In Nigeria, debts are typically secured
through the use of guarantees, mortgages, fixed and floating charges and
pledges of real, personal, tangible and intangible property belonging to the
debtor or a guarantor of the debtor. Security created in favour of a lender for
providing debt financing is documented using different forms of security

In order to perfect security documents,
such documents must be stamped at the stamp duties office and registered at the
Corporate Affairs Commission (CAC). For certain assets such as real property
which require the consent of the Executive Governor of the state where the real
property is situate, such consent must be obtained to perfect the security
created under such document. The statutory obligation to stamp documents that
transfer or create a proprietary interest in assets is provided for under the
Stamp Duties Act (SDA) with specific emphasis on sections 3, 23 (1) and (4) of
the SDA. In addition, a charge created by a company to provide security to a
lender is void against a liquidator and such lender (as a creditor of the
company) unless it is registered with the CAC within 90 days of creation.
However, in large financing
transactions, the stamp duty payable in respect of a security document could be
very high (and in certain cases, prohibitively so).  It is not uncommon
for lenders to a financing to agree that the borrower may pay stamp duty on
only a portion of the secured amount rather than the whole secured amount, with
a further assurance from the borrower that the full stamp duty will be paid on
a future date or upon the occurrence of certain events.  This practice is
known as “upstamping”.  Until the security document is upstamped, any such
lender is only protected up to the amount expressed to be secured and a lender
may lose priority to any subsequent security granted on the charged assets
during the period between the initial stamping and the full upstamping of the
security document.
The Implication of Upstamping on
Neither the SDA nor the Companies and
Allied Matters Act (CAMA), stipulate that a security document that secures a
credit facility must be stamped and registered for the exact amount extended to
a company or person. However, where a security document is stamped for an
amount lower than the facility amount, the lenders will only be permitted to
prove for and realise the security for the secured amount
i.e. the amount
for which that lenders has stamped and registered his securityCAMA
recognises the right of parties to commercially structure their transactions
such that the security documents can be stamped for an initial amount and then
subsequently up stamped for an additional amount.
Pursuant to section 202 of CAMA, any
additional amount for which a security document is up stamped will be valid and
effective to the extent of such increased amount. The lenders would only be
permitted to prove and realize the security for the full facility amount or a
higher amount only upon the security document being up stamped (i.e. payment of
additional stamp duty) to cover the facility amount or the higher amount being
sought to be recovered.
Potential Risk to Lenders in Enforcing
There is a risk that prior to the
lenders up stamping the security document for the full facility amount,
intervening third party interests might have arisen (i.e. under other third
party security), thus raising pertinent priority issues where another creditor
has acquired an intervening proprietary interest. If prior to an up stamping to
secure additional amounts, another creditor advances money to the borrower, and
perfects its security interest over the same assets that form the
subject-matter of the lenders’ security, that creditor will rank ahead of the
lenders’ interest as it relates to the subsequent up stamped additional amount
to be secured but lenders will still have priority in respect of original
amounts for which the security was perfected.
Hardening Period
Another risk lenders face in an
upstamping scenario is that an agreement to upstamp to secure additional
amounts, might be viewed as a fraudulent preference in the event of insolvency
of the borrower. See section 495 of CAMA. This “hardening period” rule,
and the resultant effect is that the additional / up stamped security interest
would be void against the liquidator of the borrower and enable the liquidator
claw-back any such payments or cancel such acts. Arguments can be made whilst
referring to decisions of English courts on the fact that a preference is not
fraudulent by essentially showing that the dominant motive for such preference
is not to prefer certain creditors to the detriment of others. It should
however be noted that such arguments are only persuasive to Nigerian courts as
Nigerian courts are not bound by the decision of English courts; they are only
of persuasive authority.
On the flip side, where the dominant
motive was to carry out a pre-existing obligation, or to keep on good terms
with a creditor, it is likely that Nigerian courts will follow English courts
in holding that in such circumstances the preference is a fraudulent
preference. It is important to note that there are no Nigerian law decisions on
this point, however, Nigerian courts are likely to follow English courts on
this point.
Addressing the Residual Risks of
The risks identified above, while
adopting the upstamping regime, can be mitigated by:
1.     Establishing an
upstamping regime in the relevant loan documentation;
2.     Using a negative
pledge clause restricting the borrower from creating any additional security
over its assets;
3.     Using automatic
crystallization provisions in the security documents for floating charges to
crystalise into a fixed charge when there is an attempt to create security over
the assets in favour of a third party; and
4.     Establishing a stamp
duty escrow account to hold the balance of the perfection costs to enable
lenders upstamp at will.
The options highlighted in (1) to (4)
above are by no means exhaustive as other options have not been discussed in
this paper.
 Chukwudi Ofili is
a Senior Associate in the corporate and commercial, banking and corporate
finance practice group of Bloomfield Law Practice; and advises on matters such
as local and foreign currency syndicated lending, leases
transaction/structured/project finance, structured trade finance, energy and
natural resources, due diligence issues and advisory services, foreign
investment advisory services, taxation and real estate.
Ed”s Note – This article was originally published by the author here