the process towards mitigating the risk in lending. Where required, the security must pass through the full process of perfection. 1. Preparation of documents - At this stage of the perfection process, documents which constitute the security for the lending are prepared. A well prepared document captures the essence of the transaction and makes enforcement easier in the event of a default. 2. Execution of documents - Affixing signatures to the documents and conforming with execution formalities where required is the next stage in the perfection process. Care must be taken to ensure that the document is duly executed. 3. Processing - Not all security documents go through a processing stage. However, security must be duly processed where legally required. e.g. Mortgages must be consented to by the governor. 4. Payment of Stamp Duty On Security Documents Basically, all Agreements are required by law to be stamped and if not stamped, such documents will not be accepted for registration or admitted in evidence in a court of law. Stamping can be Nominal, Free or Ad Valorem. In nominal stamping, documents are stamped for a specified value as indicated by the Stamp Duties office. Documents can also be stamped free of any stamp duty. Where documents are stamped on an Ad Valorem basis, the stamp duty paid is calculated as a value of the transaction sum indicated on the face of the document. Under-stamping documents is dangerous as it limits the amount realizable by the lender to the stamped value. When a document is subsequently up- stamped, it will lose priority to any other party who stamped after the under- stamping but before the subsequent up-stamping. 5. Registration of Security Documents/Priority Of Interest Documents such as guarantees, indemnities, letters of set- off, lien are not required to be registered but they must be properly executed and stamped. Registration rules for land: ▪ If land belongs to an individual, it must be registered at the appropriate Lands Registry in the state where the land is located. ▪ If the land belongs to a company, it is required to be registered at the Lands Registry and also at the Corporate Affairs Commission (CAC) Abuja (within 90 days of its creation). It should be noted that any charge on property of an incorporated company not registered with the CAC within 90 days is null and void under CAMA. Enforcement of Securities and Realization Challenges All bank advances fall into two broad classes i.e. loans or overdrafts. All forms of enforcement may only commence after a formal demand has been delivered to the debtor. This establishes “default” if the debtor does not pay after the demand. Thus, the bank’s right of enforcement crystallizes and the bank’s right to sue the debtor becomes effective. If after suing the debtor, the bank is successful and obtains judgment, it becomes a judgment creditor and can enforce judgment through: 1. Levying execution on personal or real property belonging to the debtor or 2. Obtaining a Garnishee Order. Where a bank has perfected its security, selling the asset pledged is a better option and if thereafter there is still an outstanding, it can sue for the balance. Remedies Upon Default Default on repayment of a bank loan normally attracts either a sale of security asset or monetary compensation payable by the defaulter, (“damages”) upon successful litigation. NOTES: ▪ The chances of recovering from loan default is directly dependent on the legal standing of the bank. ▪ Securities must be perfected to ease recovery as this gives direct rights over the security asset. ▪ Failure of perfection narrows recovery possibilities Remedies of a Mortgagee or Debenture Holder A debenture holder or mortgagee has the following remedies: a) Right to sue – Every lender has a right to sue upon default. b) Entry into possession of the property for his own use or use or another at his option. Such use is quantified in monetary terms and offset against the debt. c) Sale of the security asset and application of the proceeds of sale in satisfaction of the debt. The sale is usually effected by an auctioneer appointed by the bank. d) Foreclosure – an order of the court formally divesting the mortgagor of its equity of redemption thus entitling the mortgagee to sell. e) Receivership – This is one of the extreme measures of recovery which is open to a creditor/mortgagee. Notice of appointment of a Receiver must be advertised in two national newspapers and filed with the CAC within 14 days if appointed by creditors and within 7 days if appointed by Court. PETITION FOR WINDING-UP A petition to wind up a company debtor may be presented by its creditors for being unable to pay its debt under the provisions of the Companies & Allied Matters Act, 2020(CAMA). Section 572 provides that: A company is deemed to be unable to pay its debts if — (a) a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding ₦200,000, then due, has served on the company, by leaving it at its registered office or head office, a demand under his hand requiring the company to pay the sum due, and the company has for (21 days) three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor; (b) execution or other process issued on a judgment, act or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part; or (c) the Court, after taking into account any contingent or prospective liability of the company, is satisfied that the company is unable to pay its debts. Winding-up may yield no practical results if the company has become insolvent. As soon as a Petition for winding-up