Secured Credit Transactions
UNIVERSITY OF LAGOS
SCHOOL OF POST GRADUATE STUDIES
MASTER OF LAWS (LLM) 2010/2011
PRIORITY OF MORTGAGES IN WINDING UP AND LIQUIDATION
BEING A SEMINAR PAPER PRESENTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTER OF LAWS (LLM)
By
BABALOLA OLUWAYOMI RASHEED (109061038)
EDOHASIM ANWULI STELLA 000601118
OLUKOSI ADEBOLA
ADEBAYO OLATUNDE
KELLY ANDY
RACHEL AKPAN
Lecturer: Dr. Oludayo Amokaye
Course title: Secured Credit Transaction
Date: February 19, 2011
Group: 6
CONTENTS
1. Introduction
2. Definition and Determination of Priority in Security Interests
3. Creation and registration of mortgages under Nigerian law
4. Priority of Mortgages in Winding Up and Liquidation.
5. Conclusion
CHAPTER ONE
INTRODUCTION- DOCTRINE OF PRIORITY
Where two or more mortgagees advance money on the same security of a piece of land and the land is insufficient in value to satisfy their claims when realized, it is vital to know in what order that are to be paid out of the land. This may occur where the mortgagor proceeds to grant successive and separate mortgages of same land, the land depreciates in value and is sufficient only to pay one of the two or more Mortgagees.
Whereas the unsatisfied Mortgagees can enforce the personal covenant to repay against the Mortgagor, but if the other properties of the Mortgagor be of little value, they may wish to proceed against the land. For this purpose, it is necessary to know how the Mortgagees rank. This is the basis for the rule of Priority of Mortgages. The Rule also applies in determining which of several subsequent mortgagees is entitled to the title deeds when a prior mortgage is discharged, which of them can request for transfer and/or how the mortgagee will fare in a foreclosure action or one for redemption[1].
Real question of priorities arise where there are two or more valid competing valid assignments the ranking of which is not certain.
Generally the doctrine of priority relates to the principle of the first in time shall prevail. This means that where there are two or more mortgagees and the mortgagor is unable to fulfill its obligations under the agreement the first in time of the mortgagees shall have priority over the other(s).
| CHAPTER TWO |
| |
|DEFINITION OF PRIORITY |
|The Osborn’s Concise Law Dictionary[2] defines the word “Priority” in its legal sense to mean “Precedence; the right to enforce a |
|claim in preference to others.’ |
| |
|DETERMINATION OF PRIORITY IN RESPECT OF SECURITY INTERESTS |
|The question of priorities arises whenever there are two or more competing interests in property and the various interest cannot be |
|adequately satisfied by the value of the property or one of the interested parties takes or seeks to take an action which may be |
|prejudicial to the interest of the others. |
| |
|The competing interests may have been created as a result of fraud or contrivance by the owner of the property[3], the owner’s |
|legitimate exercise of his proprietary rights, (e.g by granting multiple mortgages or charges[4]) or the operation of the Land Use |
|Act[5]. |
| |
|It is important to note that the owner of a property is entitled, unless expressly precluded by agreement or operation of law, to |
|grant multiple securities over the same property to two or more persons. Thus, for instance, he has the right, in the absence of any |
|contrary agreement or statutory provision to grant successive mortgages or charges over the same property to different persons. |
|Conversely, the holder of security, unless expressly precluded, is equally entitled to create security interests over the property in|
|favour of a third party. A mortgagee for instance has the right to grant a sub-mortgage of the same property even without an express |
|agreement to that effect[6]. |
| |
|Priority or preferential is an incident of real security and so it is quite germane to the issue of enforcement of securities. In a |
|situation where diverse securities and other interests have been created over the same property, enforcement becomes problematic and |
|so the court has to first of all determine the order of priority, for instance, in cases of leases granted by a mortgagor or |
|mortgagee in possession or sale by any of them. |
| |
|In the determination of priorities, the first recourse is the twin maxims of Equity: |
|“Where equities are equal, the law shall prevail” and “Where the equities are equal, the first in time shall prevail”. Thus, the |
|basic rule, both at law and equity is that competing interests rank prima facie according to their creation. The rule is expressed in|
|the Latin maxim: “Qui prior est tempore, portior est jure”[7]. The rule however has some exceptions among which are the doctrine of |
|bonafide purchaser for value without notice, fraud, estoppel and gross negligence, registration, overreaching and the rule in Dearle |
|v Hall [8]. The principle in Dearle v Hall is that a later assignee for value has priority over an earlier assignee if the later |
|assignee gave notice of his assignment to the insurer before the earlier assignee, provided the later assignee acted in good faith |
|and without Notice of the earlier assignment. |
| |
|Virtually all the statutes governing registration of securities stipulate that priority is determined according to the order of |
|registration[9] and of course, registered securities rank before unregistered ones. |
| |
| |
|In mortgages, under the Common law, if there is more than one mortgage over land and the value of the land when sold is not enough to|
