legal aspect of banking

Learners & Trainers Legal Aspect of Banking

Learners & Trainers 1

LEGAL ASPECT OF BANKING



CONTRACT LAW

Definition

A contract is defined as an agreement which the law will enforce or which the law

recognises as affecting the legal rights and duties of the parties.

- Sagay, Nigerian Law of Contract

Note the idea of freedom of contract.

➢ Classification of Contracts

Formal Contracts

Simple Contracts

Formal Contract

A formal contract is that made by deed, and it is known as a contract under seal. A

formal contract is given legal effect by the signing, sealing and delivery by the party

executing the contract to the other party.

Simple Contracts

These are contracts other than/apart from formal contracts. They may be in writing or

may be oral (parol).

Express and Implied Contracts

A contract is expressed when its terms are clearly stated.

In implied contracts, the terms are not expressly stated, but the court will normally

construe the existence of a contract from the conduct of the parties, rather than from

their words or correspondence.

Bilateral and Unilateral Contracts



A bilateral contract is an exchange of promises – the offeror promises to do

something in exchange for which the offeree promises to do something in return.

Each party is obligated as obligor to the other party (the oblige) on their promise

made to the counterparty.

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In a unilateral contract, only the offeror has obligations. The offeror makes a promise

in consideration for a desired performance.

In general, unilateral contracts are used when an offeror has an open request in

which they are willing to pay for a specified act.

Example include the reward cases in which the offeree ‘accepts’ by actually

providing the required information to locating the missing person or object by re-

uniting it with the offeror.

The performance is referred to as executed consideration.

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➢ REQUIREMENTS OF A VALID CONTRACT

1. Offer

2. Acceptance

3. Consideration

4. Intention to create legal relations

5. Contractual capacity

6. Compliance with required formalities

7. Legality of object

(1) Offer

An offer is a proposition made by one party called the offeror, to another party called the

offeree, clearly and precisely indicating the terms under which the offeror is willing to

enter into a contract with the offeree.

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An offer must satisfy three conditions: -

1. It must be definite, certain and unequivocal. It must amount to a definite promise to

be bound upon acceptance of its terms.

2. The proposition must emanate from the person from the person liable to be bound

if the terms are accepted (questions of capacity and authority).

3. The offer must be communicated to the offeree. A person cannot accept an offer of

which he has no knowledge. An offer may be made to a particular person or to a

group or class of persons or to the public at large.



(2) Invitation to treat

For an offer to be valid; the offeror must have completed his part by declaring his

readiness to undertake an obligation upon certain conditions, leaving to the offeree the

options of acceptance or refusals. An invitation to Treat, however, is a preliminary to an

offer, and its essence is that by it, the supposed offeror is merely initiating negotiations

from which an agreement might or might not in time result. An invitation to treat is an

invitation to start negotiations with the intent to create an offer.

The offer crystallises when one of the parties (thereby becoming the offeror) finally

assumes a definite and unshifting positions of readiness to be bound if the other party

accepts.

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Examples include: -

1) Display of goods for sale

2) Advertisement of sales in catalogue

3) Announcement of a competitive scholarship examination

4) Invitation to interview for a job

5) Request for tenders

6) Advertisement of auction sale and request for bids, (though where and

auction is advertised without reserve, the auctioneer is bound to accept

the highest bid.

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(3) Acceptance

An acceptance is the final expression of assent to the terms of an offer.

It is valid and effective only if it is an assent to all the terms of the offer without

equivocation, qualification or addition.

▪ A qualified acceptance is a counter-offer

▪ Acceptance must be communicated

▪ Acceptance is not complete until it has been communicated to the offeror.

▪ Communication means actual notification of the acceptance.

Where a particular mode is prescribed, acceptance must be communicated in that

mode.

Where no particular mode is prescribed, the form of communication will depend upon

the nature of the offer and the circumstances in which it is made.

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(4) Termination of Offer

Offer cannot be left open forever, it could therefore be terminated before the acceptance

in the following manner.

Revocation- can be revoked at any time before it is accepted.

Rejection - can be rejected by the party being offered.

Lapse of time - where specified time is expressly stated.

Death of offeror or offeree before acceptance.

Impairment of subject matter- where the subject matter of the contract is

destroyed or damaged

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(5) Consideration

Consideration is defined as “some right, interest, profit or benefit accruing to one party,

or some forbearance, detriment, loss or responsibility given, suffered or undertaken by

the other”.

Simply put, consideration is the price for which the other party is bought. Thus, the

plaintiff suing on a promise made by the defendant must show that he paid a price. That

‘price’ is the consideration, and it may be either an act or a promise.

▪ Consideration need not be past

▪ Consideration need not be adequate but it must be sufficient

▪ Consideration is real

▪ Consideration must move from the promisee to the promisor

▪ Consideration is not vague

▪ Note the idea of promissory estoppels.

▪ Contracts made under seal do not require consideration.

(6) Intention to create legal relations

Regardless of the existence of valuable consideration, an agreement will not be binding

contract unless it is intended by the parties that it should give rise to legal relations.

Where that intention is not expressly stated, the test to discover whether it exists or not

,is objective, i.e. an adoption of the view of an ‘officious by-stander’.

Three categories can be identified: -

1) Where the parties themselves expressly exclude an intention to create

legal relations. . Ref: Chike Atu v. Face-to-Face Pools Limited.

2) Where the agreement relates to commercial or business transaction.

Here, the courts will presume that an intention to create legal relations

exists, unless and until the contrary is proved.

3) Where the agreement relates to purely domestic, family or social affairs –

the courts will presume that there is no intention to create legal relations

unless the circumstances point to a contrary conclusion.



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(7) Contractual Capacity

For a contract to have validity in law, the parties making it must have full legal capacity

to do so. Contractual capacity is the ability or competence of a person to enter into a

contract.

There are restrictions on the contractual capacity of-

1) Infants.

2) Persons of unsound mind.

3) Drunken person.

4) Married women.

5) Illiterates.

6) Corporations.

7) Bankrupt.

The general rule is that the contractual capacity of a company is limited to those

expressly or implied authorised by its Memorandum of Association.

Any contract made by or with a company outside or beyond such powers is ultra vires,

and void.

Note: Apart from those listed above, all other persons have full contractual capacity.

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(8) Terms of a Contract

Even if a contract is valid, it is important to determine the extent of the obligations of the

contract. This could be done by a consideration of the terms of the contract.

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Classification of Terms

Classification of terms may be necessary in order to determine what remedies are

available to the aggrieved party in the event of a breach.

1) Mere Representation

Statements made before contracting

Effects depends upon whether-

The contract was induced thereby or

The representation becomes a term of the contract

2) Condition

A “condition” is term of major importance which forms the main basis of the

contract, the breach of which normally gives the aggrieved party aright, at his

option, to repudiate the contract and treat it as an end. He may however choose

to affirm the contract, but in either event, he also has a right to claim damages.

3) Warranty

A’ warranty’ is a term of minor importance, the breach of which gives the

aggrieved party a right to damages only.

Other Classifications

Terms may also be classified as:



Express - Whereby parties have expressly have included in an agreement, the

terms of their contract, or

Implied - whereby terms are implied as applying to the contract, without any

conscious act of the parties includes the term therein.

Note:

The courts in order to reinforce the language of the contract, or give business efficacy to

it could imply terms. Terms could also be implied into a contract where such terms are

sanctioned by custom or commercial usage or by statutes.

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ASSIGNMENT OF CONTRACT RIGHTS

Nature of Contractual Rights

Tangible and Intangible property

Choses in action

Choses in rem.

Voluntary Assignment

At common law:

Choses in action generally not assignable.

Actions in promise’s name

Power of Attorney.

Novation.

In Equity

Legal and equitable nature of choses in action.

Absolute and non-absolute assignments.

Joinder, form and consideration.

Statutory Assignment

The legal right to such thing in action.

The remedies for the same

The power to give a good discharge.

Conditions:

- Assignment must be absolute

- Must be in writing

- Notice must be given to the debtor or promissor.



Study Review

1. Is a newspaper advertisement an offer?

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BANKING LAW

BANKER AND CUSTOMER RELATIONSHIP

The relationship between the banker and customer is contractual. It is the relationship of

debtor and creditor.

Definition of Bank/Banking

There is no specific statutory definition ‘Bank’ or ‘Banker’ that could help.

S.61 BOFID however defines “banking business’ as: -

“the business of receiving deposit on current account, savings account, paying or

collecting cheques, drawn by or paid in by customers; provision of financial or such

other business as the Governor may, by order published in Gazette, designate a

banking business”.

Bills of exchange act defines “Banker’ as:-

including a body of persons whether incorporated or not who carry on the business

of banking”.

Definition of Customer

There also no statutory definition of who a customer is, but the cases could help

To make a man a customer of a banker, “there must be some sort of account, either

a deposit or a current account or some similar relation”

- Ref: Great Western Rly. Co. vs. London &Country Banking Co. Limited.

