Security Without Security – Lessons For Banks, And Similar Institutions (2)
Under the Lands Registry
In addition to registration under the Companies Act and Borrowers and Lenders Act, any security created over landed or immovable property in Ghana shall be registered with the Lands Commission. Thus, if documents which have been stamped are in relation to immovable properties, then they must as of necessity be registered before it can be an effective security. Section 72(1) of the Land Title Registration Act 1986 provides that “A mortgage created after the commencement of this Act shall be in the prescribed form and shall not have effect unless it is registered in accordance with this Act”. This implies that without registration of the mortgage, it will only exist in paper and will be worthless at the stage of enforcement because it is void as a security. Subsection 2 of section 72 says that “When a mortgage is registered as an interest in land, the instrument by which the mortgage is created shall be filed in the Registry.”
Attitude of the Courts towards failure to register securities.
The very essence of taking security is for the Bank or lender giving the facility to have something to fall on in the event of a default. If the Borrower defaults and the Bank or lender does not have any security to fall on, it means the Bank or lender must write-off such loans as bad debts. It is even apparent when dealing with contingent liability like Guarantees. Under the law that governs guarantees (Bank Guarantee, Bid Guarantee, Performance Guarantee, Advance Payment Guarantee, Retention Guarantee or even a Counter Guarantee) the Uniform Rules for Demand Guarantee 2010), when a Guarantee is called in by the Beneficiary in whose favour it has been issued, it must be paid usually upon first written demand by the beneficiary without cavil or argument. This is so because, Guarantees are independent of the main transaction between the Customer on whose behalf the guarantee is issued and the beneficiary in whose favour the guarantee is issued. This means that, if there is a security that has not been registered, the Bank as a Guarantor may pay out the liability and at the time of seeking to enforce the security the question of registration will come up for determination. This subject has engaged the minds of our courts as far back as the 1960s until as recent as February 2020. These shall be discussed in detail to bring out the lessons for industry practice.
To appreciate the historical perspective, the writer shall start discussing the old judicial decisions till he reaches the most recent decision by the Supreme Court. From the case of George Cohen (W.A.) Ltd v. Comet Construction Co. Ltd.; Ghana Commercial Bank (Claimants) to the most recent decision on this subject which is the case of Bank of Africa Limited v. Gracefield Merchants Limited, & 2 others; Mike Twum Barima and Robert Allen (Claimants) decision dated 5th February 2020, the Courts seem to sound an unheeded warning to Banks and lenders on the effect of an unregistered security.
In the case of George Cohen (W.A.) Ltd v. Comet Construction Co. Ltd.; Ghana Commercial Bank (Claimants) Comet Construction Limited took a loan from Ghana Commercial Bank (GCB) and secured it with a debenture over two of their vehicles in favour of GCB but they failed to register the debenture under the Companies Act at the time. George Cohen sued Comet and later got judgment and sought to enforce same. After Comet refused to pay, George Cohen sought to attach the two vehicles through one of the modes of execution called fieri facias (fi.fa) in January 1965, at which time GCB had not registered the debenture. GCB actually registered the debenture in October 1965 after the fieri facias (fi.fa) had been issued. GCB then filed what is called an interpleader to say they have an interest (by way of the debenture) in the two vehicles attached. The issue for determination by the court was that; between the execution creditor (George Cohen) and the claimants/debenture holder (GCB) whose interest should prevail. The Court examined the effect of failure to register a debenture under the Companies Act (Companies Code at the time) and established that failure to register invalidates the security. By this alone it means the debenture holder GCB had no security in the debenture because it failed to register. But the Court went ahead to construe section 6 of the Companies Act (Code) and said since GCB was a bank with a special legislation unless there is a legal requirement under the Banking Ordinance, such failure will not be inimical to their interests. The Court speaking through Edusei J., therefore, decided that the debenture holder/Claimant/GCB’s interest prevails over the interest of the execution creditor. This decision, it is suggested by the writer was rendered in error since the Companies Act (Code at the time) governed GCB at the time and was therefore not exempted from the registration requirement and the proper position the court should have arrived at was that the execution creditor’s interest prevails over that of the claimant bank who had not registered its debenture.
The next is the case of the Republic v James Town Circuit Judge; Ex Parte Annor This case also involved Ghana Commercial Bank (GCB) which held a security. The Bank held a debenture over the stock and other equipment of a Customer for whom the GCB had given a facility in the nature of an Overdraft. The debenture was not registered by either the customer or the bank. The customer was successfully sued by the landlord. The landlord as execution creditor sought to levy execution against the assets, whereupon GCB interpleaded.