|pay them all, the order in which they are paid will depend on their priority[10]. If the mortgage affects a legal estate in land with|
|unregistered title and is made after 1925, the priority of the first mortgagee is protected by his entitlement to the title |
|deeds[11]. Priority of other legal mortgages of land with unregistered title is governed by the order of their registration as land |
|charges[12]. |
|Mortgages on land with registered title rank in the order in which they are entered on the register.[13] A first mortgage is the main|
|mortgage on the property. Subsequent mortgages can be granted with the first mortgage always taking priority. |
| |
|Essentially, the priority mortgagees may enjoy in a security depends on one or more of the following[14]; |
| |
|(1) Generally the legal mortgagee has priority over an equitable mortgagee though earlier in time, provided he had no notice. Notice |
|may be actual, constructive or statutory. |
| |
|(2).Mortgagees rank in order of time under the maxim ‘‘ qui prior est tempore, potior est jure’’ |
|(3) The priority of a mortgagee under (1) and (2) may be lost due to misconduct, or fraud especially in respect of title deeds. |
| |
|Effects of Fraud and Gross Negligence on Priority |
| |
|It has been held a person guilty of fraud and gross negligence may lose priority. In the case of Oliver v Hinton (1899) 2 Ch 264, |
|where A ., the owner of the legal estate , deposited the title deed with X as security for advances to the tune of four hundred |
|pounds made by the latter. Some two years later, A conveyed the legal estate to P who asked for the deed but was told that they could|
|be delivered because they covered some other property. This answer was accepted and A was not even asked to produce the deed for |
|inspection. The English Court of Appeal held that P though innocent of fraud was guilty of gross negligence must be postponed to |
|X[15].. |
| |
| |
|(4) A Mortgagee can tack further advances in respect of subsequent mortgagees. |
|Tacking: The application of this rule is that a mortgagee who had the legal estate should prevail over other mortgagee(s) of whose |
|interest(s) he had no notice when he made his advance. Its a method by which the general rule that equitable mortgagees rank for |
|payment according to the dates at which they took their mortgage may be modified. |
| |
|In Nigeria, there are two forms of tacking – |
|(i) The “tabular in naufragio” (‘‘the plank in the shipwreck’’)[16]. Here, if a legal mortgage to A is followed by an equitable |
|mortgage first to B and then to C, C would gain priority of payment over B if he buys A’s mortgage provided C had no notice of B’s |
|mortgage when he advanced his money to A. A’s legal mortgage is the ‘‘plank in the shipwreck’’ and whichever of B and C acquired it |
|has the better chance of being paid if there isn’t enough money to pay both.‘ |
| |
| (ii) The Tacking of Further Advances. |
| |
|This form is permitted in all states in Nigeria, but its application under the PCL differs from the states covered by the |
|Conveyancing Act 1881. |
|Under the CA 1881, the Mortgagee who made a further advance could tack only if any of the following conditions apply. |
| |
|The intervening mortgagee agreed to it before he made the further advance (here it is immaterial or not whether the first mortgage |
|was legal or equitable), or |
| |
|(B) The further advance is made by a legal mortgagee who had no notice of the intervening mortgages when he made his further advance;|
|or |
| |
|(C) The prior mortgage expressly provided that it should extend to any further advances, whether or not it is obligatory for the |
|mortgagee to make them. The prior mortgagee must have no notice of the intervening mortgages when he made his further advances. |
|Under the PCL, - |
|If the intervening mortgagees agreed, as in the other states; or |
| |
|(B) The further advance is made by a mortgagee - whether legal or equitable who has no notice of the intervening Mortgagees; or |
| |
|(C) The prior mortgage imposes an obligation on the mortgagee to make further advances. Here not even express notice will prevent |
|tacking. [17] |
| |
|(5) Where Mortgages are subject to registration, such registration may influence priority as follows- |
| (i) such Mortgages may rank in order of registration and the registered may rank prior to the unregistered. |
| (ii) An unregistered mortgage may be rendered void as against a purchaser for value. |
| |
|Tacking in Lagos State. |
| |
|By the provisions of section 68 of The Mortgage and Property Law of Lagos State, the provisions of the Conveyancing and Property |
|Act 1881 is expressly repealed. |
|Under the provisions of section 29(1) of the same law, it is stated as follows- |
| ‘‘After the commencement of of this Law, a prior mortgagee shall have a right to make further advances to rank in |
|priority to subsequent mortgages (whether legal or equitable) – |
|(a) If an arrangement has been made to that effect with subsequent mortgagees; or |
|(b) If he had no notice of such subsequent mortgages at the time when the further advance was made by him; or |
|(c) Whether or not he has such notice as aforesaid , where the mortgage imposes an obligation on him to make such further |
|advances and that obligation was noted on the register . This subsection applies whether or not the prior mortgage was made |
|expressly for securing further advances . |
|(1) Tacking will only apply where the further advance does not exceed , with any other outstanding advance , the specified |
|maximum amount secured under the prior mortgage which amount was noted in the register. |
