CORPORATE LAW PRACTICE: COMPANY SECURITIES IN NIGERIA (3)

Continuation from our last post on Company Securities in Nigeria……

We have discussed in length shares, classes of shares, how to acquire shares in a company, share certificate

TAKE NOTE, please try and practice the drafting related to what we have done before;

a)      Letter of Regret

b)      Resolutions in relation to issue of shares

c)      Letter of allotment

d)      Letter of renunciation

e)      Restriction clause

f)       Notice of meeting

You can get these drafts in BHADMUS on Corporate Law practice.

For this part we going to be looking at Raising Debt Capital through DEBENTURES

                                                DEBENTURES

This is defined by SECTION 567 CAMA;

            ‘’a written acknowledgment of indebtedness by the company, setting out the terms and conditions of the indebtedness, and includes debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not’’

RULES ON DEBENTURES

1.      A company has power to borrow money, for the purpose of its business or objects and to charge property and issue debentures. See SECTION 166

2.      The mode of borrowing is regulated by the company’s MEMART

3.      Where directors exceed their borrowing limit without approval  as required by the Articles, such borrowing needs to be ratified by the General Meeting, as an internal measure to validate the borrowing

4.     

 By combinative effect of SECTION 39(3), 68 AND 69, all points to the fact that if the borrowing is beyond the company’s capacity, the borrowing can still be validated.

5.      If the debenture are issued to the public, they must comply with the requirements of issuing a prospectus

6.      Offer of debentures by a public company to the public for subscription or purchase must be by debenture trust deed. SECTION 71 ISA 2007

N.B: Within 60 days, of the creation or registration of a debenture, the company shall deliver to the registered debenture holder a certificate of the debenture stock under the company seal.. SECTION 167(1)

FURTHERMORE, CAMA in outlining the features of a debenture outlines statements to be included in debenture;

a)      The principal amount borrowed

b)      The maximum discount which may be allowed on the issue or re-issue and the maximum premium at which it may be redeemed

c)      The rate of and the dates on which interest shall be paid and the manner of payment

d)      The date and manner of repaying the principal sum

e)      If a convertible debenture, the date and terms of such conversion into shares

f)       The charge securing the debenture and the condition subject to which the debenture shall take effect……..SECTION 168 CAMA

TYPES OF DEBENTURES

1.      Convertible debenture

2.      Bearer debenture

3.      Registered debenture

4.      Redeemable debenture

5.      Perpetual debenture

BEARER DEBENTURE

THE FEATURES

1.      The debenture is payable to the holder in due course

2.      It is transferable by mere delivery until due time for redemption

3.      How he got the debenture is irrelevant to the company issuer

CONVERTIBLE DEBENTURE (SECTION 172 CAMA)

FEATURES

1.      Option opened for debenture holder who wish to be members of the company

2.      Agreement is entered between the parties (Company and debenture holder) in lieu of repayment or redemption, there be a conversion into shares

3.      The terms of agreement is stated in the debenture instrument

4.      It a viable option for internal corporate restructuring option in arrangement and compromise

REGISTERED DEBENTURE

FEATURES

1.       This is a form of debenture repayable to the registered holder

2.      His name must not only be on the debenture certificate but also in the Register of debentures holder

3.      It operates between the original debenture holder and the borrower;  company

REDEEMABLE DEBENTURE (SECTION 174 CAMA)

THE FEATURES

1.      It issued by the company with the option of it being redeemed

2.      It can also be re-issued in certain cases. see SECTION 175 CAMA

3.      When it is re-issued, the new holder shall be deemed to have had same priority as if the debenture had never been redeemed

PERPETUAL DEBENTURE

THE FEATURES

1.      These are made redeemable or irredeemable only on the happening of;

a)      Contingent however remote or

b)      On the expiration of a period however long or

c)      Fulfillment of a certain condition

SYNDICATED LOAN DEBENTURE/ PARI PASSU MORTGAGE DEBENTURE (Series of debentures)

THE FEATURES

1.      It mostly utilized by consortium of lenders to finance mega project which would be difficult for one lender to lend such money

2.      the separate legal personalities of the individual lenders are subsumed under and held by the Trustees appointed under the Debenture Trust Deed created by the consortium

3.      We have different lenders with different legal personalities, having one single asset charged and created in series, but with a clause

4.      The clause is PARRI PASSU CLAUSE : The later series created shall share equally with the earliest

5.      It is pari passu because the lenders agree that they would not observe priority of interest but that their interest shall be equal in rank

6.      The debenture here is created by a Debenture Trust Deed

CONDITIONS FOR CREATING SYNDICATED LOAN [SECTION 197(9)]

The company must within 90 days after execution of the deed containing the charge or series of the debenture, file with the CAC, in respect of each of the issue, the following particulars;

i)                    The total amount secured by the whole series;

ii)                  The dates of the resolutions authorising the issues of the series and the date of the covering deed, if any, by which the security is created or defined;

iii)                A general description of the property charged; and

iv)                the names of the trustees, if any, for the debenture holders; together with the deed containing the charge, or, if there is no such deed, one of the debentures of the series:

PROVIDED that where more than one issue is made of debentures in the series there shall be sent to the Commission for entry in the register particulars of the date and amount of each issues, but an omission to do this shall not affect the validity of the debentures issued.

