UNIT 9

CHARGES

In Nigerian property law, a charge refers to an encumbrance on property as security for the payment of a debt or the performance of an obligation. It creates a right for the creditor to have the debt satisfied out of the property without transferring title to the creditor. Charges are commonly used in situations involving land and other real property as security for loans or obligations. Charges can be broadly classified into two types which includes the following:

1. Fixed charge: A fixed charge is a specific charge on a particular asset or property. It is tied to a specific piece of property, and the debtor cannot deal with the property without the creditor's consent. For instance, if land is subjected to a fixed charge, the debtor cannot sell, lease, or transfer the land without the creditor’s approval. Fixed charges are common when a company or individual uses immovable property like land as security for a loan. An example is if an individual takes out a mortgage on their house, the lender typically has a fixed charge on the property. This means that the lender can seize and sell the house to recover the loan if the individual defaults.
2. Floating charge: A floating charge is a security interest over a fund of changing assets. It allows the debtor to deal with the assets such as selling or disposing of them in the ordinary course of business. The charge "floats" over the assets until a triggering event occurs such as default or insolvency, at which point the charge "crystallizes" and attaches to the assets in their state at that time. Floating charges are typically used by companies to secure debts over assets such as stock-in-trade, raw materials, or inventory that are constantly changing. An example is if company that deals in the sale of goods might create a floating charge over its inventory, allowing it to continue trading in the goods until the floating charge crystallizes upon default.

CREATION OF A CHARGE

A charge can be created by contract or by law. In the case of a contractual charge, the parties expressly agree that the property will serve as security for the debt. Charges by law also known as statutory charges are created automatically by operation of law in certain circumstances, without the need for an agreement. In Nigeria, the procedure for creating a charge is governed by both common law principles and statutes, particularly the companies and allied matters act (CAMA) 2020.

REGISTRATION OF CHARGES

See section 222(1) of the companies and allied matters act (CAMA) 2020 which requires that a charge created by a company must be registered with the corporate affairs commission (CAC) within 90 days of its creation. Failure to register the charge renders it void against the company’s liquidator or any creditor of the company. See the case of Intercontractors Nigeria Ltd v. National Provident Fund Management Board (1988) 2 NWLR (Pt. 76) 280 where the court emphasized the importance of registering charges as provided by law. In this case, the failure to register the charge meant that it could not be enforced against other creditors.
However, If a charge is not registered within the required timeframe, it is rendered void against the company’s liquidator and other creditors. See section 224 of CAMA. However, the obligation to repay the loan or fulfill the underlying obligation still remains. This is to ensure that creditors and other parties dealing with the company are aware of the company’s assets and liabilities.

CRYSTALLIZATION OF CHARGES

Crystallization refers to the process by which a floating charge converts into a fixed charge. Once a floating charge crystallizes, it attaches to the assets of the debtor as they exist at that moment, preventing the debtor from further dealing with the charged assets without the creditor’s consent. A floating charge crystallizes when specific events occur, such as the following:

1. The debtor’s insolvency or liquidation.
2. Default in repayment or fulfillment of the obligation.
3. The appointment of a receiver or an administrator.

PRIORITY OF CHARGES

When there are multiple charges on the same property, the priority of the charges is crucial. The general rule is that fixed charges take priority over floating charges, and earlier charges take precedence over later ones. However, there are exceptions, particularly where a floating charge has crystallized. Under Nigerian law, priority of charges is also influenced by whether or not the charge was registered. A registered charge typically takes priority over an unregistered charge. See section 223 of CAMA and the case of NAB Ltd v. Abora Construction Co. Ltd (2004) 11 NWLR (Pt. 884) 568 where the court held that where a charge is duly registered, it takes precedence over other claims on the same property, especially where the other claims were not registered.

ENFORCEMENT OF CHARGES

When a debtor defaults on the obligation secured by a charge, the creditor may enforce the charge by exercising their rights under the agreement. In the case of a fixed charge, the creditor can directly seize and sell the charged property to recover the debt. For a floating charge, the creditor must wait for crystallization before taking enforcement actions. Enforcement of charges typically involves the following:

1. Appointment of a receiver: A creditor may apply for the appointment of a receiver or manager to take control of the charged assets, especially in cases involving corporate debtors. Under CAMA, the appointment of a receiver is a common method of enforcing charges. See the case of Wema Bank Plc v. Brastem-Sterr (Nig) Ltd (2008) 10 NWLR (Pt. 1094) 150 where the court upheld the right of a creditor to enforce a charge by appointing a receiver to take control of the company’s assets and recover the debt owed.
2. Sale of the charged property: Once the charge has crystallized or a fixed charge is in place, the creditor can sell the property to recover the debt.
3. Court action: Creditors may also approach the court to enforce their rights under the charge, particularly where disputes arise regarding priority or the validity of the charge.

CONCLUSION

Charges are a critical tool in property law for securing debts and obligations. Understanding the legal framework for creating, registering, and enforcing charges is essential for both debtors and creditors in Nigeria. The companies and allied matters act (CAMA) 2020 and other relevant statutes provide clear guidelines on the processes involved, while case law further illuminates the practical application of these rules. Failure to comply with statutory requirements, especially regarding registration, can significantly affect the rights and priorities of the parties involved.