| |
|Subsection (3) expressly states that for tacking to apply, the mortgagee ‘shall not be deemed to have notice of a mortgage merely |
|by reason of registration under the Registration of Titles Law’ save the registration was at the time the original mortgage was |
|created or when the last search was conducted by the mortgagee whichever last happened and further when the prior mortgage was made |
|expressly for securing a current account of other further advances. |
| |
|Even though subsection(4) states that tacking only applies to further advances made under the provisions of same section 29, the |
|proviso in subsection (4) saves priority acquired by tacking before the commencement of that law or in respect of further advances |
|made without notice of subsequent encumbrance or by arrangement with the subsequent encumbrancer. |
| |
| |
| . |
| |
|GENERAL VARIATION OF PRIORITY |
|Under Ghanaian laws, the priority of mortgages can be varied in the following circumstances: |
| |
|• Where a mortgage expressly provides for the making of further advances or for the giving of credit to the mortgagor on a current or|
|continuing account and further requires the mortgagee to do so, the making of further advances will have priority over subsequent |
|mortgages by virtue of the Land Title Registration Law provided that such provision or obligation had been noted in the land register|
|prior to the registration of the subsequent mortgage. |
| |
|• Where the parties to the mortgage execute an instrument of variation under the Land Title Registration Law affecting priority of |
|their interests. Such a variation is only effective in so far as it does not affect the subsisting rights of any third party, or that|
|third party has given his consent in writing to the variation. Similarly, under section 19 of the Mortgages Decree encumbrances may |
|by express agreement re-arrange the order of priority among themselves. |
| |
|• By virtue of the Mortgages Decree, where an Act of Parliament varies the order of priority[18]. |
| |
|STATUTORY VARIATION OF PRIORITY IN NIGERIA AND GHANA |
| |
|The following are instances where there is a statutory variation of priority: |
|• Companies and Allied Matters Act: When a transaction involves the issue of debentures by a company to raise loan capital, a |
|debenture secured by a fixed charge on any property shall have priority over a debenture secured by a floating charge even where the |
|floating charge was created before the fixed charge[19]. |
| |
|• The Local Government Act, 1963 (Act 462): This provides that the amount of a general or special rate due in respect of any premises|
|shall be a charge on the premises until such rates are paid. The charge created will have priority over all other charges against the|
|premises except claims of the Government. |
| |
|• The Social Security Law, 1991 (PNDCL 247): This provides in section 30 that where on the application of a secured creditor the |
|property of an employer is sold, the proceeds of the sale or other realisation of such property shall not be distributed to any other|
|creditor entitled to such proceeds until the Court ordering the sale or other realisation has made provision for the payment of any |
|amount due by the employer under PNDCL 247 to the Social Security Scheme. |
| |
|• The Internal Revenue Act, 2000 (Act 592): This provides that a Receiver of a company is required to set aside the amount of tax |
|owed by the company out of the assets realised and must make full payment of the tax found payable by the company. |
| |
|• The Bodies Corporate (Official Liquidation) Act, 1963 (Act 180): This provides that in an insolvent liquidation, the following are |
|to be paid by the liquidator in priority over the claims of debenture holders under floating charges created by the company, and out |
|of any property composed in or subject to such charge. |
|a) remuneration [not exceeding one hundred and fifty pounds] owed to an employee of the company in respect of employment for a |
|maximum of four months preceding the commencement of the winding up, or |
| |
|b) rates, taxes or payments owed to the Republic or a local authority which have become due and payable within the year preceding the|
|commencement of the winding up. |
|This is also detailed under Section 494 of the Company and Allied Matters Act and will be discussed in details in Chapter Four of th |
|CHAPTER THREE |
| |
|CREATION AND REGISTRATION OF MORTGAGES UNDER NIGERIAN LAW |
| |
|Generally, there are 2 (two) forms of lending prevalent in Nigeria i.e unsecured and secured credit. However, virtually all lending |
|institutions practice secured lending. |
| |
|Secured Credit |
|The main type of security accepted in Nigeria over immovable property is the Legal Mortgage. The Legal Mortgage is the transfer of |
|the whole of the debtor’s legal ownership in the property covered by the security, subject to a right to redeem the legal title to |
|the property upon repayment of the debt (This is known in legal parlance as the equity of redemption). |
| |
|An alternative is the Equitable Mortgage which differs from the Legal Mortgage in that only the beneficial interest (as distinct from|
|the legal interest) is transferred by the debtor. It is essentially an agreement to enter into a Legal Mortgage. |
| |
|CREATION AND REGISTRATION OF MORTAGES UNDER NIGERIAN LAW |
| |
|A) Where The Mortgage Is Effected By A Document Or Instrument. |
| |
|Priority in this case is governed by registration under the Land Instruments Registration Laws of the various States of Nigeria[20]. |
