Security Without Security – Lessons For Banks, And Similar Institutions (1)

Banks and Specialized Deposit Taking institutions (SDTIs) exist to provide financial solutions to their Customers. In doing so, they largely take deposits and grant credit facilities to Customers. Credit Facilities come in several forms/types ranging from Contingent Liabilities (Bid Guarantees, Bank Guarantees, Performance Guarantees, Advanced Payment Guarantees, and Retention Guarantees), to Loans, Overdrafts, Finance Lease, Import Finance Facility, Issuance of Letters of Credit (LC), Standby Letters of Credit (SBLC) among other services. For a Bank or SDTI to engage in all these services, means that such services are permissible activities under the legislation regulating banks and SDTIs under section 18 of the Banks and Specialized Deposit Taking institutions Act,^[1]

Whatever facility a Bank or SDTI gives in line with its permitted activities/services, there is the need for collateral security to be taken in order to secure the Bank or SDTI in the event of default. This is simply what is called Collateral Security. Before giving out the facility, the Bank or SDTI may take a security from the Borrower or Customer. This is to ensure that in the event of a default, the Bank or SDTI has something to fall on, because at the core, the funds being given to Customers or Borrowers are depositors funds and so the Bank cannot be seen to be giving monies to Customers without any security to support or fall on in the event of default.

Taking Security

When a financial Institution grants a facility or loan, the security they may request for or take comes in several forms. Except in a few instances, where a Bank or SDTI may decide to lend clean, i.e. giving a loan without a security. 

The securities the Banks or SDTI may take, in this regard may be in the form of a Legal Mortgage (bilateral or tripartite), Debenture (Fixed or Floating), Liens, etc. 

A Mortgage is basically a charge/encumbrance over a landed property used as a security for the repayment of or the performance of an obligation. Indeed section 1(1) of the Mortgages Act 1972^[2]defines it thus “A mortgage for the purposes of this Act is a contract charging immovable property as security for the due payment of a debt and the interest on the debt or for the performance of any other obligation for which it is given, in accordance with the terms of the contract”. Subsection 2 continues thus “A mortgage is an encumbrance on the property charged, and does not, except as provided by this Act, operate so as to change the ownership, right to possession or any other interest, whether present or future in the property charged.” 

By this, we see that a Mortgage as security is only a charge and does not operate as a transfer of property from the Mortgagor to the Mortgagee unless otherwise provided. The law under section 3 of the Mortgages Act requires that ordinarily a Mortgage must be evidenced in writing and signed by the parties especially mortgagor (the person creating the Mortgage or the owner of the property) unless it is excused from this requirement by operation of law or customary law. It is communis opinio among all lawyers that customary law knows no writing. A Mortgage, therefore, is an encumbrance or a charge over the immovable property and it operates in such a manner that the owner (Mortgagor) is unable to lawfully deal with the property in accordance with the ownership rights because the mortgagee has acquired an interest in the property. 

Another form of security is a Debenture. A Debenture as a security is however a charge over moveable properties used to secure the due performance obligation which in this case is usually the payment of monies lent. These charges could either be fixed or floating charges. Section 90(2) of the Companies Act,^[3] provides that “Subject to subsection (2)” a floating charge is an equitable charge over the whole or a specified part of the undertaking and assets of the company both present and future”. A fixed charge is one that is created over a specific asset of the company. Until crystallization, the Company that has created the floating charge is not precluded from dealing with the assets the subject of the charge. Crystallization is the process where a floating charge becomes a fixed charge.

A security could also be a Guarantee, whether Corporate or Personal Guarantee. A Guarantee is usually an undertaking by a third party to secure the due repayment or performance of an obligation of a Borrower. It is a corporate guarantee if such security is provided by a Company (legal entity) and it is personal if it is given by an individual (natural person).  There is also the option of a Counter Guarantee which by its effect is a Guarantee that is issued usually by insurance companies as a security for a Guarantee issued by a bank or SDTI.