The landlord applied for the court to dismiss the interpleader application by GCB since the debenture had not been registered as required by law. The Circuit Court Judge before whom the application was heard dismissed the landlord’s application, and relied on the reasoning in the George Cohen case discussed above. The landlord filed an application for certiorari to quash the decision of the Circuit Court Judge and the High Court hearing the certiorari application, granted the application and quashed the erroneous decision of the Circuit Court Judge. The High Court speaking through Justice Taylor had this to say:
“the combined effect of Act 179, sections 107 and 111 was that a duty was mandatorily cast on any company creating a charge to register the charge and failure to register the charge in compliance with this duty rendered the charge void so far as any security on the company’s property concerned. Neither Act 339, s. 46 nor Act 179, s. 6 could be said to affect in anyway the provisions of Act 179, ss. 107 and 111… The circuit judge erred completely in his choice of cases to support his conclusion that the combined effect of Act 179, s.6 and Act 339 s. 46 nullified the effect of provisions of Act 179 dealing with registration and validated charges made by a company in favour of a bank even where the charge was not registered. One case was decided per incuriam since it ignored the provisions of Act 179, ss. 107 and 111….”
It is the writer’s respectful view, that this case states the correct position of the law and a correct departure from the previous wrong conclusion in the case above.
The next is the Court of Appeal decision of ESM Company Limited vrs Exim guaranty Company and Big Aidoo Construction and In the Matter of Best Point Savings and Loans Co. Ltd (Garnishee Applicant) decision rendered on 31st May, 2018. In this case, ESM sold a Quarry Plant to Big Aidoo Construction on credit. Exim Guaranty issued a bank guarantee for the outstanding purchase price. ESM obtained judgment against the defendants and sought to proceed against the defendants with garnishee proceedings directed at the Ministry of Finance, Ghana Highways Authority and Best Point Savings and Loans (BPSL) (as the Garnishee Applicant). At the garnishee hearing it turned out that BPSL was not indebted to Big Aidoo, rather BPSL had given a credit facility to Big Aidoo.
The proceeds of an Interim Payment Certificate to be issued in favour of Big Aidoo was assigned to BPSL as part of the security for the facility. They had created a charge over the IPC 11 proceeds in favour of BPSL but BPSL had not registered as required by law at the Collateral Registry and the IPC was the subject of the garnishee proceedings. The trial High Court heard arguments and ruled that the legal interest of ESM Limited prevails over the equitable interest of the Garnishee/Applicant and so the Court made the garnishee order absolute, although BPSL had argued the said proceeds had been assigned to them by way of security and held same jointly with Big Aidoo. BPSL being aggrieved with the decision of the High Court, appealed against the decision. The Court of Appeal dismissed the appeal on the basis that the IPC 11 was a charge created in favour of BPSL but same was not registered as required by section 25 of the Borrowers and Lenders Act. This is another case that shows how the Courts deal with charges/securities that are not registered and hence declared unenforceable.
The most recent decision is case of Bank of Africa Limited v. Gracefield Merchants Limited, & 2 others; Mike Twum Barima and Robert Allen (Claimants). This is a Supreme Court decision rendered in February 2020, in which Bank of Africa (BOA) had given a loan facility to the 1st Defendant, Gracefield Limited (the Borrower) for specified amounts. The loan was secured by a charge over a landed property in the form of a Mortgage belonging to the 2nd Defendant Dr. Kofi Ruben Atekpe the (the Mortgagor). The Mortgage Agreement was executed in 2007, but was not registered by the parties until around August 2009. The same Deed of Mortgage executed in 2007 was used as security for another facility in 2010. Before the Bank sought to register its interest in the property, the 2ndDefendant/Mortgagor in 2008 and 2009 had assigned his interest in the same property to a certain Mike Twum Barima and Robert Allen 1st and 2nd Claimants respectively.
Upon default of the 1st Defendants, the Bank commenced an action and obtained judgments against the Defendants to recover an amount of Seven Million, Five Hundred and Twenty-Six Thousand, Two Hundred and Thirty-Four Ghana Cedis and Twenty-Nine Ghana Pesewas (GHS7,526,234.29) being the balance and interest outstanding. It was in the execution of the judgment that BOA attached the property of the Mortgagor, whereupon the 1st and 2nd Claimants filed an interpleader proceedings. During the interpleader proceedings, the trial High Court found that the 1st and 2nd Claimants were innocent purchasers for value without notice and ruled in their favour. BOA being aggrieved, appealed to the Court of Appeal which dismissed the appeal and upheld the decision of the High Court.
BOA further appealed to the Supreme Court. Their Lordships at the Supreme Court examined how each of the Claimants acquired the properties from the 2nd Defendant/Mortgagor and established that the 1st Claimant acquired his own from the 2nd Defendant by a Deed of Assignment dated 11thNovember, 2008, after obtaining the requisite consent from the Lands Commission. The 2nd Claimant also acquired the property through a Deed of Assignment after also obtaining consent from the Lands Commission and they both parted with monies. The Supreme Court observed thus:
“The record of appeal revealed that apart from applying and obtaining the consent of the Lands Commission for their respective Assignments, there is no evidence that both Claimants conducted official searches at the Lands Commission to ascertain whether the properties they were acquiring were encumbered. From the evidence on record there is no dispute that the property acquired by the Claimants were owned by the 2nd Defendant. However, the 2nd Defendant had in 2007 mortgaged the properties to the Appellant for a loan. The Appellant failed to register the mortgage promptly and for that matter at the time the 2nd Defendant assigned his interest in the properties to the Claimants, there was no registered encumbrance on the properties to the notice of the public. The mortgage was only registered in August 2009, after the 2nd Defendant had assigned his interest in the properties”.