The word “customer” signifies a relationship in which duration is not of the essence.

A person whose money has been accepted by a banker on the footing that they

undertake to honour cheques up to the amount standing to his credit is ….a

customer of the bank”.

-Ref.: Ademiluyi Vs. A.C.B. Ltd.



Note :- While the basis or relationship between banker and customer is contractual, it

could be classified depending on the transaction at any point in time, namely

Debtor and Creditor

Principal and Agent

Bailor and Bailee

DUTIES OF BANKER

To receive the customers’ money and cheques etc., for collection.

To receive the whole or part of customers’ money upon presentation of his

written authority during banking hour at the branch where the account is held or at

other arrangements or banks as agreed.

To give reasonable notice before closing a credit account so that customer can

make other arrangements and have outstanding cheques cleared without damage to

his reputation.

To advise the customer of any forgery of his signature, and exercise all due diligence

required in relation to the account.

To maintain secrecy in respect of the customer’s account and financial affairs.

Duty of Secrecy

The bank’s duty of secrecy is subject to the following exceptions-

1. Compulsion of law – e.g. pursuant bestowed on inland Revenue authorities, or

NDLEA

2. Authorisation by the customer (express or implied)

3. Disclosure in bank’s interest (e.g. in litigation; or returning a cheque for lack of

funds).

4. Public Duty - e.g. if an account is being operated for immoral or illegal purposes.

Note :- There is “ no confidence in iniquity”.



DUTIES OF CUSTOMER

Duty to draw cheques carefully- so as not to mislead the bank or to facilitate forgery.

Duty to disclose forgeries. Failure to report could facilitate a successfully plea of

estoppels.

Duty to seek out the banker for repayment.

RIGHTS OF A BANKER

To charge a reasonable commission for its services and interest upon loans. (Note

the Bankers’ Tariff ).

To return as unpaid, cheques drawn by the customer which create an unauthorised

overdraft or excess over an agreed limit.

A lien over its customers’ securities deposited with it.

A right to set-off what is due on one account against what is due from the customer

on his other account, where he operates more than one account at the same

branch of a bank, or at two or more branches of the same bank.

Note:

The right of set-off is precluded by

1) Unmatured or contingent liabilities

2) Express or implied agreement

3) Account containing trust funds



BANKERS’ OPINIONS

It is customary for banks to answer enquires of each other in respect of their customer’s

financial standing. The opinions are usually guided by the following consideration:

No information must be given about the actual state of the account whether it is

in credit or overdrawn or what the balance is.

Nothing must be said that could be interpreted as a promise by the bank to pay

cheques drawn on the account.

Opinion on an account is not likely to be construed as a breach of the duty of

secrecy. Note that it is given in general words. It is also customary.

Where a customer insist that no opinion should be given the bank should refuse

to operate the account.

A bank is ordinarily liable for its opinion, where there is negligence. This explains

the reasoning behind disclaimers in opinion.

- Ref: Hedley Bryne & Co. Ltd. Vs Heller & Partners

Regardless of disclaimer, a bank will be liable for a misleading opinion given deceitfully.

There is liability under the tort of deceit generally called “fraud”.

In Hedley Byrne’s case, the court pointed out that the standard words of disclaimer

could not be used by the bank to avoid an action for deceit; otherwise, the bank would

be a part of the fraud.

A bank is entitled to rely on the defence of qualified privilege to claim for defamation

for an erroneous opinion if it bona fide believes:

1) That the information given is true, and

2) That the person making the enquiry has a justifiable interest in receiving the

information.

Note:

A credit reference agency does not enjoy qualified privilege when giving information.



NEGOTIABLE INSTRUMENTS



NEGOTIABLE INSTRUMENTS

Negotiable instruments are documents used in commercial and financial transactions

usually to secure the payment of money.

They entitle the holder to payment of the sum specific thereon and the handling over of

such a document is often accepted as equivalent to payment.

Examples of Negotiable Instruments include –

Bearer debentures

Dividend warrants

Treasury bills

Travellers’ cheques

Cheques

Promissory notes

They are also called bills of exchange because of their practical value lying in there

being evidence of title to a legal right e.g. a right to enforce a debt.

By negotiability, it means that the title instruments pass to the transferee free from all

equities, provided he takes it for value and in good faith.

Bills of Exchange

S.3 (1) of the Bills of Exchange Act 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.”



Parties

There are normally three parties

1) The person who gives the order to pay (drawer)

2) The person to whom the order to pay is given (drawee)

3) The person to whom payment is to be made (the payee)

Consideration

A bill must be supported by consideration.

Any antecedent debt or liability may be the consideration, though such debt or reliability

must be the debt or liability of the drawer.

Acceptance

When the drawee signs the bill he becomes the acceptor, and promises to pay the

holder the amount of the bill on maturity provided the acceptance is unqualified.

A qualified acceptance varies the effect of the bill as drawn; and it may be conditional,

partial, local (as to place), and as to time.

Payment

A bill must be duly presented for payment; otherwise, the drawer, and endorsers are

discharged from liability.

If a bill is not paid when presented for payment, or if upon presentation for payment

being excused; It is overdue and unpaid, then the bill is said to be dishonoured by non-

payment, and the holder has an immediate right of recourse against the drawer and

indorsees.

Negotiation and Negotiability

A bill is negotiated when it is transferred from one person to another in such a manner

as to constitute the transferee the holder of the bill.

A bill containing words prohibiting transfer is not negotiable.

When a bill is negotiable, it may be payable either to order or to bearer.



Indorsements

For an indorsement to be valid, it must: -

1) Be written on the bill itself and singed by the indoser;

2) Be an endorsement of the entire bill; a partial indorsement does not operate as a

negotiation.

3) Where payable to order of two or more payees, all must indorse unless the indorsing

has authority to indorse for the others.

4) Where there are two or more indorsement on the bill, each is deemed to have been

made in order in which it appears on the bill until the contrary is proved.

Types of Indorsement

There are of four kinds Indorsements-

1) Blank Indorsement- simply by mere signature, thus payable to bearer

2) Special Indorsement- with specific instruction at the back, e.g. “pay AB”

3) Conditional Indorsement- where a condition is attached to the signature e.g.-

‘pay x when he delivers the bill of lading’ any payment made to x prior to the

satisfaction of the condition constitution x a trustee until the condition is fulfilled.

4) Restrictive Indorsement- where further negotiation is prohibited e.g. “pay B

only”

Note:

The effect of the negotiation of a bill is to give the transferee if he took the bill bona fide

and for value, a good title to the bill not withstanding any defect in the title of his

predecessors.



Holders

The person entitled to enforce a bill of exchange, by presenting it for payment or by

taking enforcement proceedings if it is dishonoured, is called “the holder” of bill.

Only payment to the holder can discharge the payee’s liability on the bill.

• The holder of a bearer bill is the bearer,

• The holder of an order bill is the payee or indorsee* in possession of it.

The Act recognises three classes of holders

1) Holder (e.g. payee in possession) – see above

2) Holder for value – a person in possession of a bill for which value has been

given.

3) Holder in due course – a holder who has taken the bill complete and regular on

the face of it before it was overdue for value and in good faith, without notice of

any defect in the title of his transferor, and if it has been dishonoured, then

without notice of the dishonour.



CHEQUES

A Cheque is:

▪ A bill of exchange

▪ Drawn on a bank

▪ Payable on demand

The law relating to bills of exchange applies to cheques.

A banker is not bound to accept an undated cheque, and if a cheque is post dated, it

may be accepted before the date shown.

Where the bank on which the cheque is drawn is unable for any reason to honour

the cheque; the holder is a creditor of the bank to the extent of the discharge of the

drawer.

If a bank wrongly dishonours a cheque, it is liable to pay damages to its customer.

Crossed Cheques

Crossing of cheques may be in any of the four ways –

General – the parallel lines the words “and company’/Co.”

Special – when the name of a banker is written between the parallel lines, only the

named banker must be paid.

Not negotiable – with this phrase, the cheque becomes non-negotiable.

A/c Payee – can only be collected for the named payee, therefore, not transferable.

A crossing is material part of the cheque and must not be obliterated or altered.

If the banker on whom a crossed cheque is drawn pays it otherwise than in accordance

with the crossing, he is liable to the true owner for any loss he may sustain owing to the

payment.



Protection of the Paying Bank

The main risk for a paying bank is that it may pay without its customer’s mandate such

that it would not have the right to debit the customer’s account.

Protection of the bank could be treated under two headings –

1) Common law protection:

a The customer may be stopped from setting up a forgery or lack of authority

either as a result of representation or as a result of a breach of his duty of care in

management of his account.

b. If a bank pays out on an altered cheque, it may debit the customer’s account for

the original amount of the cheque if the alteration was not apparent, and the

customer may be estoppled from complaining of the alteration if it was facilitated

by his negligence in drawing the cheque.

c. If a bank’s payments discharge a liability of its customer it may be able to debit

the customer’s account relying on principles of subrogation.