When the financial institution as a lender takes the security, it does not end there. The Law imposes certain obligations on the parties in order to perfect the securities in order for it to be enforceable when there is a default.

Perfection of Security

Under the law, documents that are used to secure the performance of an obligation or payment of a loan must be registered unless the law provides otherwise. It is the registration of the security, whether it is a Legal Mortgage, Debenture, or a Guarantee that makes the security a security properly so called and hence enforceable. This means that if a financial Institution gives out a loan, takes security and fails and/or refuses to register it, that security is, or becomes, a ‘worthless piece of paper’ before the law. In this piece we shall examine the law on this all important subject since it is the most important part of taking a security to secure the performance of an obligation.

The Companies Act, 2019^[4]  provides that if a company creates a security/charge, it must be registered, otherwise the security created is void and of no legal effect. Section 110 thereof provides “A charge, other than a charge specified in subsection (5) created by a company after the commencement of this Act is void so far as a security on the property of the company, is conferred by that charge, unless the particulars prescribed in this section together with the original or a certified copy of the instrument by which the charge is created or evidenced, are delivered in the prescribed form to the Registrar for registration within forty-five days after the days of the creation of the charge”. It is seen from this current law, a departure from the old Companies Act 1963^[5] in the sense that Act 179 gave only twenty-eight days for such registration. 

It is the view of the writer that the twenty-eight days under the old law, was not only over-ambitious but unrealistic, seeing as the registration process is usually preceded by Stamping, which subject shall be discussed presently. The effect of the above quoted section is that, if a Company that created the charge or the one who has an interest fails to register it, then in law there is no security at all, meaning that, in the event of a default, that security cannot be relied on by the financial institution. This however, does not mean that the person who secured the transaction with the void security is relieved of the obligation under the transaction. Section 110 (3) of the Companies Act supra provides thus “This section shall not affect a contract or an obligation for repayment of the money secured by the contract or obligation”, Sub section 4 makes the import clearer when it says that “When a charge becomes void under this section, the money secured by the charge shall immediately become payable despite a provision to the contrary in the contract”. This is the legal position in relation to securities created by or in favour of companies, to which we shall return in much detail. 

Perfection of securities, whether Mortgages, Debentures, Guarantees is divided into two major stages, there is the Stamping requirement and then the Registration aspect. The registration under the Companies Act is just one of the registration requirement, there is also the registration requirement at the Collateral Registry as well as the requirement under the Land Title Registry if the security is over an immoveable property.

Stamping of Securities

Stamping is the making of an impression on a legal document, by the appropriate authority (in this case Ghana Revenue Authority) in accordance with law and for which duty a tax or duty is exacted. 

Stamping of securities is governed by the Stamp Duty Act, 2005^[6]. It is trite that stamping is the first stage towards the perfection process. That is to say, before a security is registered whether at the Company’s Registry or Lands Registry, it has to be assessed and stamped before it is submitted for registration. The stamping involves payment of the appropriate fees as assessed and payment made to the Ghana Revenue Authority (GRA). In effect, stamping is a sine qua non to registration. Section 14 of the Stamp Duty Act 2005^[7] provides that “An instrument or title shall not be registered or entered in the registry of instruments that affect land or in the land title registry unless (a) that instrument or document containing particulars of title is stamped; or (b) the instrument or document is stamped under section 10 with a particular stamp denoting that it is not chargeable with duty”

The law is that a security document relating to any matter or thing done or to be done in Ghana must be stamped in order to be enforceable or be used for anything in Ghana. Stamping is where the security document is submitted to the stamping authorities for assessment to be made and then payment of the stamp duty fee effected by the person registering same. The current law is that stamp duty is assessed either at 0.5% of the facility amount on the primary security created and 0.25% on the facility amount on any other additional security created. So when there is a security evidencing a mortgage, bond, debenture, covenant, guarantee or lien it shall be treated as an instrument which is ‘stampable’ under the Stamp Duty Act.

