Nigeria: Informed decisions

Author: | Published: 1 Jun 2011
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Despite the recent economic meltdown and the resultant dip in investments globally, African countries, being mostly emerging markets, have remained relatively attractive destinations for foreign investment. Extensive legal and regulatory reforms and the renewed focus on infrastructural development in many African countries have, no doubt, contributed to ensuring that certain African countries continue to enjoy positive foreign interest.

In negotiating financing documents, it is imperative for foreign institutions interested in financing projects in Africa, to adopt structures which would assure optimal returns on investments within the existing legal and regulatory framework. Certain key considerations when negotiating arrangements for financing projects are explored below.


In making an investment decision, financiers must assure the existence of an effective tax regime with respect to the project to be financed. While it is important that the borrower's tax obligations are not so burdensome as to frustrate its ability to fulfill repayment obligations as they fall due, financiers must also be mindful of their own tax obligations. Generally, foreign financiers are exposed to the following tax obligations in Nigeria:

Withholding tax

By virtue of the Nigerian Companies Income Tax Act, payments of interests on loans from foreign lenders are generally liable to withholding tax, and this is deemed as a final tax payable by a non-resident recipient of such payment.

The current rate of withholding tax on interest payments is 10%. However, where the financier is located in a country which has a double taxation treaty with Nigeria, the withholding tax rate will be reduced by 25%, making the applicable rate 7.5%.

Stamp duties

In order for any financing documents to be admissible in evidence before and enforced by a Nigerian court, the documents must be stamped upon payment of the relevant stamp duties, as prescribed by the Stamp Duties Act.

Stamp duty is payable in Nigeria either on a flat rate or an ad valorem basis. The maximum rate of stamp duty payable in Nigeria in respect of security documents (including guarantees) securing payment or repayment of money (where the security is not a marketable security transferable by delivery), is 0.375% levied on an ad valorem basis on the value of the underlying transaction.

Notwithstanding the foregoing, financiers may transfer their tax burden to the borrower by means of tax gross-up or indemnity clauses. The Nigerian Court of Appeal has confirmed that gross-up clauses in agreements (including financing agreements) are not ipso facto illegal (Total (Nig) Plc v Moshood Adeleye Akinpelu (2004)).

Governing law

In practice, lenders prefer to choose a system of law with which they are familiar or in which they have sufficient confidence. In most transactions involving foreign institutions, the choice of governing law is generally between English law and New York law. Nigerian law allows parties to determine the terms that will regulate their contractual relationship, including the applicable governing law. Accordingly, Nigerian courts will recognise the choice of governing law agreed by the parties, be it English, New York or other law.

Quite naturally, however, in the event of insolvency the provisions of Nigerian law on insolvency will override any foreign governing law in the treatment of the assets and liabilities of a Nigerian borrower and in determining financiers' rights in such circumstances.


As regards the choice of jurisdiction for settlement of disputes, financiers must be aware of the position of Nigerian law on enforcement of judgments and or arbitral awards obtained from foreign courts or arbitral institutions.

Enforcement of foreign court judgments

The Reciprocal Enforcement of Foreign Judgments Ordinance 1958 and the Foreign Judgments (Reciprocal Enforcement) Act (FJ Act) are the two statutes regulating enforcement of foreign judgments in Nigeria.

The Ordinance empowers Nigerian courts to enforce judgments obtained from superior courts in England, Ireland, Scotland and those parts of Her Majesty's Dominion to which the Ordinance is extended, subject to certain conditions. The FJ Act also empowers Nigerian courts to enforce judgments obtained from any country in respect of which the Minister of Justice has, by order, extended the application of the FJ Act.

No ministerial order has however been made pursuant to the FJ Act extending the application of the provisions thereof to judgments of courts of any jurisdiction, including English courts. However, the FJ Act preserves the applicability of the Ordinance to the aforementioned jurisdictions, pending the making of the relevant order by the Minister of Justice. Accordingly, judgments obtained from English courts are enforceable in Nigeria by registration in the Nigerian courts, without a re-examination of their merits.

In order for a judgment of an English court to be registrable, it must, among other requirements, be presented for registration at a High Court in Nigeria within 12 months of the date of the judgment, or such longer period as may be allowed by the Nigerian court. Such a judgment must have been delivered by a superior court in England and must be final and conclusive as between the parties. Upon registration, the judgment is imbued with the same force and effect, and the sum for which the judgment is registered shall carry interest, as if the judgment had originally been given in the registering court, and entered on the date of registration.

Financiers seeking to enforce a judgment obtained from a New York court or other courts not covered by the Ordinance, against a Nigerian borrower must bring a new action on the judgment in a court of competent jurisdiction within Nigeria. Such foreign judgments may be recognised and enforced under residual common law powers, which would allow the judgment to be used as the basis of proof of liability or as a determinant of the central issue, in the new action.