From these conditions above, a trustee (s) is appointed since the debenture is created by debenture Trust deed. So CAMA provides for persons who are disqualified as trustees for a debenture trust; SECTION 187 CAMA

1.      an officer or an employee of the company which issues debenture covered by the trust deed or of a company in the same group of companies as company issuing debenture

2.      less than 18 years old

3.      of unsound mind and has ben so found by a court in Nigeria or elsewhere

4.      an undischarged bankrupt

5.      a substantial shareholder of the company ( his a person who holds by himself or by his nominee, shares in a public company which entitles him to exercise at least 10% of the unrestricted voting rights at any general meeting of the company. Section 95(1)(97)]

SECURED AND NAKED DEBENTURE

Generally, debentures may either be secured by a charge over the company’s property(secured) or may be unsecured by any charge(Naked)

The next question should be what is a charge?

            ‘’ a charge is a security interest created in or over an assets by their owner, the charger in favour of a creditor (the charge) by which it is agreed that property shall be appropriated to the discharge of a debt or other obligation’’

Therefore, a secured debenture can either be secured by;

a)      Fixed Charge

b)      Floating Charge

FIXED CHARGE

The features

1.      This is a charge over a specific property of a company which fastens on the property when the charge is created.

2.      The charge is attached to a particular piece of property when the charge is created and the identity of the property does not change (though it may be extended)

3.      The property may not be in existence when the charge is created

4.      The property is sufficiently defined in the instrument creating the charge

5.      The charge can obtain injuction to restrain unauthorized disposal of that asset

6.      It can either be

a)      Legal in nature or

b)      Equitable in nature

7.      It is legal in nature when the charge is expressed in deed form

8.      Where the charge is merely a deposit of title deed it is equitable in nature

FLOATING CHARGE

The Features

1.      It is a charge on property which is constantly changing and can be disposed of by the company in the ordinary course of business

2.      It is an equitable charge over the whole or a specified part of the company’s undertaking and assets (including cash, uncalled capital both present and future)

3.      It remains dormant until the charge crystallize and becomes fixed

4.      It is ambulatory and floats over the property until the event indicated in the debenture deed happens

CRYSTALIZATION OF FLOATING CHARGE

By virtue of SECTION 178(1) (a-c) states events that make a floating charge to crystalize.

The section states that a floating charge does not preclude the company from dealing with such assets until;

a)      The security becomes enforceable and the debenture holder enforces it by appointing a receiver or manager or enters into possession of such assets

b)      The court appoints a receiver or manager of such assets on the application of the holder

c)      The company goes into liquidation

INTERPRETATION: On the happening of any of the above events the charge crystalize, you remember from the feature of a floating charge; it is ambulatory and floats over the property until the events indicated in the debenture deed happens or any of the aforementioned events then it causes the charge to settle and become a fixed equitable charge.

So, the company’s freedom to deal with the assets comprised in the charge comes to an end.

TAKE NOTE, SECTION 179 CAMA, provides that A fixed charge on any property shall have priority over a floating charge affecting the property, unless;

1.      The terms on which the floating charge was granted prohibited the company from granting any later charge  having priority over the floating and

2.      The person in whose favour such later charge was granted had actual notice of that prohibition at the time when the charge was granted to him

REGISTRATION OF CHARGES

STATUTE: Section 197(1) and section 199(1) CAMA; Every company is under a duty to register every charge created by it;

1.       By filing Form CAC 8(PARTICULARS OF CHARGE) and other necessary documents with CAC.

2.      Such registration must be done within ninety (90) days from the date of the creation of the charge.

3.       The documents to be sent to CAC for the registration are provided for under Regulation 34(1)&(3) Companies Regulation, 2012:

a)      Duly stamped and sealed deed of mortgage with counterpart copy

b)      Duly completed form for notice of charge as in Form CAC 8, Particulars of Charge

c)      Court order where applicable (court order extending time within which to register. See section 205 CAMA)

d)     Photocopy of previous registered deed in the case of upstamping

e)      Evidence of payment of fees

f)       Evidence of application of governor’s consent duly submitted to the appropriate authority, if applicable

TAKE NOTE That after the expiration of the ninety (90) days, the court may extend the time for registration upon application to it under section 205 CAMA. The procedure for this is by Originating Motion supported by an Affidavit.