2) Statutory Protection

a. Where a bank pays someone who has no has title to the cheque because his title

depends on a forged or unauthorised indorsement and the bank pays the cheque

in good faith and in the ordinary course of business, it is deemed to have paid the

cheque in due course. The bank is entitled to debit its customer’s account;

through he may still be liable to the true owner of the cheque in conversion.

b. where a bank pays crossed cheque in accordance with the crossing and does so

in good faith and without negligence, it is treated as if it had paid the true owner.

The bank is entitled to debit the customer’s account and is protected against

liability to the true owner. The drawer also is protected, and payee bears the loss

of the cheque.



Protection of the Collecting Banking

Ordinarily, a bank which collects a cheque other for the true owner may be liable to the

true owner in conversion or for money lent and received.

Note that the bank has no means of ensuring that customer is entitled to a cheque

which he presents for collection. Thus, a special protection is necessary for the banker.

The Act affords a protection where a bank in good faith and without negligence –

a. Receives payment of a cheque on behalf of a customer, or

b. Having credited the customer’s account with the amount of the cheque, receives

payment for itself, and the customer has no title, or only a defective title to the

cheque, the bank incurs no liability to the owner by reason only of collecting.

c. Where the bank credits the customer’s account and allows him to draw against

the cheque before it is cleared, it effectively collects the cheque for itself and is

potentially protected.

If the bank pays cash for the cheque for the cheque at the counter, it buys the

cheque and becomes holder for value, but since it does not credit the customer’s

account, it is not protected by the Act, through it may quality as a holder in due

course, in which case, it is the true owner of the cheque.

Note that the protection is negated by negligence of the banker, for example, in

circumstances which would have put a reasonable banker on enquiry that the

customer’s title may be defective e.g. on a cheque drawn by an employee on his

employer.



REGULATION OF BANKING IN NIGERIA*

“Banking” is defined as

“…… the issue of notes payable on demand intended to circulate as money when the

banks are banks of issue, in receiving deposits payable on demand, in discounting

commercial paper, making loans of money on collateral security, buying and selling bills

of exchange, negotiating loans, and dealing in negotiable securities issued by the

government, state and national, municipal and other corporations’ 1.

This definition explains the functions, which a bank is authorised to perform. However a

question may be raised as to who could be authorised to perform such functions.

Section 2, BOFID prohibits any person from carrying on the banking business without a

valid banking licence, but that is not to presuppose that the phrase “any person’ refers

natural persons, rather the intention of statute is in relation to corporate institutions

licensed for the purpose of carrying on banking business.

In the case of Akwule & Ors. V. The Queen2, the Supreme Court of Nigeria opined that

the word “banker” does not include a person who is a mere employee of the bank. The

implication of this decision appears to run counter to the general assumption that banks

employees carry the tag of ’bankers’.

The current and the most important legislation governing the operations of banks in

Nigeria is the ‘Banks and other Financial Institutions Act. The act agrees by and large

with the definition above as to the meaning of banking business4 and it goes further to

define a “bank” as “a bank licensed under this act”.

The definition of a bank under the Act amounts to what is often referred to as ‘Lawyers’

definition’ in that it does not explain how any person could identify a bank from that

definition. There is no doubt that it is only a bank that could carry on banking business

and law makes provision for a term of imprisonment or a fine both for any person

carrying on the business without a valid licence.



REGISTRATION OF BANKS

To obtain a licence, an application shall be submitted to the Governor of the Central

Bank of Nigeria (CBN) with the following documents:

(a) a feasibility report of the proposed bank;

(b) a draft copy of the memorandum and articles of association of the

proposed bank;

(c) a list of the shareholders, directors, and principal officers of the proposed

bank and their particulars;

(d) the prescribed application fee;

(e) such other information, documents and reports as the Bank (CBN) may

from time to time specify5.

The proposed bank shall also deposit the approved minimum paid-up share capital; and

section 9 fixes the relevant share capital as follows: -

Section 61 defines “profit and loss sharing bank” as a bank which transacts investments

or commercial banking business and maintains profit and loss sharing accounts”.

The Governor of CBN may issue or refuse to issue a license subject to the approval of

the Minister of Finance, and his decision shall not be subject to reasons. Where the

licence is not granted however, the application deposit is refundable with investment

income less administrative expenses and tax.

The governor is also empowered to revoke or vary the conditions for the grant of a

licence, subject to the Minister’s approval. 6



REGULATION OF BANKING OPERATIONS.

The nature of the operations of banks is such that law must regulate it. Without

regulation, a bank may deal with depositors’ money in such a manner that the interest of

the latter is jeopardised due to a bank’s insolvency. Banks by creating credit affect the

whole economy.

Therefore, the Nigerian legislature has over the years enacted several statutes to

regulate banking activities.

The most important legislation is contemporary banking law is the BOFID, of 1991 later

amended(1907) and later and Act (BOFIA). BOFIA among other things regulates banks

and other financial institutions makes adequate provisions for the proper supervision of

such institutions by the Central Bank of Nigeria.

BOFIA is complemented by some other statues.

(a) Foreign Currency (Domiciliary Accounts) Act 8

The purpose of the Act is to authorise citizens of Nigeria, persons resident in Nigeria,

corporate bodies, diplomats, foreign diplomatic missions and international organisations

to import foreign currency and deposit same in a designated local bank account

maintained in an approved foreign currency. The relevance of this legislation to a bank

is that any approved bank for the purpose of the Act is allowed to operate such

accounts thereby liberalising the inflow of foreign currency, which in turn would

contribute to the revamping of the economy. 9

(b) Bank Employees, Etc (Declaration of Assets) Act10

The Act makes provisions for the declaration of assets by employees of banks operating

in Nigeria. Section 1 of the Act provides that every bank employee shall make a full

disclosure of his assets within 14 days of his employment. The declaration is also to be

renewed annually and any assets found not to have been disclosed shall be forfeited to

the Federal government. The purpose of the Act is to ensure probity on the part of

banks’ employees in view of the fidelity nature of their calling. For the avoidance of

doubt, an ‘employee’ of a bank is defined to include ‘the Governor, Chairman and

members of the Board, Managing Director, Director, General Manager, Examiner,



Inspector, Controller, Agent, Supervisor, Officer, Clerk, Cashier, Messenger, Driver,

Cleaner, and any other category of workers of the Central Bank, a bank or other

financial institutions of whatever title or designation, whether general or peculiar to the

bank. And it includes a person engaged as a part time, casual or temporary worker and

also any worker deployed to work in any branch or office of the bank in or outside

Nigeria”.

(c) Banking (Freezing of Accounts) Act 11

It is common with all corrective governments the world over to seek retrieve ill-gotten

wealth of corrupt public officers’. One such method is to freeze the bank accounts of all

such persons in the affected country. A banker cannot on his own freeze the account of

any customer, but if required by law to do so, he must comply.

The Banking (Freezing of Accounts) Act empowers the president to cause investigation

into any person’s account or restrict the operation of the person’s account, if suspects or

believes that such person has been involved in certain offences including bribery and

abuse of office.

The Act makes it an offence for any bank or manager to refuse to comply with any

direction under this Act, and a defaulting bank shall be subject to the penalties

prescribed under BOFIA in respect of failure to produce any book, account, document

or information.

Furthermore, the affected banker is immune for disclosing information concerning his

customer, because the Act expressly ousts court’s jurisdiction irrespective of the fact

that the customer’s conditional fundamental right has been infringed by such disclosure.



(d) Nigeria Deposit Insurance Corporation Act

The upsurge in the number of banks in the wake of the Structural Adjustment

Programme continuously creates a fear that circumstances may arise whereby some

banks due to incompetence or mismanagement may not be able to satisfy their liabilities

towards their depositors.

Although BOFID later BOFIA contains copious provisions in this regard, the government

has also enacted the Nigerian Deposit Insurance Corporation Act under which the

Nigeria Deposit Insurance Corporation is established for the purpose of insuring all

deposit liabilities of licensed banks and other financial institutions.

Thee Act provides that all licensed banks and such other financial institutions in Nigeria

engaged in the business of receiving deposits shall be required to insure their deposit

liabilities with the corporation. Contravention of this provision is an offence punishable

by a fine for each day the offence is committed.

The functions of the Nigerian Deposit insurance corporation are such that would protect

the interest of depositors in the event of the failure of an insured bank. The Act provides

that the Corporation shall have responsibility for: -

(i) Insuring all deposit liabilities of licensed banks and such other financial

institution;

(ii) Giving assistance in the interest of depositors, in case of imminent or

actual financial difficulties of banks particularly where suspension of

payments is threatened, and avoiding damages to public confidence in the

banking system;

(iii) Guaranteeing payments to depositors, in case of imminent or actual

suspension of payments by insured banks or financial institutions up to

maximum sum currently two hundred thousand Naira (N200,000);



(iv) Assisting monetary authorities in the formulation and implementation of

banking policy so as to ensure sound banking practice and fair

competition among banks in the country; and

(v) Pursuing any other measures necessary to achieve the function of the

Corporation provided such measures are not repugnant to the functions of

Corporation.