Enforcement of foreign arbitral awards

By section 51(1) of the Arbitration and Conciliation Act, an arbitral award will be enforced by the Nigerian courts irrespective of the country in which it is made, upon written application to the Nigerian courts by the party seeking enforcement of the award. The application for enforcement of an arbitral award must be accompanied by:

(i) the duly authenticated original award or a duly certified copy thereof;

(ii) the original arbitration agreement or a duly certified copy thereof; and

(iii) where the award or arbitration agreement is not made in English, a duly certified translation thereof into English.

The court may, however, refuse to enforce the award where the party objecting to its enforcement furnishes proof (among others) that a party to the arbitration agreement was under some incapacity or that the arbitration agreement is not valid under the law which the parties have indicated should be applied. Also, the court may of its own volition refuse to enforce an arbitral award if it finds that the subject matter of the dispute is not capable of settlement by arbitration under the laws of Nigeria or that the recognition and enforcement of the award is against the public policy of Nigeria.

Also, where an arbitral award arising from an international commercial arbitration is sought to be enforced in Nigeria, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards applies to such awards made in a country that is a party to the Convention that has made reciprocal legislation recognising the enforcement of arbitral awards made in Nigeria in accordance with the provisions of the Convention. The Convention however applies only to differences arising out of a legal relationship which is contractual.

Taking and enforcement of security

Another key consideration in project finance is obtaining an adequate security package and ensuring that an efficient framework exists for its enforcement.

The importance of the security arrangement cannot be over-emphasised as it affords financiers control over the collaterals in the event of default by the borrower, thus creating protection against the risk of non-repayment. The security arrangement is also important in determining priority amongst competing financiers in the event of the debtor's death, bankruptcy or insolvency.

Forms of security interests

In Nigeria, security interests taken by financiers over assets of a project company typically come in the form of pledges, mortgages and charges. Notwithstanding the use of similar terms in other jurisdictions, it is pertinent to note that these concepts are treated differently under Nigerian law. For financiers, understanding the differences is important to knowing which security is best suited for each circumstance.

Under Nigerian law, an asset can only be pledged if it is transferable by delivery of possession. The principal type of asset which can be pledged is tangible property – for example, goods. However, even though a pledge of goods necessarily occurs when the debtor delivers his goods to the creditor, there are instances where the deposit of the document of title to the goods and not the goods themselves could amount to a pledge.

Another exception is an intangible asset that is represented by documents, such as promissory notes. Where title to such assets can be transferred by delivery of the document, such assets are capable of being pledged. On this point, it should be noted that the transfer of title to shares under Nigerian law is effected by the registration of the transferee in the register of members of the relevant company, the share certificate being merely evidence of title, and not a document of title.

Accordingly, a financier cannot effectively take security over the shares of a Nigerian company by way of a share pledge agreement. In practice, the security is usually created by a deed of charge over such shares.

A form of viable collateral generally available to project financiers in Nigeria is real property. Under Nigerian law, taking security over real property is usually done by way of legal mortgage. This involves the transfer of the legal title in the property to the financiers or to someone holding same on their behalf as security for the loans, subject to the borrower's equity of redemption (the right to have the property transferred back once the debt has been repaid).

The mode of creation of a legal mortgage over real property in Nigeria depends on where the property is situated and for this purpose, the States in Nigeria are divided into Conveyancing Act States, Property and Conveyancing Law (PCL) States and Land under the Registration of Titles Law.

Another way in which financiers can take security is by way of charge. A charge is an equitable proprietary interest granted by way of security without transfer of title or asset in discharge of a liability. In distinction from a mortgage, the creditor does not obtain either legal or beneficial title to the charged asset. However, the chargee obtains an equitable proprietary interest in the asset by way of security.

Perfection of security interests

As noted earlier, Nigerian courts will recognise the security interest created under financing documents provided that such interest was validly created under the applicable governing law. This also holds true if the collateral over which such security interests are created is located, or deemed located, in Nigeria, while the financing documents are governed by a foreign law.

The foregoing is, however, without prejudice to the steps required to be taken in perfecting title to assets which are located or deemed located in Nigeria. Specifically, for perfection purposes and enforceability against bona fide third-parties, there must be compliance with Nigerian law requirements on perfection of title.

The perfection of security interests in the assets of a Nigerian company is generally determined by (i) the type of assets over which security interest is created; and (ii) the type of security interest to be created.

Perfection of security in Nigeria generally involves at least two of the following steps: (i) obtaining Ministerial and/or Governor's consent to create the security interest; (ii) stamping the relevant instruments; and (iii) registration of the security interest.

By the provisions of the Land Use Act, the consent of the State Governor in the State where the land is situated is required for any alienation of land.

Alienation is defined in the Act to mean an assignment, transfer, sublease or mortgage, and the Nigerian courts have interpreted the requirement of Governor's consent to be applicable to the transfer of legal title to land, whether by way of a sale or mortgage.