is presented, the company debtor’s assets are frozen in place and all employees and the Board of the company stand dismissed. All creditors except priority ones must prove their debts. Priority creditors are listed in the CAMA starting with liquidation expenses, then government, owed wages and salaries follow, then others. Natural persons can only be declared bankrupt not wound-up. A bankrupt is disqualified from holding certain elective and other public offices or from practising any regulated profession (except as an employee). He also cannot serve on the Board of any company. BANKRUPTCY ADJUDICATION Debts may also be recovered through a process stipulated in the Bankruptcy Act, 2004 whereby the debtor is adjudged bankrupt. A debtor must have committed an act of bankruptcy as defined below. Section 1. A debtor commits an act of bankruptcy - (a) if a creditor – (i) has obtained a final judgment or final order against him for any amount, and execution thereon not having been stayed, has a bankruptcy notice served on him, and (ii) does not, within 14 days after service of the notice, comply with the requirements of the notice or satisfy the court that he has a counter-claim, set off or cross demand which equals or exceeds the amount of the judgment debt. (b) if execution against him has been levied, and the goods have either been sold or held by the bailiff for 21 days: (c) if he files in the court a declaration of his inability to pay his debts or presents a bankruptcy petition against himself. Fraudulent preference in bankruptcy can be explained as the transfer of property by a debtor to his creditors in order to conceal assets, destroy, withhold or falsify documents in an effort to defeat bankruptcy proceedings. In accordance with the provisions of the Bankruptcy Act, the bankruptcy procedures up to adjudication are as follows: (i) Occurrence of the Act of Bankruptcy; (ii) Presentation of petition; (iii) Receiving order; (iv) Preparation of statement of affairs; (v) Public examination of the debtor; (vi) Meeting of the creditors; (vii) Adjudication of the debtor as a bankrupt Adverse Effects of Bankruptcy Under S.126 of the Bankruptcy Act, a bankrupt is disqualified from: i. Being elected into any legislative house of the National or State Assembly. ii. Election into the office of the President or Vice President, Governor or Deputy Governor. iii. Appointment as a justice of the peace. iv. Appointment or function as a Trustee of a Trust Estate. v. Participating or engaging in any regulated profession except as an employee. vi. Appointment to the governing council of a statutory body GLOBAL STANDING INSTRUCTION (GSI) CLAUSE To ease recovery of unpaid credit facilities by banks, the CBN in August 2019 issued a letter to all banks directing them to include a clause in all their credit offer letters to be signed by all borrowers before disbursement of credit to them. (CBN Ref.BSD/DIR/GEN/LAB/12/054). By virtue of the clause, banks will have access to funds of defaulters in other banks to repay debts owed on utilized facilities through CBN. The signed undertaking requires borrowers to empower the banks to take this action by petitioning the CBN who will track such borrower’s accounts in other banks using their BVN and instruct such banks to transfer owed balances from such accounts to the petitioning bank. By virtue of the undertaking, borrowers also waive their right to confidentiality and indemnify their other banks for that purpose. SOME TIPS TO REDUCE RECOVERY STRESS A thorough analysis or appraisal of credit proposals and a credit check on a company borrower and on its principal officers are imperative. Do not lend solely on the basis that the customer has offered a good security and after lending, monitor customer’s repayment and business activities. Always conduct a title check and ensure professional valuation before accepting any asset as security. Ensure all security assets are insured and bank noted as loss payee. Where business revolves around one person and there is a risk of business failure if he dies, consider a Keyman Insurance policy. Ensure that loans to companies are authorized by their board by obtaining a Board resolution. Glossary Case Study Ikemefuna is a 16-year old student who had been operating a savings account with your bank for over 3 years before he attained that age. Recently, he opened a current account and obtained a loan facility and bought a Yamaha Power bike, a Rolex wrist watch, and a pair of Giorgio Armani sunglasses. He provided an authentic (valid) driver’s licence to your bank showing his age as 23 based on which the account was opened and the loan was granted. To assure your bank of repayment, he provided a guarantor, his friend’s uncle who signed the bank’s deed of guarantee. He has now defaulted in repaying the debt. Explain the legal issues involved and determine whether your bank can successfully sue him and/or his guarantor to enforce recovery of the loan? 2. ”The duty of confidentiality owed by a bank to its customers is a serious but not an absolute duty.” Briefly explain the nature of this duty and explain four (4) exceptions to the general rule. Practice Short answer Questions What is tort? What is a negotiable instrument? What is the difference between an agreement and a contract? Explain vicarious liability with examples. List 3 regulatory bodies that impact on banking. What are the elements of a crime? Name 4 essential differences between a public and a private company?

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