The NDIC (Amendment) Decree of 1997 confers extensive powers on the NDIC with

respect to distressed financial institutions.

The Decree provides that “where an examination or an investigation report of the

Corporation or any regulation institution reveals that an insured institution is significantly

or critically under-capitalised, the Corporation shall assume the supervisory

responsibilities over the insured institution for the purpose of taking prompt corrective

action as provided” under the Decree.

Such supervisory responsibilities extend to arranging re-capitalisation plan, removal and

substitution of the management of the affected institution.

Furthermore, NDIC is conferred with powers to take over the control and management,

or to merge such institution with a healthy institution, and where there is no hope of

rehabilitation, to recommend the winding-up of the distressed institution.



Control

Control or regulation of banking operations could take place via one of two methods,

namely

internal or self-regulation, and

external regulation.

Internal Regulation

Every bank has a duty to keep proper books of account with respect to all the

transactions in the bank. The books of account shall be kept at the principal

administrative office of a bank and of a bank and at the branches of each bank, in the

English language or any other language approved by the Federal Government.

BOFIA requires that every bank must make monthly returns to the C.B.N. and the

returns must give information on the following items:

(i) The assets and liabilities of the bank;

(ii) An analysis of advances and other assets at its head office and all its

branches;

(iii) Any other information that the CBN may require. It is worthy if note in this

regard that the Central Bank of Nigeria publishes Monetary and Credit

Policy Guidelines for every fiscal year indicating the breakdown of

information to be supplied by banks in their returns.

The current circular places great emphasis on ‘moral suasion’ hence it reiterates the

fact that “the CBN shall continue to hold dialogues with banks, other financial institutions

and industrial agencies with a view to keeping them informed of current policy

implementation and securing their co-operation on all aspects of monetary policy.

Each bank also has its regulatory procedures governing different aspects of its

operations. It may be complied in a single document, or each process may have its own

operating procedure manual. Compliance with such internal rules and regulations are

made mandatory by BOFIA



External Regulation

Central Bank

Persons and institutions other than the banks themselves also regulate/control banks.

BOFIA provides that the supervisory role of the CBN is to be carried out by the Director

of Banking Supervision authorised to examine the affairs of the bank periodically.

The Bank’s Auditor

To qualify as an approved auditor of a bank, the person concerned must be: -

(i) A member of one of the professional bodies of accountants recognised in

Nigeria.

(ii) Approved by the CBN

(iii) Resident in Nigeria

(iv) Carrying on in Nigeria Professional practice as accountant and auditor.

The approved auditors shall make a report to the shareholders upon the annual balance

sheet and profit and loss account of the bank.

In preparing the report, he (auditor) must make such investigations as may enable him

to form an opinion as to whether or not there has been compliance with the statutory

requirement; though he does not necessarily have to become a detective, for as it has

been said, the auditor is merely a ‘watchdog’ and not a ‘blood hound’. However, where

there are suspicious circumstances, the auditor must probe them exhaustively,

otherwise, he may bee liable for beach of duty.

In Re: London & General Bank13 the account of the bank contained some loans that

on the face value the auditor knew were unrealisable. The auditor made this fact known

to the directors but merely stated in the report that the assets as shown in the balance

sheet were dependent upon realisation. Consequently, the bank paid dividends out of

capital. The court held that the auditor was liable to refund the amount paid as

dividend14.



Apart from these general and statutory duties of auditors, BOFIA imposes additional

duties on a bank’s auditor, section 29(7) provides that if a bank’s auditor is satisfied that

(a) There has been a contravention of this Decree (BOFID), or that an offence has

been committed by the bank or any other person; or

(b) Losses have been incurred by the bank which substantially reduce its capital

funds; or

(c) Any irregularity which jeopardises the interest of depositors or creditors are

covered by the assets of the bank;

He shall immediately report to the C.B.N and if he fails either negligently or deliberately

to report such matter, he shall be guilty of an offence and liable on conviction to fine.

Supervisory Role of the C.B.N.

BOFIA provides for the supervisory role of the C.B.N. The Director of Banking

Supervision mainly performs this role on behalf of the C.B.N. His duty is to be

performed under conditions of confidentiality. He is assisted by officers whom the

Governor of Central Bank may appoint from time to time.

The Decree confers controlling powers on the C.B.N. over ‘failing bank’.

A bank becomes a ‘failing bank’ if it informs the C.B.N. that:

(i) It is likely to become unable to meet its obligations under the Decree; or

(ii) It is about to suspend payment to any extent; or

(iii) It is insolvent, or

(iv) The CBN is satisfied after examination that the bank is in a grave situation.



The Governor of the CBN through the director may take steps to control the failure and

if the affairs of the bank do not improve significantly, may with the approval of the

President assume control of the whole of the property and affairs of the bank; carry on

in whole or part the affairs of the bank as may be necessary; or appoint persons to do

so on behalf of the CBN.

Such powers of control may extend to the revocation of the bank’s licence if the

President gives his approval. Where the licence of a bank is revoked, the bank shall

within 14 days apply to the Federal High Court for an order winding up its affairs. If the

bank fails to apply, the governor may supply that the bank would up.

When a bank is being wound up, the act gives priority to local deposits liabilities where

such bank is unable to meet its obligations. The assets of the bank in the federation

shall be available to meet all its deposit liabilities; and such deposits liabilities shall have

priority over all other liabilities of the bank 16.



The Role of a Bank’s Legal Department

There is no statutory provision, which makes it mandatory that a bank shall have a legal

department, although in practice many banks have such departments.

Even where the department is non-existent, all banks comply with the requirement of

section 293 of the companies and Allied Matters Decree, 1990 that every company

must have a secretary.

It is noteworthy that legal practitioners occupy the office of Company Secretary of most

banks.

The major duties of company Secretary are

▪ To ensure that the company complies with all rules and regulations laid down by

law;

▪ To maintain records and registers required to be maintained as well as filing

relevant returns at the corporate Affairs Commission.

▪ To ensure that the bank complies with the law.

▪ To ensure that the C.B.N. examiners as well as the bank’s approved auditors

have access to all the books of the company so as to perform their duties without

hindrance.



OTHER STATUTES AFFECTING BANKING

• Bills of exchange Act, Cap. 35

• Companies Income Tax Management Act, cap. 60.

• Income Tax Management Act, Cap. 173

• Land Use Act, Cap. 202

• Bankruptcy Act, Cap. 30

• SFEM Act, Cap. 405

• Insurance Decree, 1997

• Loans Act, Cap. 212

• Dishonoured Cheques (Offences) Act, Cap. 120.



DUTIES OF BANKS

Maintenance of capital funds unimpaired by losses.

Minimum holding of cash reserves, liquid assets, special deposits, and stabilisation

securities

· Ratios to be prescribed by CBN from time to time

· Usually done through Monetary Policy Circulars

Maintenance of Reserve Funds

• To be created out of NPAT prior to declaration of dividend.

• Where the reserve is less than the paid up share capital – transfer 30% of

NPAT thereto

• Where the reserve is equal to or exceeds paid up capital – transfer a

minimum of 15% of NPAT thereto

• CBN is authorised to vary the proportions either generally or in particular

cases

• No provision for penalty for breach

Restriction on dividend

• Banks cannot pay dividends without satisfying conditions stipulated in the

maintenance of reserves.

• Preliminary expenses must have been written off.

• Adequate provisions made for actual or contingent losses.

• Satisfaction of capital ratio requirement.



Disclosure of interest- Personal Interest by Directors, Managers, and

Officers

· Direct or Indirect personal interest in advance, loan or credit facility to be

disclosed.

Such facilities to comply with internal rules and regulations (Ref: CPG)

· No benefit there from

For Directors

Notice immaterial where he holds less than 5%, or

Where CBN considers the Director’s interest immaterial (subjective) - in any

event, it must first be disclosed to CBN before materiality is determined).

Any conflict or potential conflict of interest to be notified.

Prohibition of employment of certain persons –

* Persons adjudged bankrupt

* Persons who have suspended payment to or compounded with creditors.

* Persons convicted for an offence involving fraud, dishonesty, or

professional misconduct.

Restrictions on certain activities

CBN approval must be obtained before –

* Any facility exceeding 25% of the shareholders’ fund unimpaired by losses

is granted to any person

* lf such loans/facilities to be aggregated, and extend to those of

subsidiaries or associates.



CBN approval is necessary for

* unsecured facilities granted to Directors.

Note : ‘Director’ includes spouse, parent, sibling, children and their spouses.

* Firm, partnership, or private company in which a director is interested as director,

partner, management, agent, or guarantor.