Section 25 of the Stamp Duty Act provides that “A writing evidencing a mortgage, bond, debenture, covenant, guarantee or lien shall be treated as an instrument which shall be stamped in accordance with this Act”. Aside stamping being a condition precedent to registration, if a document that is subject to stamping is not stamped, same cannot be used in civil proceedings in the court of law since it will have an effect on the admissibility of the document.  See the case of Lizori Limited v. Evelyn Boye and School of Domestic Science and Catering^[8], a case that discussed the effect on admissibility of unstamped document. 

The law requires that, the stamping must be done within two (2) months after the security has been created if created in Ghana and if same is created outside Ghana, stamping must be done within two (2) months after being received in Ghana. One wonders why the Stamp Duty Act gives two (2) months to stamp a security, yet the old Companies Act gave only twenty-eight (28) days, when stamping is a condition precedent to registration. One could argue that it makes more ‘sense’, that the new Companies Act will increase the number of days for registration from twenty-eight (28) days to forty-five (45) days, although the writer thinks that it would have been better if the number of days allowable for registration was more having regard to the number of days under Stamp Duty Act.

Registration of Securities

Under the Companies Act

Once the security is created, the law requires same to be registered. After the security has been stamped in accordance with law, the next stage is submission of the documents to the Companies Registry for registration. Registration is where the particulars and copies of the said document is submitted to the various Registries for them to note the interest of the Lender in the property. As earlier indicated, our Companies Act requires every company that creates a security or a charge over its assets to register same. This is because, if the registration is not effected, the security created is void and of no effect as a security, it may not be enforceable, as mentioned above. 

It must be noted that, the duty to register is principally on the company creating the charge or security. But the law was prudent to add that the security could be registered by anyone who has an interest in the charge or security created. When a person other than the creator of the charge registers the security, the person can recover the fees incurred from the person who created the security. Section 114(2) of the Companies Act 2019^[9], provides that “A company shall send to the Registrar for registration the particulars required to be sent under sections 110 to 113, but registration of the particulars of the charge may be effected on the application of a person interested in the charge” (emphasis mine).

And so Section 114(2) says that “Where registration is effected on the application for a person other than the company, that person is entitled to recover from the company the amount of the fees payable to the Registrar for the registration.” It must be noted that the reason why a financial institution will go through all these is to secure the performance of an obligation i.e. repayment of the loan. Since without registration the security is void and unenforceable, it behoves on the financial institution to take the needed steps to register. The writes makes the analysis that, if he takes a facility from a bank and creates a legal mortgage of a landed property, he will for mischievous reasons not be in a haste to register it.

This is because, if it is not registered and there is a default, the Bank or SDTI cannot take or realize the security. This is why in practice, we see the lenders rather take a keen interest in registering the securities. We shall examine in due course how the courts have treated unregistered securities at the time of enforcement under Ghana law, which is the core of this piece. Let me hasten to add that, aside the fact that failure of registration makes the security void and unenforceable, it is also an offence for which the company and every officer may be liable to pay an administrative penalty of Six Thousand Ghana Cedis. Section 114(4) says that “Where a company defaults in sending to the Registrar the particulars requiring registration as required by this section, the company and every officer of the company that is in default is liable to pay the Registrar, an administrative penalty of five hundred penalty unitsunless the particulars have been duly submitted for registration by any other person”. According to law i.e. Fines (Penalty Units) Act^[10], as amended by the Fines (Penalty Units) (Amendment) Instrument,^[11], one penalty unit is Twelve Ghana Cedis (GHS12.00).

It is said that to every rule, there is an exception; this is applicable in registration of securities. It is not all securities that are subject to registration. The law itself provides exemptions. Under Section 110 (5) the law says that “This section shall not apply to a pledge of, or possessory lien on, goods, or to a charge, by way of pledge, deposit, letter of hypothecation or trust receipt, of bills of lading, dock warrant or any other document of title to goods, or of bills of exchange, promissory notes or any other negotiation securities for money”.