| |
|An ‘‘instrument’’ under that law is defined as ‘a document affecting land in Lagos State, whereby one party (hereinafter called the |
|grantor) confers, transfers, limits, charges, or extinguishes in favour of another party (hereinafter called the grantee) any right |
|or title to, or interest in land in the Lagos State, and includes a certificate of purchase and a power of attorney under which any |
|instrument be executed, but does not include a will ’’ |
| |
|Registration is the act of documentation and recording of data whether pictorial, technical, statistical or otherwise.[21] Land |
|Registration is a system of where ownership of estate in land is registered or recorded by an office of government in order to |
|provide evidence of title and to facilitate transactions thereon.[22] |
| |
|Section 16 of the Lagos State Land Instrument Registration Law provides as follows- |
| |
|‘‘Subject to the provisions of this law, and in particular of subsection (2) of this section , every instrument registered under |
|this Law shall, so far as it affects any land, take effect, as against other instruments affecting the same land, from the date of |
|its registration as hereinafter defined in the proper office as specified in section 3, and every instrument registered before |
|the commencement of this Law shall be deemed to have taken effect from the date provided by the law in force at the time of its |
|registration.’’ [23] |
| |
|B) Where The Mortgage Is Created By A Company As A Charge Under The CAMA |
| |
|A company is empowered to borrow money for the purpose of its business or objects and to mortgage or charge its undertakings, |
|property and uncalled capital or any part thereof. |
|For this purpose, the company is empowered to create debentures (secured through fixed or floating charge), debenture stock and other|
|securities. These may be for any debt, liability or obligation of the Company or that of a third party[24]. A company can create more|
|than one debenture which, unless specified otherwise, rank in order of priority according to the dates on which they were created. |
| |
|In practice however the security document usually executed to secure credit to companies in Nigeria is the Debenture or what is |
|sometimes known as a Mortgage Debenture. By the provisions of section 166 of CAMA a debenture is a security document that includes |
|the fixed and floating charges as well as mortgages in one document. Once executed, the document has to be registered as a mortgage |
|at the relevant land registry and subsequently, the debenture has to be registered at the Companies Registry known as the Corporate |
|Affairs Commission within 90 (ninety) days of its creation. |
| |
|FIXED AND FLOATING CHARGES |
| |
|A Fixed charge involves no transfer of ownership but gives the creditor the right to have the designated property sold and the |
|proceeds applied to discharge the debt. It attaches to the property in question immediately on creation (or, if acquired later, after|
|creation but immediately on the debtor acquiring the right over the property to be charged) e.g building or machinery. The debtor may|
|then only dispose of the property once the debt has been repaid or with the consent of the creditor. A floating charge on the other |
|hand is on a class of assets usually all the assets for the time being of a company. |
| |
|Floating Charges are created over the whole business and the undertaking of a company and therefore cover all present and future |
|assets of the company. A Floating Charge does not attach to a specific asset but is created over a class of assets, present or |
|future, and allows the debtor to buy and sell such assets whilst the charge remains floating. It is only on the happening of a |
|certain event, such as default on the repayment of the debt, that the charge attaches to the secured assets which are at that time |
|owned by the debtor company. This is known as ‘crystallisation’. |
| |
|On crystallisation, the floating charge becomes a fixed charge and the debtor is no longer free to deal with the assets without |
|repayment of the debt or without the consent of the creditor. |
| |
|The Supreme Court in Intercontractors Nigeria Limited v UAC [25] adopted the Common law principle of floating charges stated by Lord |
|Machaghten in Illingworth v Houldsworth[26] thus : |
|“A floating charge ... is ambulatory and floats over the property until the event indicated in the debenture deed happens which |
|causes it to settle, remain fixed and crystallise into a fixed charge” |
| |
|A mortgage may also include specific charge of future acquired property and a floating charge over the company’s assets. However, |
|under section 22 and 32 of the Insurance Companies Act 1974 of England, there is restriction on mortgage of assets of Insurance |
|Companies. |
| |
|Subject to the provision of its Memorandum of Association however, a company may also charge its property with the debt of another |
|company, for instance, using the property of a subsidiary company to secure a loan to a holding company. |
| |
|REGISTRATION OF MORTGAGES UNDER COMPANIES AND ALLIED MATTERS ACT |
| |
|The Companies and Allied Matters Act requires every company creating a charge (and this includes mortgages) over its assets and |
|undertakings to register such charges at the Corporate Affairs Commission. The relevant provision in respect of registration of |
|company charges is Section 197 of CAMA. S197(1) states as follows: |
