Commerce and investment are the lifeblood of any strong economy. Financing these highly capital intensive commercial and investment activities requires the use of credit facilities by individual entrepreneurs, corporate entities, small and large-scale industries and multinational companies, who often depend largely on financing their investments through borrowing.
Banks and other financial institutions provide the finance for the vigorous commercial and investment activities through borrowing. A lender has two options in providing credit facility. The lender may rely on the borrower’s covenant to repay (self-recognizance) or take in addition to the debtor’s covenant to repay, assets and/or personal assurances in the form of guarantee or indemnity as security for the loan. Assets could be tangible (real property) or intangible (chooses in action such as stocks and shares) of the borrower company.
A prospective borrower who intends to use real property (land) as a security, may have to mortgage its proprietary interest in the said land as security for the repayment of the loan.
With respect to use of stocks and shares of a company as security for loan, it is noteworthy that a private limited liability company (Ltd) is required by section 22(2) of the Companies and Allied Matters Act Cap C20 LFN 2004 (CAMA) to restrict the transfer of its shares by its Articles of Association.
Thus, lenders prefer the use of shares quoted on the floor of the Nigeria Stock Exchange as it is easier to find buyers for them in the event of enforcement of such security.
Capital requirement of a big company may not be met by its shareholders especially where the CAMA allows the company to carry on a wide range of business as a going concern. The company may resort to borrowing money to meet its capital needs by issuing debentures secured by a charge on the company’s assets.
The charge may be created in the form of a fixed charge attaching to specific and ascertainable assets of the company or created in form of a floating charge hovering over all the assets of the company present and future but attaching only upon crystallization.
For a debenture to be valid, therefore, it must comply with the provisions of section 168 of the CAMA which requires that every debenture must include a statement on the following matter:
- The principal amount borrowed;
- The maximum discount which may be allowed on the issue or re-issue of the debentures, and the maximum premium at which the debentures may be made redeemable;
- The rate of and the date on which the interest on the debentures may be made redeemable;
- The date on which the principal amount shall be repaid or the manner in which redemption shall be effected whether by the payment of instalments or principal or otherwise;
- In the case of convertible debentures, the date and terms on which the debentures may be converted into shares and the amounts which may be credited as paid up on those shares; and the dates and terms on which the holders may exercise any right to subscribe for shares in respect of the debentures held by them;
- The charges securing the debentures and the conditions subject to which the debentures shall take effect.
Furthermore, by virtue of section 183 of CAMA, every company offering debentures to the public for subscription shall, before issuing any such debentures, execute debentures trust deed in respect of them and procure the execution of the deed by the trustee for the debenture holders appointed by the deed.
The trust deed enables many debenture holders to hold security by having legal interest vested in the trustees in trust for the beneficiary debenture holders and the trustees can retain custody of title deeds in the case of legal mortgages.
It is noteworthy however that a borrower whilst exercising the option of using land as security must comply with the requirement of the Land Use Act Cap L5 LFN 2004 (hereinafter referred to as “the Act”).
It is required by virtue of section 21 of the Act to obtain the consent of the Local Government with respect to land in a rural (non-urban) area which is sought to be used as security. Where the land is in an urban area, section 22 of the Act requires that the consent of the Governor in the state where the land is situated, be obtained.
Thus in the case of Savannah Bank (Nigeria) Ltd v. Ajilo  1 NWLR (Pt. 77) p. 305, the Supreme Court of Nigeria stated that failure to obtain the Governor’s consent renders the transaction void. What is required is that Governor’s consent is obtained in order to have a valid transaction.
The consent could be obtained prior or subsequent to the execution of the deed of mortgage of the land. This is to give business efficacy to a mortgage of land as a corporate finance option.
Thus, in Awojugbade Light Industries Ltd v. Chinukwe  4 NWLR (Pt. 390) p. 379, the Supreme Court of Nigeria made it clear that failure to obtain Governor’s consent at the time when the holder of the right of occupancy (proprietary interest) executes or seals the deed of mortgage does not render the mortgage transaction void.
On the whole, whilst there are several options for corporate finance in Nigeria, regard must be had to the various laws regulating each of those options.