* Any public or private company in which one or more of its (bank) directors holds

not less than 5% of equity directly or indirectly.

* Unsecured facilities to officers and employees exceeding 1 year emolument.

CBN approval is required before a Bank can –

* Facilities to be secured by the banks shares.

Approval is required before a bank could:-

i. engage in wholesale or retail trade, import or export trade except as may be

exceptionally necessary in the course of banking operations, or in the course of

the satisfaction of debts to it –

Note:

Equipment Leasing or debt factoring is permitted.

Investment for the promotion of capital or money market, approved by CBN

which must not exceed 25% of the bank’s paid up capital and statutory reserves

of that bank is allowed.

All shareholding acquired by a bank while managing an equity issue.

Acquisition of shares in small and medium scale industries, agricultural

enterprises, and venture capital companies).



Medium Scale Industry, Agricultural Enterprise, Venture Capital Company,

or other approved business – Not more than 10% of Bank’s shareholders’

fund, and < 40% of the acquired company’s equity.

Aggregate investment therein not to exceed 20% of Bank’s shareholders’

fund (Merchant Banks – 50%).

Display of interest Rates –

To be displayed at offices – lending and deposit rates, and render information to

CBN as required.

Books of Account

Proper books of account to be kept –

Returns by banks –

* Within 14 days of the end of each month.

Publication of consolidated statements –

Though returns to CBN are confidential, CBN may disclose same to any

Government agency as required by law, or may publish aggregate consolidated

statements for each category of banks.

Publication of annual accounts of Banks –).

▪ To be published not later than 4 months after the end of its financial year.

▪ The accounts should disclose penalties paid for contravention of BOFID.

Note:

The bank shall obtain the approval of CBN before publication.

Contents and forms of accounts –

* To be as prescribed by CBN.

Relationship with specialised Banks



* Right of CBN to examine accounts now extended to:

• NIDB

• NACB

• Nigeria Import/Export Bank

• NBCIS

• Urban Development Bank

• All Mortgage Institutions

• Community Banks

• People’s Banks

• Bureau de Change

• Discount House

• Other Financial Institutions

SUPERVISION

• Routine Examination and Report

Every Bank must present CBN’s routine examination report on its affairs to its

Board of Directors.

▪ The Board’s reaction must be forwarded to the CBN within 2 weeks of its

meeting.

▪ Special Examination may be ordered on the affairs of any Bank –

Branch opening/closing and Reconstructions

* Subject to the prior consent of CBN.



CONCLUSION

Banking industry has passed through a lot of changes.

Regulations are necessary but should not be negative or inhibitory.

Regulations should only assist in achieving normal economic objectives.

Banks are subject to both legal and ethical standards.

Ethics mean more than remaining within the law. Every legal action is not

necessarily ethical

The business, which hopes to earn the trust of the public, must aim for higher

ethical standards.



Discussion

1. What is the effect of a forged signature on a bill of exchange?

2. What is the effect of crossing?

3. What was the impact of a uniform December 31 fiscal year end for all banks in

Nigeria.?

4. Was CBN right to change the management of some of the “fledging” banks??



BUSINESS ORGANISATIONS

Before commencing any business, the promoters must decide which form of business

organisation to adopt. The degree of personal control which the owners will be able to

exercise over the business, and the extent to which they will be personally liable to the

business creditors will largely depend on the form of organisation adopted.

Other relevant factors in the choice of an organisation include-

▪ Incidence of taxation

▪ The nature of available finance

▪ Continuity or continuos existence of the business

▪ Ease of formation

▪ Desired form of management

Four common forms of business organisations for business are –

• Sole proprietorships

• General partnerships

• Limited Partnerships

• Corporations/Companies



SOLE PROPRIETORSHIP

In sole proprietorship, the State exercises a minimum control over the operation of the

business.

The only form of registration required is, if the proprietor operates in a name other than

his true name(s) e.g. AB & Co.; or ABC Enterprises.

Liability

Since the owner has maximum personal control over the enterprise, he is subject

to full personal responsibility for all its debts. The owner has unlimited personal

liability.

Offer letters and loan agreements must be made to/with the individual person

‘trading under the name and style of ‘ABC Enterprises’.

Taxation

The business is not subject to corporate tax.

The owner suffers all losses and receives all profits, hence he is subject to

personal income tax laws and regulations.

Continuity

The business is bound up with the life and decision of its individual owner. He

could end the business at will (or by his death).

Management

The owner is management.



PARTNERSHIP

• A ‘partnership’ is ‘’the relationship subsisting between two or more persons carrying

on a business with a view to profit’’.

• This exception does not apply to a partnership of legal practitioners and accountants

• There are two types of partnership, namely –

1) General Partnership, and

2) Limited Partnership.

General Partnership

Formation

The law does not present a specific form. A partnership may be formed orally, or in

writing, or there may be a partnership deed.

It is however beneficial that there exists a partnership deed in writing so that the rights

and obligations of the parties could be clearly spelt out.

Rights and duties of partners depend largely on the partnership agreement/deed, but

where that is non-existent, the Partnership Act provides for the rules for the

determination of the interest of the partners.

Partners and Third Parties

The rule of agency applies. Every partner is an agent of the firm and of his co-partners

for the purpose of the partnership business.

In a Trading firm, a partner may –

a) Draw, accept, transfer for indorse negotiable instruments in the firm’s

name.

b) Borrow money on the firm’s goods as security.

c) Recover/claim on obligations due to the firm.



Liability

Liabilities of parties for contract are joint and several. The firm is liable for the wrongs of

each partner, for wrongs committed in the ordinary course of the firm’s business.

For purpose of obligations, contracts with partnerships should be in the partners’

individual names “trading under the names name and style of XYZ and Co.”

Dissolution

A partnership may be dissolved for any of the following reasons –

- Expiration or notice

- Bankruptcy of a partner

- Death of a partner

- Subsequent illegality of the partnership

- Upon the happening of a certain named event

- By the Court (due to-

Instant of a partner

Inability of a partner to continue

Misconduct of a partner which could adversely affect the firm

Breach of partnership agreement

Continuous loss

Whenever it is just and equitable to do so.



Limited Partnership

A ‘limited partnership’ combines the privacy of partnership with the limited liability of an

incorporated company.

At least one of the partners must have unlimited liability. There must be an

individual capable of carrying the liabilities.

A limited partnership must be registered under Part B, CAMA.

The limited liability of the limited partner subsists for as he does not take part in

management of the partnership business.

If it takes part in management, the agency principle applies, and he is treated as

an ordinary partner.

Other incidences of a general partnership apply.



CORPORATIONS

The word “corporation’ or ‘company’ connotes an association of a number of individuals

formed for some common purpose.

CAMA explicitly identifies the basic characteristics of a company. It provides:

“from the date of incorporation mentioned in the certificate of incorporation, the

subscribers of the memorandum together with such other persons as may from

time to time become members of the company, shall become a body corporate

by the name contained in the memorandum, capable forthwith of exercising all

the functions of an incorporated company, and having perpetual succession and

a common seal, but with such liability on the part of the members to contribute to

the assets of the company in the event of its being wound up”.

Two critical doctrines are peculiar to the incorporated business association,

namely –

1) theory of Corporate Personality,

i. e. the company is a person in the eye of the law, quite distinct from

the members who have formed it.

2) theory of Limited Liability

The members cannot be liable for the obligations of he company and visa-

versa.

Advantage over other forms

- Limited liability of members

- Capacity to own property

- Perpetual succession

- Transferability of capital

- Ability to raise capital



Classification of Companies

Classification of companies could be viewed from two perspectives namely –

a. By the nature of members’ liabilities –

▪ Companies limited by shares

▪ Companies limited by guaranty, and

▪ Unlimited liability companies

b. By the character of the Articles of Association

i. Private Companies -

• restriction of the right to transfer shares

• limit the number of members to 50

• prohibition of invitation to the public to subscribe for shares or

debentures

ii. Public Limited Companies

no restriction



MEMORANDUM OF ASSOCIATION

The company’s Memorandum is required to state the following –

a) The name of the company

b) That the registered office of the company is situated in Nigeria:

c) The object clause:

d) The restriction, if any, on the powers of the company:

e) Whether the company is public or private:

f) The capital clause

g) The nature of liability of the members.

The Ultra Vires Doctrine

The objects clause of the Memorandum indicates the business, which the company

could engage in.

The company shall not carry out any act, which is not included in its objects clause. If it

does, such acts shall be ultra vires, hence, null and void.

CAMA however affords some protection to third parties in that the acts of companies

shall not be invalidated by reason of such acts exceeding the company’s objects or

powers.



ARTICLES OF ASSOCIATION

The Articles of Association prescribe the rules and regulations governing the conduct of

the company’s affairs.

The Articles make provisions on issues like – Borrowing powers

- Board of Directors

- Shares

- Meetings

- Membership

- Committees

- Secretary

- Dividends

- Reserves

- Accounts

- Winding Up, etc.