|“Subject to the provisions of this part of this Act, every charge created by a company, being a charge to which this section applies |
|shall so far as any security on the company’s property or undertaking is conferred be void against the liquidator and any creditor of|
|the company, unless the prescribed particulars of the charge together with the instrument, if any, by which the charge is created or |
|evidenced have been or are delivered to or received by the Commission for registration in the manner required by this Act or by any |
|enactment repealed within 90 days after the date of its creation but without prejudice to any contract or obligation for repayment of|
|the money thereby secured, and when a charge becomes void under this section, the money thereby secured shall immediately become |
|payable” |
| |
| |
|By this section, charges made by limited companies require registration with the Registrar General of the Corporate Affairs |
|Commission. If not registered they are void as regards security on the company’s property, against the Liquidator and creditors. It |
|is noteworthy, however, that when a charge becomes void under this provision, the money thereby secured shall immediately become |
|payable by the debtor and the creditor is left with pursuing alternative remedies rather than resorting to the security. |
| |
|The essence of registration and keeping registers at the Commission is to protect prospective investors and third party creditors in |
|ensuring fair assessment of the company’s capital and avoid fraudulent concealment of its financial affairs through disclosure in |
|dealings on its assets.[27] |
| |
|EFFECT OF REGISTRATION OF CHARGES |
|The effect of registration of charges within 90 days as registeredprovided by Law goes, not to priority but to validity and |
|effectiveness of the charges. Priority will then be determined under the general law[28]. Registration therefore, is notice of the |
|existence of registered prescribed particulars to all chargees. |
| |
|Registration of a charge prevents subsequent chargee from rightfully advancing plea of bonafide purchaser for value without notice. |
|The possession of a Certificate of registration is no longer conclusive evidence that all the requirements of the Act have been |
|complied with.[29] |
| |
|Registration of a charge does not cure any defect in the charge as the charge may be impugned on other grounds. |
| |
|CONSEQUENCES/EFFECTS OF NON-REGISTRATION OF CHARGES |
| The General Rule is that where a charge is created and no particulars in the prescribed form are delivered for registration |
|within 90 days, the charge is void as against administrator or liquidator and any person who for value acquires an interest over |
|the property. This confirms the position taken in WATRON VS DUFF, MORGAN AND VERMONT (HOLDINGS) LTD[30]. In that case it was held |
|that where a second charge is created and registered within the statutory period required for the registration of a charge under the |
|provisions of section 402 of the English Companies Act 1985 (similar to Section 197 of CAMA), the earlier charge does not lose it |
|priority over the second charge. |
| |
|This means that when a second charge is created within the 90 day period required by Law to register the first charge, the first |
|charge retains some priority which though is provisional but becomes permanent if then registered within 90 days. This provisional |
|priority will be lost if not so registered. |
| |
|Where both the first and second charges are not registered within 90 days of that creation, priority goes to the first to register. |
|Where both are not registered, priority is determined by the order of creation on the general first in time principle. |
| |
|An unregistered charge does not lose priority as against a person acquiring an inherent title over the property subject of charge if |
|the acquisition was made subject to the charge[31]. |
| |
|Where a second chargee knowing of the existence of an unregistered first charge but yet took even without contracting to take subject|
|to such, it is submitted that he should prevail as there is no duty of good faith implied under the Act. What is more the provisions |
|of the law was at all time available to both and imputed to be known to them.[32] An unregistered charge does not make void the |
|obligation secured, as the CAMA makes that debt payable on demand. |
| |
|It is the security that is void as against any creditor and the liquidator for non registration but the money becomes repayable. The |
|security is void as against the creditors even though they had notice of non-registration. The security is valid against the Company|
|hence any step taken by the mortgagee in enforcement of his security is valid and cannot be upset by a liquidator subsequently |
|appointed.[33] The company cannot maintain any action arising from the non-registration.[34] |
| |
|When a mortgage or charge is voided as against the liquidator, everything ancillary to it, such as lien, is also avoided – Re Molton |
|Finance Ltd (1968) Ch 325 . |
|CHAPTER FOUR |
| |
| |
|PRIORITY OF MORTGAGES IN WINDING UP AND LIQUIDATION |
| |
|WINDING UP AND LIQUIDATION UNDER THE NIGERIAN LAW |
|An insolvent company maybe wound up on the ground that the company owes a debt which is due and the company is unable to pay the |
|debt. |
| |
|Dissolution of a Company |
|A company having been created by a legal process by way of incorporation under the law in Nigeria under the Companies and Allied |
|Matters Act, Cap C2.,Laws of the Federation of Nigeria, it follows that it can only be brought to an end by law. In Co-operative and |