An example of a requirement for Ministerial Consent can be found in the Petroleum Act which requires the consent of the Minister of Petroleum Resources to be obtained prior to the transfer/assignment (whether by way of security or otherwise) of rights, powers and interests in or under any petroleum license or lease in Nigeria.

As stated earlier, financing documents are required to be stamped and will be subject to the payment of the relevant rate of stamp duty. Although the party taking the security (in this case, the financier) is statutorily obliged to pay the relevant stamp duties, in practice, financiers generally resort to gross-up provisions or indemnities to transfer such costs to the borrower.

By section 197(1) of the Companies and Allied Matters Act (CAMA), every charge created by a company with the intention that it provide security, shall be void against the liquidator and any creditor of the company unless it is registered with the Corporate Affairs Commission (CAC) within 90 days of its creation.

While the omission to register a registrable charge at the CAC does not render the document illegal or non-binding among the parties, and does not prejudice any obligation for repayment of monies secured by the charge, such failure to register renders the security created void against a liquidator or another creditor.

Effectively, the secured creditor loses priority to other competing secured creditors who validly registered their own security.

Although section 197(2) of CAMA enumerates the types of charges that are required to be registered, in practice, however, lenders, as a matter of prudence, require borrowers to register all the security instruments prepared in connection with the loan facility being advanced.

Instruments creating charges that are not required to be registered pursuant to section 197(2) of CAMA may nonetheless be registered at the CAC as miscellaneous documents at a nominal rate.

The rationale is to ensure that third parties who conduct a due diligence search or checks at the CAC with a view to dealing with the borrower obtain actual notice that a charge has been created over specific assets of the company.

A financier that has taken security interest over real property in Nigeria is also required to register its interest at the Lands Registry of the State where the property is situated. Registration serves as notice to bona fide third party purchasers and confers priority on such financiers in the event of competing claims.

Enforcement of security

In the event of breach by the borrower, financiers may enforce their security in Nigeria by means of foreclosure, sale, appointment of a receiver, or action in court for recovery of the debt owed.

Foreclosure is a judicial process by which legal title to mortgaged property is fully transferred to a mortgagee.

Upon the occurrence of a default under relevant security documents, the financiers may foreclose on the mortgaged property by making an application to court for an initial interim forfeiture order and subsequently for a final/absolute order.

In the event that the order of foreclosure is granted, the mortgagee is conferred with full title to the mortgaged property, free of all subordinate mortgages given by the borrower.

Foreclosure is, however, not a popular choice of enforcement in Nigeria because of the length of time required to effect it and the fact that the mortgagee is precluded from claiming any shortfall between the value of the mortgaged asset and the outstanding debt.

The power of sale is an enforcement mechanism which is often contained in Nigerian security documents. The borrower confers the financiers with the power to sell the assets given as collateral in realisation of its debt, in the event of a default.

Unlike foreclosure, which is restricted to mortgages, the power of sale is generally available in respect of mortgages, charges, pledges and other forms of security. In respect of legal mortgages of real property, the power of sale is statutory and need not be expressly incorporated (although it usually is) into the security documentation and the security interests may be enforced by sale without recourse to court.

The right to appoint a receiver is statutorily implied with respect to legal mortgages of real property in Nigeria. A receiver is usually vested with wide powers to manage and sell the borrower's business, including the rights to take possession of the security, and sell the same and collect debts to repay the borrower's outstanding debts.

In addition to other available remedies, financiers are entitled to sue the borrower for the recovery of any outstanding debt.

Accordingly, financiers may institute civil actions in court for the recovery of the debt and attach the borrower's assets in enforcement proceedings where the latter subsequently fails to comply with any judgment of the court made in favour of the financiers.

The foregoing analysis underscores the importance of proper legal, financial and commercial due diligence and advisory support in any project finance transaction which is sought to be undertaken in Nigeria.

With such support, investors are better able to make informed assessment of the investment risks and the viability or otherwise of financing any project in the country.

About the author

Isa Alade is a senior associate at Banwo & Ighodalo and a team leader in the firm’s securities, finance, corporate & commercial practice group. He obtained his law degree from the University of Lagos, Nigeria and is admitted to the Nigerian Bar.

Isa, a member of the Nigerian Bar Association, has specialist experience in project and corporate finance transactions, capital markets, and M&A. He has advised on several project finance transactions, in particular in the telecommunications and infrastructure sectors. Isa recently advised Main Street Technologies Limited (the project sponsor) and Main One Cable Company, Mauritius (the project company), as project counsel, in connection with the structuring, financing and negotiation of the relevant project/contract and financing documentations in relation to the $240 million Main One Fibre-optic Submarine Cable System with landing points in Portugal, Ghana and Nigeria; and tailed for extension to southern Africa. The transaction was awarded the Euromoney’s Project Finance Magazine’s 2009 African Communication Deal of the Year.
Contact information

Isa Alade
Banwo & Ighodalo

98, Awolowo Road
South-West Ikoyi

t: +234 803 638 4283