Due to the fact that registration may not in all cases be completed within the time specified by law, in this case forty-five (45) days, the law makes room to accommodate late registration after the forty-five (45) days. A person who is unable to register a security under the Companies Act within the forty-five days, can apply to the High Court under section 118 of the Act for extension of time within which to register the charge after the forty-five (45) days. The Court must be convinced that, the omission to register within the forty-five (45) days was due to some inadvertence or due to just and equitable reasons and such late registration will not be prejudicial to the position of the creditors or members of the company. In practice, the application for such extensions will be served on the person creating the charge and the Registrar of Companies. The Courts in the absence of any valid opposition (which opposition is rare) will grant the application to register. In the case of Re Ghana Timber Marketing Board’s Application; Ghana Timber Board v. Ashanti Curl & Lumber Products Limited^[12], a party opposed the application for extension of time, but the court dismissed the opposition and granted leave for the registration of the security.

Registration under the Borrowers and Lenders Act,^[13]

The Borrowers and Lenders Act,^[14] was enacted inter alia to provide the legal framework for credit, to improve standards of disclosure of information by borrowers and lenders, to prohibit certain credit practices, to promote a consistent enforcement framework related to credit. It has been said by scholars that the purpose of this Act was to ensure an easier means to enforce credit securities.

This Act also requires that, when a security or charge is created, it must also be registered. Section 25(1) similarly states that “A borrower or a person interested in a charge shall register a certified copy of a charge or collateral created by the borrower in favour of and a lender with the Collateral Registry within twenty-eight days after the date of the creation of the collateral or charge” This requirement is not mutually exclusive with the registration requirement under the Companies Act. Indeed subsection 2 of section 25 is authoritative on this when it says, “Where a charge is created by a company, the requirement to register charges with the Collateral Registry under this section shall be in addition to the requirement under section 107 of the Companies Act,^[15] to register charges with the Registrar of Companies” (Note that the Companies Act mentioned here should be read as Section 110 of the Companies Act^[16]. The Borrower who created the charge is required to register the charge, but the lender who has an interest in the charge can also take steps to register same. The effect of a failure to register is the same as we saw in the Companies Act, the security becomes void and unenforceable. Section 25(3) says that “A charge which is not registered in accordance with subsection (1) is of no effect as security for a borrower’s obligation for repayment of the money secured and the money secured shall immediately become payable despite any provision to the contrary in any contract”

Unlike the Companies Act, which relates to companies or artificial persons, the Borrowers and Lenders Act is applicable to both legal and natural persons. It is only when a charge is registered thereunder that the charge can be enforced as a security. If the charge is subject to registration and it is not registered, the person in whose favour it was created cannot rely on it or enforce it. In lending to Borrowers, when the security is a lien over cash for instance in an investment or a savings account, the writer takes the view that, as long as there is no third party right arising, failure to register will not be inimical when there is a default because the money is already held (lien/security) in the possession of the lender, who can access it to defray the obligation since there is a document creating a charge over the money. The challenge comes in when there is a third party right through for instance, a court judgment as against the lender who had the security in its favour but failed to register. What happens in such a case is what we shall discover in the Court of Appeal decision in the Best Point Savings and Loans Limited (BPSL) case which shall be discussed below.

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^[1] 2016 (Act 930)

^[2] (N.R.C.D 96)

^[3] 2019 (Act 992)

^[4] supra

^[5] ibid

^[6] (Act 689)

^[7] ibid

^[8] (2013) 67 GMJ 66 SC

^[9] supra

^[10] 2000 (Act 572)

^[11] 2005 (LI 1813)

^[12] [1968] GLR 931

^[13] 2008 (Act 773)

^[14] supra

^[15] supra

^[16]