It is generally the case that lending money and creating credit in favour of customers by way of overdrafts and so on is the most important segment of banking.
In the normal course of banking business, banks secure the credit they grant by creating security over some tangible assets of the customer. This is meant to ensure repayment in case of default and prevent banks from having bad debts on their books.
Ordinarily, all things being equal, creating security by a bank to ensure repayment of a loan and other credit to customers should not pose problems for the bank and should be a straightforward transaction devoid of any complications. In practice, however, it sometimes turns out to be the case that creating security by a bank tends to be problematic and dashes expectations for a quick realisation of the security which is used to secure a loan.
Some problems in the realisation of security
As a lawyer, I have often come across situations where a bank which has created a documented security over a loan has been faced with difficulties in realising the security.
The most common of these is interpleader suits. This is that, after the right of realising the security has accrued to a bank or a lender probably after a lengthy trial or through summary judgment, some persons suddenly appear to stake a claim to the property.
Often, an interpleader suit is filed by a spouse who might be a joint owner of the property but whose consent is not sought by the other spouse who creates security in favour of the bank or the lender.
This situation could become quite complicated especially where the claimant spouse’s name does not appear on the documents on the property.
Sometimes, such spouses explain that even though they contributed to the acquisition of the property, they allowed the other spouse, often the husband, to use his name for the documentation.
In a bizarre case, a claimant spouse claimed the right to issue an interpleader summons to safeguard her right to the property in case of divorce at a later time.
It was claimed that with the pronouncements of the Supreme Court lately in cases such as Mensah vrs Mensah 2012 1 SCGLR 391 which deviated from the classical position of the law of not granting to a spouse any interest in property acquired during marriage without proof of substantial contribution and which granted a spouse an automatic interest in property acquired during marriage whether or not she made a contribution???.
Other clogs to the right of realisation of security by a lender would be interpleader suits by other lenders in whose favour security has been created over some assets and who may claim a right of first realisation to the exclusion of the lender.
In some bizarre circumstances, interpleader suits have been filed by children claiming an interest in properties offered by their parents as security for the reason that they extended financial assistance to their parents to enable them to put up the property.
Therefore being potential personal representatives, they could exercise their right to the property by an interpleader suit. It is to be noted that even though most interpleader suits turn out to be frivolous and are dismissed in the long run, they exert an incalculable toll on the expectations of the bank in the quick realisation of the security.
Some clogs in the realisation of security would be a sudden realisation by the lender of the lack of capacity of a borrower to borrow in the absence of directors’ resolution to borrow. Banks and microfinance companies especially should be wary of creating security over assets such as vehicles which are used for cross border operations.
A microfinance company which recently created security over a commercial vehicle used for cross border operations found itself unable to realise the security because the borrower, on learning of a legal action to recover the vehicle, decided not to return the vehicle to the company. Also, a security which is created for example over a fishing trawler could be problematic in realising it in the event that the trawler is seized outside the country or is sold by its owners outside the country or gets damaged.
In that situation, the bank would incur more legal costs to seek legal representation abroad to safeguard its interests in the asset.
Also, a mortgage deed may not have been registered at the Deeds Registry or a charge created over an asset may not have been registered with the Registrar-General’s Department which would render it void against the lender and other creditors in the event of liquidation.
Furthermore, prior searches must be conducted to ensure the non-existence of prior charges which could clog the realisation of the charge on default.
Particular care should also be taken when security is taken over such things as shares, life policies on directors of companies and also goods, especially those for which loans are extended for clearance from the ports.
An undated transfer document authorising the borrower to transfer shares into the name of the bank or the lender in case of default could be problematic with its realisation.
This will be especially so if the borrower refuses to execute a transfer deed on default or in a worst case scenario, the lender finds out to its amazement that the shares were only held in trust, which fact was not disclosed to the lender.
A loan which is secured with the life policy of a director of a company, though it offers a secure form of security, could be problematic with its realisation if the necessary processes for assurance are not complied with.
Firstly, the lender should make a demand for an acknowledgement by the life assurance company of the lender’s interest in the life insurance policy and a pledge to redeem the policy in favour of the lender in the event of default by the borrower.
Where loans are made to customers to clear goods from the port, the documentation should be drafted in such a way to ensure that the lender is not left empty handed in case of default if the goods are offered as security. — GB
The writer is a lawyer with specialisation in international business law.
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