ACCOUNT OPENING DOCUMENTATION

RATIONALE

▪ The banker/customer relationship is contractual, hence, there must be documents

evidencing the nature of the relationship.

▪ When the customer completes the account opening application form, they are

making an offer, which the bank is at liberty to accept or refuse.

▪ The mandate in the package, which the prospective customer executes imposes

some obligations upon it/him and also confers rights upon the bank.

▪ The law requires the bank to be aware of relevant information on its customers

their businesses. The process of documentation/facilities compliance requires.

- References

- Basic customer information form

- Application form, etc.

Signature mandate affords an opportunity to the bank to permanently capture the

customer’s authority regarding transactions on the account.

INDIVIDUAL Accounts

▪ Letter of Reference

– Comments on the suitability of the prospective customer as an account -

holder.

▪ Banker’s opinion on the referee is then obtained.

▪ BVN

▪ Signature/Mandate



SOLE PROPRIETORSHIP/PARTNERSHIP Accounts

▪ Letter of Reference

▪ Copy of Certificate of Registration

- Ascertain that there is no dual registration

▪ Copy of Application for Registration

- Necessary so that the partners could be identified.

▪ Partnership Deed/Agreement (if any).

Note that partners are liable for the obligations of the firm

Note also that the firm cannot contract in its name; it has to be through the

partners/proprietor.

SOCIETIES/CLUBS/ASSOCIATIONS

▪ References

▪ Copy of Certificate of Registration

▪ Copy of Application for Registration

▪ Constitution

▪ Minutes of Meeting.

Note that in reality, it is the registration of the Trustee that confers legal

personality on the association

▪ Copy of Constitution, Rules, & Regulations –

It is necessary to know the powers of the trustee, especially in relation to

borrowing, and the associations’ property.

EXECUTORS/ADMINISTRATORS Accounts

▪ References

▪ Copy of Letters of Administration or probate

▪ Note that account is to be opened in the name of the Estate.



CORPORATE Accounts

▪ References

▪ Copy of the Certificate of Incorporation.

▪ Check for the nature of liability in the registered name.

▪ Review the Printed copy of the Memorandum and Articles of Association.

- to ascertain objects and borrowing powers.

▪ Copy of Form CO7 – (Particulars of Directors)

- to ascertain the particulars of the directors.

Note

There are circumstances when the directors could be personally liable. Thus, if the

particulars on the From CO7 appear insufficient, request for additional information

(Principle of ‘lifting the veil’).

Search Report

- Note that there has been evidence of multiple registration in the past.

- Opportunity to ascertain whether or not the company’s assets are

charged.

The law allows creditors to sue directors personally, if there is evidence that loan meant

for the company’s business were applied for other purposes.



LOANS DOCUMENTATION

Pre-Contractual Issues

The Term Sheet

What issues should be addressed?

How much detail should it include?

Is it intended to be legally binding?

. Issues

- Borrower

- Amount

- Purpose

- Draw-down

- Term

- Repayment

- Security

- Interest Rate

- Fees

Arrangement fee

Agency fee (where applicable)

Commitment fee, Facility fee, others

- Representations and Covenants

(Those usually found in facilities of this kind)

- Events of Default (as above)

- Legal costs

- Law and jurisdiction

- Acceptance

The ‘Term Sheet’ is ordinarily not a legally binding document. Its purpose is to enable

the parties ascertain the issues agreed upon during negotiations. Hence, it is usually

written “Subject to Contract “Without prejudice”.

Upon acceptance, the term sheet would normally form the basis of the offer letter.



THE LOAN AGREEMENT

The Loan Agreement seeks to address the concerns of the Lender, with a view to

protecting the Lender’s interest.

. All loop-holes must be plugged, hence, the account officer or relationship

manager should ‘level’ with the Solicitors on the full facts.

. Areas of Concern could be classified under three headings-

▪ Asset Risks

▪ Project Risks

▪ Corporate Risks

Asset Risk

• Government Restriction

• How do I charge the assets?

• Saleability of assets

• Depreciation

• Insurance

• Can the assets be accessed?

• Can I excise the assets from an existing charge covering future assets?

Project Risks

• Duration (when does earning potential materialise?)

• Any guarantee to cover the period?

• Income (How do I ensure the receivables will come to me?)

• Any insurance against business interruption?

• Any Regulatory Approvals?

• Coverage/plugging of any possible leakage of funds

• Currency risks (if any)

• Taxation risks (if any).



Corporate Risks

• Financial Standing

• Other Lenders’ Right

• Corporate Management

• Litigation.



SECURITY

THE GOLDEN RULE Never lend against a security as a first consideration.

Irrespective of whether or not a security is offered, the banker must abide with the

principles of good lending before advancing a credit.

“The principles of good lending are based on a consideration of the following”

• Legal capacity of the Borrower

• The purpose of the advance

• The amount involved

• The duration of the advance

• The source of repayment

• The profitability

• The security offered.

“The most fundamental principle of all is that the bank should have confidence in the

integrity, competence and continuing creditworthiness of the borrower’ Security should

be regarded as a last line of defence to fall back upon in exceptional circumstances.

The realization of security is sometimes a lengthy, costly, and complicated business.

Nevertheless, a bank would ordinarily require security for its exposure because a

borrower’s position (no matter how good) can, and sometimes does change

Obtain r security at the outset, where security is required

COMPONENTS OF A SECURITY

• Mortgage

• Asset covenants

• Insurance assignment

• Earnings assignment

Factors Influencing the Security



• type of asset

• type of finance

• source of income

• location of asset

• is the security given by a third party?

• Third party involvement (e.g. end user)

Third Party Involvement

• Add third party clauses or prepare tripartite agreements

• waiver of subrogation

• principal obligor

• guarantee, if required (it is necessary if security is being given by a corporate

body)

Check commercial benefit requirements.

If There Is a Lessee

• Covenants from lessee regarding use of asset

• Insurance assignment from lessee

• Right to terminate lease if bank wishes to enforce.

• Right to continue leasing if borrower is insolvent.

If There Are Other Mortgages

• Regulate enforcement rights

• Regulate first mortgagee’s right to advance further credit

• Regulate repayment rights.



CONDITIONS PRECEDENT

• acceptance of offer

• board resolution (seal is not required by law, but if offer letter required a seal, the

acceptance should be under seal)

• execution of loan agreements and security documents

• lean search report on (registered) asset

other conditions peculiar to each credit facility and security, e.g.

• import cash letter of set off

• tripartite security guarantee

• finance letter of pledge/trust receipt



CLASSIFICATION OF SECURITY

Real and Personal security

* Real security gives the creditor real property rights over some or all of the debtor’s

assets e.g. pledges, mortgages, changes

*Personal security involves a third party entering into separate contract with the creditor

and undertaking responsibility for the debt if the debtor defaults, e.g. a guarantee.

Quasi Security

* A quasi security involves a reservation of ownership which allows the creditor to retake

the goods if the debtor fails to pay, and gives the bank priority over the debtor’s other

creditors if the debtor becomes insolvent. It avoids the formality and registered

requirements, which apply to security interest, e.g. lien and net-off.

Consensual and Non- consensual SECURITY

Consensual security is created by the agreement of the creditor and debtor.

E.g.- pledges, and mortgages.

Non- consensual security arises by operation of law, e.g. liens

Possessory and Non-possessory security

Possessory security depends on the creditor having possession of the goods e.g.

pledges

Non-possessory security is not dependent on possession of security interest by the

creditor, e.g. mortgages and equitable charges



MORTGAGES

A mortgage is a non-possessory form of real security. which involves the transfer of

ownership of an asset to a creditor by the mortgagor by way of security upon conditions

that the asset will be transferred back to the debtor when the sum secured is paid.

The mortgagor borrows money to pay for their property. The mortgagor is the

borrower.

The mortgagee is an entity that lends the mortgagor money. This entity is

typically referred to as the lender. The mortgagee will set the terms of the loan.

• The mortgagor may retain possession of the mortgaged property.

• The mortgagor has the right to recover ownership of the mortgaged property

known as the equity of redemption on payment of the debt secured by the

mortgage.

• The equity of redemption can only be extinguished by the mortgagee’s exercise

of the power of foreclosure or sale.

• Foreclosure is the legal process by which the mortgagee attempts to recover the

amount owed by the mortgagor on a defaulted loan by taking ownership of and

selling the mortgaged property.

The effect of foreclosure is to end the mortgagor’s equity of redemption, leaving the

mortgagee the outright ownership of the property. Where foreclosure could give the

mortgagee a windfall, the court might be reluctant to make a foreclosure order without

giving the mortgagor the opportunity to redeem. Thus, the court might give the

mortgagor some days of grace, before the foreclosure order is made absolute.

The mortgagee has a power of sale where:

• The mortgage is created by deed.

• it is expressly or impliedly included in the contract of mortgage.

