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:
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
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)).
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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.
Banwo & Ighodalo
98, Awolowo Road
t: +234 803 638 4283