|Commerce Bank (Nig) Ltd v. Alex Onwuchekwa (2002) 2 NWLR (pt 647) p. 65 it was stated that- |
| |
|“By virtue of section 454(1) and (2) of the Company and Allied Matters Act, 1990, a company dies only on its dissolution. The |
|subsequent revocation of the license of such company where it is a bank, and the further order of court winding same up may indicate |
|the ineffective existence of the company but not its death” Similarly, the appointment of a liquidator for a company only means that |
|it is to act as an undertaker to prepare for the liquidation of the company which happens at the dissolution of the company’[35] |
| |
|Under the provisions of Section 401 of CAMA there are three ways to wind up a company. These are by the Court, voluntarily |
|and subject to the supervision of the court. Under the provisions of Section 408 of the Act, the Court may wind up a company if |
|it is unable to pay its debt.[36] |
| |
|Furthermore, by the provisions of section 408 (d) CAMA, subject to any conditions, the mortgagee (known as the debenture holder) may |
|present a petition for winding up as a creditor of the company if the company is unable to pay the principal and/or interest which is|
|a debt. |
| |
|Liquidation is the means by which a company’s existence is brought to an end and its called dissolution /winding up. Liquidation may |
|be compulsory (also called Creditors liquidation) or Voluntary liquidation (members liquidation). Voluntary liquidation where the |
|company is insolvent will be commenced by the creditors. This is called Creditors voluntary liquidation. |
| |
|The Court has power to appoint provisional liquidator before the winding up order. This is made if the assets of the Company are in |
|jeopardy. A Provisional Liquidator however, may be appointed in special circumstances[37]. As general rule, where company is |
|insolvent the wishes of creditors are paramount[38] but if company is solvent, wishes. |
|By Section 209 (2) CAMA, the creditors can subpoenaed the court to wind up a company where the company is assumed to be insolvent. |
|Upon winding up the creditor may either appoint a liquidator or have the court appoint a liquidator of contributories are given |
|priority. |
| |
| |
|PRIORITY OF MORTGAGES/CHARGES IN WINDING UP AND LIQUIDATION |
|The priority of charges is regulated substantially by the principles of common law and to certain extent, the provision of CAMA. The |
|priority of mortgages and charges will be discussed under the following headings: |
| |
|Between Fixed and Floating Charges |
|At Common law and by virtue of Section 179 of CAMA, a floating charge will be postponed to a later fixed charge whether legal or |
|equitable, even if it the later fixed chargee had notice of the existence of an earlier floating charge. i.e a fixed charge will have|
|priority over a floating charge unless the terms on which the floating charge was granted prohibited the company from granting a |
|later charge having priority over the floating charge and the person in whose favour the charge was granted had actual notice of that|
|prohibition at the time when the charge was granted to him. |
| |
|The juristic basis for this is the implied license given by the creditor to the company to continue to deal with the assets despite |
|the charge. It has also been argued that the company retains its capacity to deal with its assets under its Memorandum and Articles |
|of Association unless expressly excluded. |
| |
|However, to forestall the creration of any other charge which would otherwise have priority over the floating charge, the practice is|
|to insert a negative pledge clause in the debenture prohibiting the creation of any later charge subsequently having priority over a |
|floating charge. However, by Section 179, such clause will only be effective and availing to the floating chargee and give him |
|priority over a later fixed charge, if the fixed chargee has actual and not constructive notice of the floating charge.[39] |
| |
|B) Between Two Floating Charges |
|As a general rule, the first floating charge to be created has priority over other subsequent floating charges,[40] and a company |
|cannot create a subsequent floating charge on the same assets that will rank in priority to or pari passu with the original floating |
|charge. However this rule applies where both charges are created over the same assets. Thus, a general floating charge on the whole |
|of the company’s undertaking may be postponed to a subsequent floating charge on a particular class of assets where the first charge |
|contemplates the creation of the later charge. |
| |
|C) Between Floating Chargee and Unsecured Creditor |
|An unsecured creditor has priority over a floating charge prior to crystallization so that if such creditor has levied and actually|
|completed execution , the floating chargee cannot compel him to restore the money nor can he be restrained from levying execution. |
|[41] The situation is different upon crystallisation since the chargee ipso facto becomes entitled to specific property under a |
|fixed charge free from the claims of unsecured creditors. |
| |
|4. FLOATING CHARGE AND RIGHT OF LIEN OR SET-OFF |
|Where debts due to the company are subject to a floating charge, the interest of the floating charge holder is postponed to any lien |
|or set-off accruing prior to crystallisation, for a floating charge is not regarded for this purpose as an immediate assignment of |
|the chose in action until after crystallisation[42]. |
| |