The mortgagee’s power of sale is ordinarily restricted by statute, but the restrictions

are usually excluded by the mortgage deed.

A mortgage can be either legal or equitable. A legal mortgage involves the transfer

by way of security of legal ownership of the property.

Mortgage of Land/Landed Properties



Land in law connotes the earth and everything permanently attached to it, below and

above

Advantage of Land as security

Land invariably has an increasing value (e.g. the sum of a guarantee is fixed)

*Disadvantages of Land as Security

* Property is not easily realizable

* Accurate valuation may not be possible

* It involves the customer in expenses for perfection

* There is a risk of unrealisation for imperfection

* There could be adverse publicity upon realization

Preliminary Steps

Valuation of the property

Legal or Equitable Mortgage

Investment of Title (search at the Land Registry)

Execution of mortgage deed

Poser

How good Is equitable mortgage as security in lending?



Special Clauses in Bank Mortgage Deeds

1) Continuity Security

Balances on overdraft usually fluctuate. Without the clause, payments into the

account might be treated as towards the discharge of the mortgage while outward

payments are treated as unsecured advances.

2) Personal Covenant to repay

the clause usually reserves the right to repay upon demand. Its effect is to exclude

the application of the Limitation Act until a demand is made, otherwise time could

begin to run immediately an advance is made.

3) Covenants to repair and insure-

this is to ensure that the property does not deteriorate, and in the event of a loss or

demand, to ensure reinstatement

4) Money due on demand-

the power of a mortgage cannot be exercised until money is due, hence, the

practice to state in the mortgage deed that the money is due on demand.

5) Power of sale and power to appoint a Receiver

the limitations imposed by statute is excluded here

6) Consolidation Clause

Where two or more properties are mortgaged, the effect of the clause is that a

mortgagor would not repay one mortgage without redeeming them all

7) Deprivation of Mortgagor’s power to Grant Leases

The effect is to take away the mortgagor’s power to leases, the property and subject

same to the mortgage’s consent.

8) Negative Charge Clause



To prevent any subsequent charge without the lender’s consent

9) Charging Clause

The most important transferring ownership to the lender

Tripartite Legal Mortgages

This is a mortgage of property by a party called ’surety’ or ‘mortgagor’ of his own

property in security for a credit advanced to a “borrower” by a ‘lender’ or “mortgagee”

The terms and clauses are basically the same with those of a legal mortgage



DEBENTURES

A commercial charge created by contract is called "a debenture "

S. 650 CAMA defines ‘ debenture’ as

A written acknowledgement of indebtedness by the company, setting outs the terms

and conditions of the indebtedness, and includes debenture stock, bonds and any

other securities of a company constituting a charge on the assets of the company.

The law recognizes the power of every company to borrow money, issue debentures

and to charge property for the purpose of its business. See-S.166, CAMA.

The classification of debenture depends largely on the nature of the assets charged.

1. Assets Debenture

This is the debenture of a company in respect of its assets, which do not include land or

landed property.

The debenture will normally contain an undertaking by the company to repay on

demand all monies owing, including interest and charges;

an undertaking by the company to create:

• a fixed charge on some named assets, and/or

• a floating charge over the company’s remaining assets, present and future;

• an undertaking by the company to create no Mortgage or charge that would

rank in priority or pari passu with the floating charge created;

• Provision that the monies secured by the debenture will become payable on the

happening of the named events of default.

• power of the bank to appoint receiver

• Insurance

• Other general provisions.



2) Mortgage Debenture

This is the debenture created by a company over land, or other assets which include

land.

In addition to the undertakings above, the deed will include provisions similar to those

discussed on Mortgages.

NOTE:

It is possible to have an all assets debenture, which will create a charge over all the

assets of a company, including land and non-land properties. In this case, the

applicable rules of registration of different kinds of assets will apply.

Registration

Depending on the assets underlying the debenture created by a company, registration

has to take place in one or two places.

• CAMA requires that all charges created by a company has to be registered with

the Corporate Affairs Commission (CAC) within 90 days otherwise the security

will be void against the liquidator or creditor of the company.

• Where land is involved, additional registration is required at the Land Registry of

the state where the land is located.

Note:

It is a requirement under the Land Use Act that consent of the Governor must be

obtained to interest created over land which affect the ownership/possession of the

grantee. Such interests include Mortgages.

Priorities

Where a Mortgagor has created more than one mortgage of his property, it is important

to determine the priority of those mortgages, i.e.- the order in which they shall rank for

payment, because a problem will normally arise where the amount due exceeds the

value of the various mortgages.



• The applicable rule is based on the registration of the Mortgage at Land Registry.

The first in time ranks prior.

• Where however, a legal Mortgagee has notice of an equitable Mortgage,

subsequent registration by the legal Mortgagee does not confer priority on him.

Consent to Share Pari Passu

Bankers have devised a method whereby two or more creditors could secure their

advances with the same property.

The initial banker will grant consent to subsequent lenders, and this will enable them to

share the assets pro-rata their exposure.

Once an asset is charged with creditors ranking pari passu, any additional charge is

subject to the consent of the lenders.

To forestall ranking, it is important to regulate-

• Enforcement rights

• Right to advance further credits

• Repayment rights

• Registration of inertest is still necessary even after consent has been granted.



PLEDGES A ‘pledge’ is a type of security, which involves a debtor (the pledgor) delivering goods to

a pledgee (creditor) as security until payment of a debt, upon an undertaking that the

goods shall be restored to the pledgor as soon as the debt is repaid.

A pledge involves the transfer of possession to the pledgee, and where the creditor

merely has a contractual right to seize the goods to secure a debt; the contract will

amount to a bill of sale.

The pledge contract should clearly state that the pledgor will bear the expenses of

storage and insurance, otherwise, the expenses will not be claimable.

Delivery of possession could be constructive- that is, by some symbolic act. For

example, the transfer of the bill of lading operates as a transfer of possession of, and

property in the goods.

In practice, the pledge is usually evidenced by a ‘letter of pledge’ executed by the

pledgor.

LIEN A ‘lien’ is a form of security, which entitles a person (the lienee) who has done work for

another (lienor), to retain possession of the lienor’s goods or documents until the

charges for the work have been paid.

It is a ‘self-help’ remedy.

A lien like a pledge depends on possession, and it could be reserved by contract

e.g. the lien over shipping documents in an import finance credit.

A lien on its own does not confers a right of sale, otherwise the lienee will be liable

for conversation, but he could reserve the right of sale by contract.

Where the lienee exercises the right of sale, the sale must be reasonable, and he

must account to the lienor for any surplus.



BILL OF SALE

A ‘bill of sale’ is an instrument in writing whereby a party transfers property in goods to

another party but remains in possession of the goods.

There are two types of bills of sale-

An absolute bill- given as security for transaction not involving payment of money.

A conditional bill- given to secure a money payment

• There must be a document (oral transactions are excluded)

• The document must comply with the form required by statute.

• The document must relate to persona chattels

• The document must confer on the transferee a right to seize or take possession

of the goods.

SET- OFF

SET- OFF is the right one party (a creditor) to require payment or performance from the

other party (debtors) upon some other dealing or transaction involving the parties where

payment is due from creditor to the debtor.

Set-off is usually consensual, though it does not create a security interest.

The account opening mandate usually creates and reserves the right of a bank in

this regard.



NEGATIVE PLEDGE

A pledge contract should clearly state that the pledgor will not be claimable.

Negative pledge’ is not a security for a debt, hence, its has relatively little value

for the protection of a creditor.

The substance of a negative pledge is a covenant of the debtor that henceforth, it

will not charge its assets in favour of any creditor, and in the event of any future

charge, the interest of the creditor would be noted.

Because negative pledges are not registered, it would be difficult to prove that a

subsequent debenture holder was aware of their existence

LETTER OF COMFORT

Rather than being a security, a letter of comfort is merely a ‘comfort’, a means of

reassuring potential creditors that their loan or credit facilities will be repaid, without

actually guaranteeing payment.

It is usually given by a company to support an advance of credit facilities to its

subsidiary or affiliate by a lender.

A typical Letter of Comfort usually provides:

• A statement of the awareness of the parent company of the advance made to

the subsidiary;

• A promise that the parent company will not, without the lender’s consent,

relinquish or reduce control of the subsidiary before repayment;

• Words of comfort- starting how far the parent company is prepared to go in

supporting the debtor company.

Effect

The contractual effect depends largely on the construction of the letter, through in

virtually all the cases; the letters have been regarded as not intended to be binding.



A creditor agrees a loan with a subsidiary company based on two letters of comfort

by the parent company, indicating that-

“It is our policy to ensure that the business of the subsidiary is at all times in a

position to meet its liabilities to you under the loan agreement.

The court held that the letters were not intended to create a contractual promise as

to future conduct, hence, not binding legally.

Letter of comfort generally create a moral, but not a legally binding obligation.