TAKE NOTE By virtue of section 199 CAMA, the registration of the charge with the CAC can be done either by the company or the debenture holder or any other interested person. However, the section impose the duty on the company to register the charges,

BUT, where the registration is effected by person other than the company, that person shall be entitled to recover from the company the amount of any fees properly paid by him to the commission on the registration. See SECTION 199(2)

                        EFFECT OF FAILURE TO REGISTER WITH CAC

CASE: CAPITAL FINANCE CO.LTD V STOKES

1.      The debenture becomes void against the creditors and liquidators of the company

2.      The loan agreement is not void ab inito and the Mortgagee can recover the loan

3.      The loan amount becomes repayable immediately as the debenture is rendered unsecured( NAKED)

4.      The collateral is lost and debt becomes a simple debt

5.      The interest of the mortgagee is then equitable and it losses priority over the debentures that are registered.

PROCEDURE FOR THE CREATION OF CHARGES

1.      Convene Board Meeting to pass resolution authorizing the loan

2.      Preparation, execution and stamping of the loan documents

3.       Obtain Governor’s consent for the legal mortgage if necessary (if landed property is involved)

4.      File documents at Land Registry if landed property is used as security, pay stamp duty

5.      Within 90 days of the creation of the debenture, file documents for registration at the commission and they include;

1. Duly stamped and sealed deed of mortgage with counterpart copy
2. Duly completed form for notice of charge as in Form CAC 8, Particulars of Charge
3. Court order where applicable (court order extending time within which to register. See section 205 CAMA)
4. Photocopy of previous registered deed in the case of upstamping
5. Evidence of payment of fees
6. Evidence of application of governor’s consent duly submitted to the appropriate authority, if applicable

6.      Collect Certificate of Registration at the commission and keep at registered address

7.      Enter particulars of the debenture in the;

a)      Record of instrument

b)      Register of charges

c)      Register of debenture holders

PROCEDURE FOR DISCHARGE OF CHARGES

When the debt for which the charge was given has been satisfied;

1.     

 Execute a Deed of Satisfaction or Release of debentures between the parties

2.      The company is to file memorandum of satisfaction with the CAC. This is done by completing and filling form CAC 9 – Declaration Verifying Memorandum of Satisfaction of Charge. section 204 CAMA

3.      Collect a certificate of satisfaction of the charge from the commission

4.      Keep a copy of the certificate at the registered office

TAKE NOTE Regulation 35(1) Companies Regulations 2012, the document to be filed at CAC for the discharge or satisfaction of a charge are:

i)                    Duly stamped deed of release

ii)                  Duly completed form for satisfaction of charge; Form CAC 9 – Declaration Verifying Memorandum of Satisfaction of Charge.

iii)                Evidence of payment of fees

By regulation 35(2) Companies Regulation, 2012, the notice of release or satisfaction of a charge shall be filed with CAC within fourteen (14) days after the release or satisfaction.

RECORDS TO BE KEPT BY COMPANY ON CREATION OF A DEBENTURE

Every company is required to keep the following records

• Register of charges – s. 191
• Register of debenture holders – s. 193
• Register/Records of instruments – s. 190

REMEDIES OF DEBENTURE HOLDER IN EVENT OF DEFAULT

A debenture holder lends money to the company and he expects to be paid back the principal sum and interest. Where there is default on the part of the company, by section 209 CAMA, the following are the remedies available to the debenture holder:

1. Recovery of principal and interest: this by an action against the company in court. Since it is the principal sum and interest the court with jurisdiction is the State High Court and it applies both for secured and naked debentures.
2. Petition for winding up. The debenture holder can bring a petition for winding up of the company as a creditor – s. 408(d).The petition is to be brought at the Federal High Court. see section 209(2)(b)(ii)
3. Debenture holders’ action. This is a representative action brought by one or more of the debenture holders to recover the principal sum and interest. See section 209(2)(a)
4. Power of sale: where the debenture is secured with a fixed charge, the debenture holder can exercise power of sale. The power of sale must have arisen and be exercisable. Principles governing mortgages are applicable.
5. Foreclosure of the security/property. The application for order of foreclosure is at the FHC (same as in property law). See section 209(2)(b)(i)
6. Valuation of the security and providing proof for the balances on winding up
7. Appointment of receiver/manager either by the debenture holder if authorized by the instrument or FHC.

TO BE CONTINUED!!!!!! Next time on company securities; Flotation of Securities, collective Investment Schemes…. Stay tuned!!!!

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