|5. FLOATING CHARGE AND CLAIM BY THE TITLE PARAMOUNT |
|The holder of a floating charge takes over the company’s property subject to any claim by title paramount. Thus, the Landlord can |
|re-enter and distrain on chattels in the leasehold premises if rent is unpaid notwithstanding that the chattels are comprised in a |
|charge which has crystallised.[43] |
| |
|In summary, secured creditors would have priority over unsecured creditors. Further, a fixed charge would have priority over a |
|previous or subsequent floating charge. Where a charge is created over an asset which is already subject to a similar (i.e legal or |
|equitable) charge, the prior charge will have priority if the subsequent creditor had prior knowledge of the charge over the asset. |
|Similrly, a legal mortgage would, at all times, take priority over an equitable mortgage. |
| |
|RANKING OF CLAIMS IN WINDING UP AND LIQUIDATION |
|Section 494 (1) CAMA provides for the mode of distribution of assets and ranking of claims upon winding up of the affairs of the |
|Company. |
|It provides thus: |
|“ In a winding up there shall be paid in priority to all other debts” |
|all local rates and charges due from the company at the relevant date and having become due and payable within twelve months next |
|before that and all Pay- As-You-Earn deductions, assessed taxes, land tax, property or income tax assessed or due from the company up|
|to the annual day of assessment next before the relevant date… |
|deductions under the National Provident Fund Act 1961; |
|all wages or salary of any clerk or servant in respect of services rendered to the company |
|all wages of any workman or labourer whether payable for time or for piece work, in respect of service rendered to the company |
|all accrued holiday remuneration becoming payable to any clerk, servant or labourer……….. |
|Section 494 (4) qualifies the provisions of subsection 1 stating that the foregoing debts shall rank equally among themselves and be |
|paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions. It further |
|provides that the debts shall have priority over the claims of holder of the debentures under any floating charge created by the |
|company so far as the assets of the company available for payment of general creditors are insufficient to meet them. |
It follows that upon the winding up of a company, the payment of any accrued wages of employees of the company is to take priority over the settlement of all creditors of the company (secured and unsecured).
Because the provisions on payment of preferential creditors, albeit unsecured, creates a statutory duty, where a floating chargee or his receiver collects funds out of which preferred debts could have been paid, he will be personally liable to the extent of these funds if the preferred debts are not paid.[44] This statutory duty does not however arise until the preferential claim is proved and becomes payable.[45]
It is noteworthy however that these statutory limitations do not apply to fixed charges as fixed charges take priority over the claims of preferential creditors.
Section 498 of the CAMA goes on to render any floating charge created within 3 months of the commencement of the winding up of the company invalid unless it is proved that the company immediately after the creation of the charge was solvent. The effect of this provision is to prevent Directors from retrospectively converting themselves into secured creditors in respect of moneys which they have previously advanced without demanding security”.
This restriction does not however apply to a fixed charge which does not become invalid by reason of its creation by an insolvent company immediately before liquidation, although it may be attacked on the ground of fraud or as fraudulent practice under Section 495 of CAMA.
COST OF LIQUIDATION
At Common Law and under the CAMA, expenses of the company’s liquidation are payable
out of the assets of the company in priority to other claims . In Re Barley Corn Enterprises Ltd [46] the court held that assets subject to a floating charge constituted assets of the company for the purpose of paying the costs of liquidation.
CHAPTER FIVE
CONCLUSION
In the course of this paper, it appears that both Common la and Statutes are settled on the application of the principle of “Qui prior est tempore, portior est jure” i.e first in time in the determination of cases of priority. The Courts have however been warned against applying the temporal order of “ first in time takes priority” mechanically. An eminent English Judge, Kindersley, V.C in Rice v Rice[47] observed:
“ In a contest between persons having only equitable interests, priority of time is the ground of preference last resorted to i.e that a court of Equity will not prefer the one to the other on the mere ground of priority of time until it finds upon an examination of their relative merits that there is no other sufficient ground of preference between them or, in other words, that their equities are in all other respect equal, and that if the one has on other grounds, a better equity than the other, priority of time is immaterial.”
The Courts should therefore look beyond merely looking at the temporal order of creation of the various interests and seek to discover whether there has been any fraudulent contrivance, collusion or gross negligence on the part of any of the parties.
It is our submission that despite the position of the law and equity on priority, the overriding interest of the creditors, especially the unsecured, should be the ultimate concern of a winding up process and a Liquidator.