The Court therefore observed that at the time the 2nd Defendant assigned his interest in the property to the Claimants, there was no registered encumbrance by the Bank and so even if the Claimant has conducted a search, it would not have yielded the results that the property was encumbered in anyway. Their Lordships reviewed the authorities and spoke through Marful Sau JSC thus
“It is trite that a mortgage in writing is an instrument affecting land and same ought to be registered under section 24(1) of the Land Registry Act. A mortgage shall have no legal effect until it is registered. Further the Land Title Registration Act,, provides by its section 72 that a mortgage created after the coming into force of this Act shall not have any legal effect until it is registered in accordance with the Act….. The law is thus clear that the Deed of Mortgage executed between the Appellant and the 2nd Defendant had no legal effect for lack of registration, at the time of the assignments to the Claimants”.
The Supreme Court continued thus:
“Mortgage was executed on the 4th of May 2007. Clause 11 of the Deed of Mortgage enjoined the 2nd Defendant, who was the Mortgagor to immediately ensure the registration of the mortgage upon execution of same. The 2nd Defendant failed to perform this obligation and the Appellant also went to sleep.”
The above clearly showed that the 2nd Defendant Mortgagor failed to perform his obligation of registering the mortgage neither did BOA. His Lordship Marful-Sau JSC was therefore apt when he remarked thus “From the evidence on record, this whole bizarre episode was caused by the greed and venality of the 2nd Defendant and he must be ashamed of himself”. Although the principal obligation to register rests with the person creating the charge, the law permits anyone who has an interest in the charge to register, one wonders why the Bank also did not take steps to register it and possibly bill the Defendants with the fees. But BOA also failed. And so the Supreme Court has this to say “Indeed the Appellant cannot escape blame either for her lack of diligence after executing the mortgage”.
The Court concluded by saying that:
“Appellant, as the mortgagee, failed to ensure the registration of the mortgage by the 2nd Defendant in compliance with the provisions of the mortgage. If the Appellant has been diligent and ensured that the mortgage was promptly registered as provided in the Deed of Mortgage by the 2nd Defendant, the Appellant would not have been in the present situation. In the circumstances, Appellant can only blame the 2nd Defendant who from the record appears to be fraudulent from the way he conducted the transactions with the Claimants and Appellant. The argument by the Appellant that it obtained the consent of the Lands Commission for the mortgage did not change the position that at the time of the assignment, the mortgage was not registered. The consent of the Lands Commission did not amount to registration and could not create an encumbrance on the property or constitute notice to the public. The option left for the Appellant is to enforce the judgment entered by the trial High Court on 10th August 2011 against the Defendant at the trial namely Gracefiled Merchants Limited, Dr. Ruben Atepke and Kofi Kwakwa.”
It is therefore clear that no matter what, once a charge or security is created, same must be registered because if it is not registered, it is void as a security and same cannot be enforced. In practice, it is always easy to obtain judgment against a defaulting Borrower, but the difficulty is the process of execution. Sometimes even finding a property against which to levy execution is a problem and so it is advisable, and the writer agrees with their Lordships, to ensure that whatever security a Bank or financial institution takes, same is well perfected in order to provide some degree of comfort when there is a default. It does not feel good to be in the shoes of the Appellant Bank (BOA) in this last suit. In most instances, because of business exigencies and the need to meet or exceed customer expectation, certain due diligence measures are deferred, ignored or relegated, the funds are disbursed and there is no more motivation to follow through to the end to ensure that the Bank is adequately secured, only to be hit in the end by the question of registration upon default and during enforcement.
From the above discussions, one could see that there is no much difficulty if no third party acquires an interest in the security the Bank holds, but the moment a third-party’s right accrues, usually through execution of judgments, then the only answer or way out is for the Bank to show that it has duly registered the security on which it relies.
Based upon the foregoing, it is clear that the Banks or SDTIs that give out facilities have a major obligation to ensure that securities they take are adequately registered so that in the event of a default, their interest is not prejudiced. It is important therefore that, just as the Banks or SDTIs are interested in the business aspect of granting facilities, the same importance ought to be placed on the perfection of securities they take, otherwise when there is a default and enforcement is being sought, the Bank and SDTIs will suddenly realize that the security they hold is just a worthless piece of paper. Banks Beware!!!
 (Act 152)
 (URDG 758
  GLR 777
 unreported Civil Appeal Suit No. J4/35/2016
  GLR 777
  GLR 453
 unreported Civil Appeal No. H1/169/2017
 unreported Civil Appeal Suit No. J4/35/2016
 See Asare v. Brobbey and Others (1971) 2 GLR 331 CA
 PNDCL 152