GUARANTY

A guaranty is an undertaking given by a third party, to answer for another’s default.

Example

X will loan money to Y, subject to Z providing security by guarantying the loan.

The guarantor (Z) will only become liable under the guaranty if the principal debtor

(Y) defaults.

The guaranty is based on the debtor’s default so; it is referred to, as a secondary

obligation because the primary obligation to pay lies with the principal debtor.

A guaranty can be used to secure both fixed and revolving debts. e.g. –to secure

a potential buyer’s/supplier creditworthiness; or requiring a creditworthy third

party to guaranty the repayment of a loan made to borrower.

One off and Continuing guarantees

A guaranty may secure a single ‘one-off’ obligation (e.g.- a loan of fixed credit), or it

may secure a continuing credit facility such as an overdraft

In a Continuing guaranty, the guarantor remains liable throughout the period of the

credit facility and is not released merely because the debt is cleared from time to

time.



Conditional and Demand guaranty

Under a conditional guaranty the guarantor’s obligation is conditional upon the

happening of a specified event (e.g. receipt of a written a statement that the debtor

is in default),

Whereas under a demand guarantee the guarantor must pay on first demand by

the creditor.

A guaranty is not enforceable as a contract unless evidenced by a note or

memorandum in writing and signed by the guarantors or other authorized person.

Through the liability of the guarantor does not arise until the debtor defaults, but as

soon as the debtor defaults, it is not necessary for the creditor to sue or even to

make a claim against the principal debtor before calling on the grantor, except the

contract of guaranty expressly so provides.

Since the contract of guaranty is ancillary to the main contract, if the main (principal)

contract is void and unenforceable, so too is the guaranty, thus a provision could be

included indicating that the surety shall be liable even in circumstance where the

principal debtor is not. i.e. a ‘principal debtor clause’ should be included.

INDEMNITY

An indemnity is a personal security undertaking given by a third party (security)

independent of the debtor/creditor relationship. It is therefore a primary liability, not

dependent on the debtor’s default.



Example

Where X says to Y, “Supply goods to Z and I will see you get paid” Thus X’s liability

to pay is not contingent on Y’s default.

Note:

It is advisable to insist upon a guaranty or indemnity whenever a third-party security

arrangement is envisaged.



CHECKLIST FOR SECURITY DOCUMENTATION

1. GENREAL

Board resolution for the facility.

Accepted offer letter

Evidence of compliance with conditions precedent

2. LEGAL MORTAGE

Original copy of title document- C of O, Conveyance land certificate, etc

Search Report on property/Company.

Tax Clearance Certificate of 2 directors.

Tax Clearance Certificate of Company/Customer.

Tenement rate receipt or Affidavit of Exemption

Development levy receipt

Insurance Policy on property

Copy of Executed Legal mortgage on property.

Receipt of Ground Rent.

PAYE Receipts (for Corporate Customers)

Consent letters from existing Mortgagees (lf any), and copy of existing Deed of

consent letters from existing Mortgage or Debenture.

3. GUARANTY/INDEMNITY

1. Consent of Guarantor

2. Execution Guarantee Agreement

3. Statement of Personal Net-worth of Guarantor

4. Evidence of Security taken (if required).



4. DEBENTURE

Search Report on company.

Execution Deed of Debenture/Trust Deed (if existing debenture)

Valuation Report on company’s Assets

Income tax Clearance Certificate of 2 directors

Company’s income Tax Clearance Certificate

Letter of Consent from existing debenture holder (s) (if any), and copy of existing

debenture.

Insurance policy on assets

List of existing assets.

5. EQUIPMENT LEASE

Original document of title of the Equipment.

Sale Agreement (in cases of sale & lease back).

Equipment Lease Agreement- copy

Evidence of registration of title (in the Bank’s name-where required).

6. DEPOSIT OF SHARE CERTIFICATES

Memorandum of Deposit - duly executed.

Bank Transfer forms signed & confirmed

Letter from customer requesting Registrar’s confirmation of signature on transfer

form.

Original Share Certificate (s).

Share Valuation Report (in cases of firms not quoted on the stock exchange)



STOCKS AND SHARES

The principal types of securities issued by companies are -

1) Debenture Stocks

- Not part of the company’s share capital

- It is a loan, which is generally secured by a charge on the company’s assets.

- It may however be an unsecured or a convertible loan stock.

2) Preference Share or Stock

It ranks before the ordinary share or stock with regard to the payment of dividend, and

very often it carries preferential claims to return of capital in the event of the company’s

liquidation.

Preference shares are either cumulative or non-cumulative; the distinctions being

important if in any particular year the company earns insufficient profits to enable the

preference dividend to be paid.

For non- cumulative shares, the dividend will never be paid, while for cumulative shares,

the dividend will be paid when profits are available.

3) Ordinary Shares or Stock

They carry the highest risk of the business

-If the company prospers, they also prosper, but if disaster overtakes a company, its

ordinary, shares may become worthless.

Advantages of Shares as Security

The value of the security can be ascertained without difficulty (quoted shares)

In normal times stocks and shares enjoy stability of value.

Formalities are not complex (Note CSCS requirements)

Easily realizable upon borrower’s default



Disadvantages of Shares as Security

• Values can change very quickly – (hence, shrinkage margins are built in)

• Shares not quoted on the stock exchange are subject to certain special

disadvantages.

Unquoted Shares as Security

• There is difficulty in valuation

• It may be difficult to find a purchaser upon default.

• There could be some restraint on transfer of shares. Note the characteristics

of private companies.

• A legal Mortgage of shares through the C S C S process is not possible

Documentation Procedure for Use of Shares as Security

Account Officer to confirm customers holding by applying to the CSCS for a Statement

of Stockholding. This Report is equivalent to a statement of account.

(Note: the customer must have an” account” with the CSCS)

Charge the shares by submitting the following documents to the CSCS:

1 A memorandum jointly signed by the Bank and the Borrower (To be prepared by

legal).

2 A share transfer form signed by the Borrower stating the units and Securities (i.e.

companies) involved. (Account officer to collect from Borrower)

3 The Borrower should also submit to the Bank an undated letter signed by the

Borrower, authorizing the Bank to sell the shares.



(Note:

the signature of the Borrower on the documents listed in (2) and (3) above should be

verified through the Registrars (where the shareholder’s name was in the Register

before the inception of the CSCS) or through relevant documents e.g. Driver’s license

and/or international passport (where shareholder’s name/ mandate was never with the

Registrar).



EQUITABLE MORTGAGES

A Mortgage is a transfer of an interest with the intention of securing the payment of

money or the discharge of some other obligation.

The creation of Mortgages is governed by legal rules- statutory or common law.

Mortgages made in strict compliance with the legal rules were commonly called

legal Mortgages.

Mortgages not complying strictly with the legal rules, but governed by the rules of

equity are regarded as equitable Mortgages.

CREATION

An equitable Mortgage can be created in any of the following ways:

An imperfect legal Mortgage (i.e. one not meeting all legal requirements for the

creation of Mortgages) may qualify as an equitable Mortgage. For example, a

Mortgage without Governors consent, or one not registered at the land registry.

A contract to create a legal Mortgage qualifies as an equitable Mortgage

A simple deposit of title documents, as security for the discharge of an obligation,

is an equitable Mortgage.

Advantages and Disadvantages of Equitable Mortgage

The advantages (as well as the disadvantages) of the equitable Mortgage is determined

in relation to the legal Mortgage, since it is considered to be inferior to the legal

Mortgage.

Advantages

1. Since the equitable Mortgage does not require obtaining Governors consent

or registration, it is faster and easier to create.

2. In the absence of registration, the equitable mortgage attracts no cost for its

creation



This compares favourably with legal mortgage that attracts cost for stamps duties,

registration fees, filling fees, consent fees, etc. (NB: it may cost more than N1.275MM)

excluding solicitors cost to create legal Mortgage of N50MM) The equitable mortgage is

obviously cheaper to create.

Disadvantages

1. The interest/right created by an equitable Mortgage is not enforceable against a

bona fide purchaser for valuable consideration without notice of the existence

of the equitable Mortgage. The legal requirement for notice is satisfied by

registration at land registry. Since the equitable Mortgage is not registration, the

equitable Mortgage is registerable; the requirement on notice will not be

satisfied, thus exposing the security to the application principle.

2. Since no legal interest in transferred, no power of sale flows to the lender. As

such he cannot sell/transfer the property without an enabling power of sale.

Thus, the equitable mortgage can only be enforced with the assistance of the

courts.



DOCUMENTATION OF EQUITABLE MORTGAGE IN GUARANTY TRUST

The current documentation procedure for equitable Mortgage involves the following:

Preparation and execution of

- memorandum of deposit of deed

- power of attorney

Submission of the executed documents mentioned above along with the original title

documents of the property to CAD

Registration of the power of attorney/caution notice at a minimal cost at the

appropriate lands Registry.

legal aspect of banking

Documents