-----------------------
[1] See Fisher and Lightwood Law of Mortgage(9th edn.) p. 429.
[2] 2001 (9th Edition) Sweet & Maxwell ed. by Sheila Bone
[3] Maitland, Equity (Cambridge University Press, 1910), p. 130
[4] Okoli H.S.N., “Fixed and Floating Charges: Legal Problems of Priority” in Akanki, E.O., Unilag Readings in Law , (Faculty of Law, University of Lagos, 1999),p.197
[5] E.g ss. 5, 9,28,34,36,39 & 47
[6] Fisher and Lightwood, op. cit., p.260
[7] see Barclays Bank Ltd v. Bird (1964) Ch. 274 at 280; Rufai v. Olugbeja (1986) 5 NWLR (Pt. 40) 162 at 169.
[8] (1828) 3 Russ. 1 ,
[9] See. e.g s. 10(3) Bills of Sales Act 1878; s. 18(2) Bills of Sales Law, Cap. 12 Laws of Lagos State 1994; s. 16Land Instruments Registration Law, Cap 111 Laws of Lagos State 1994; s 119 PCL
[10] ibid
[11] Section 85(1) Law of Property Act 1925
[12] ibid at S97
[13] S29 of the Land Registration Act 1925
[14] Fisher and Lightwood, ibid.
[15] See also Grierson v National Provincial Bank of England (1913) 2 Ch 18 and Northern Counties of England v Whipp (1884) 26 Ch D 482l
[16] This form has been abolished in the States making up the old Western and Midwestern Nigeria -vide section 11(3)of the PCL 1959.
[17] Section 116(1) PCL
[18] http: //business4c.htm
[19] S. 179 CAMA
[20] E.g Land Instrument Registration Law Cap L 58 Laws of Lagos State 2004 This Law creates the Land Registry.
[21] Omotola J.A The Law of Secured Credit Evans Brothers (Nigeria Publishers) Ltd 2006 p. 66
[22] The Torrens system was introduced in South Australia in 1858 by Sir Robert Torrens. The system is now popular in the Commonwealth and some countries of the world. Torrens Title is a system of land title where register of land holdings is maintained by the state. This seeks to guarantee such titles as indefeasible. The system was to correct problems of uncertainty, complexity and cost of the old system in which proof is by way of an unbroken chain of title to a prior good root of title.
[23] Registration under the Lands Instrument Law does not cure any defect in title. See section 25 thereof
[24] See section 166 CAMA see also section 165, 167-177, 183-196 CAMA
[25] (1988) 2 NWLR(pt. 76) page 303 at 322
[26] (1916) 2 KB p. 979 at p. 999
[27] I.O Smith, “Nigerian Law of Secured Credit” 2001 p310
[28] See Oditah F; Legal Aspects of Receivables Financing- Sweet and Maxwell (1991) p. 179.
[29] National Provincial & Union Bank of England vs Charnley (1924) 1 CB 431; R v Registrar of Companies (1986) QB 1114.
[30] (1974) 1 WLR 451. This decision was criticized by R.R Pennington –‘Company Law in charge’ B.G. Pettet (ed.), (1987) pp 115-116)
[31]See Sections 197, 198 of CAMA.
[32] see Re Monolithic Building Co (1951) 1 Ch. 642)
[33] See Mercantile Bank of India Ltd v Chartered Bank of India (1937) 1 AER 231, Re Row Dal Constructions pty., Ltd (1966) V.R. 249)
[34] See Independent Automatic Sales Ltd v Knowles and Foster (1962) 3 AER 27
[35] See also Opebiyi v Oshoboja (1976) 6-10 SC 195
[36] See the case of Oriental Airlines Ltd vs. Air Via Ltd (1998) 12 NWLR pt 577 p. 271; Nationwide Dev. Co Ltd vs. UBA Plc (1996) 3 NWLR pt 436 p. 425.
[37] See Re Accident Insurance Co Ltd (1972) 1 WLR 640.
[38] – Re Western Canada Land Oil and Works Co (1873) LR 17 Eq 1; Re Chapel House Colliery Co (1883) 24 Ch D 259,
[39] I.O Smith, op.cit 316
[40] Re: Benjamin Cape Co. (1914) Ch. p. 800
[41] Evans v. Rival Granite Quarries Ltd. (1910) 2 KB p 979
[42] Cretanor maritime Co. Ltd v. Irish Marine Management Ltd (1978) 1 WLR p. 966
[43] Re Roundwood Colliery Co. (1897) 1 Ch. p. 373
[44] I.R.C v. Goldblatt(1972) Ch. p 458
[45] ibid.
[46] (1970) Ch. p 465.
[47] (1854) 2 Drew. 73 at 78
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