A loan is a sum of money given to the borrower that must be repaid later. A borrower may pay it back: i) at once; ii) in scheduled instalments that reduce the loaned amount; or iii) periodically, where the lender allows the borrower to use the available line of credit (where this is the case, the debt owed by the borrower fluctuates).
A borrower is commonly described as a person who owes money to another person. However, for the purpose of the Borrowers and Lenders Act (BLA), a person is a borrower if the person has concluded a credit agreement with a lender and provided some property as collateral to secure obligations specified in the credit agreement. Borrower also includes a transferee of the collateral who acquired it subject to a security interest and a transferor of a receivable.
A lender, under the BLA, is a person, especially a financial institution that enters into an agreement that provides for the creation of a security interest. This includes a chargee under any type of charge, chattel mortgagee or holder of any type of consensual lien. A person that acquired a receivables, such as a factoring company is considered a lender. The lender acquires a security interest in some of the borrower’s assets (the collateral) to secure the repayment of the loan. Only regulated financial institutions may act as lenders under the BLA.
Collateral is any property immovable or movable property, whether tangible or intangible, that is subject to a security interest.
An asset is anything tangible or intangible with respect to which the borrower has rights (e.g., ownership but also a license) that may be used as collateral.
Movable property refers to tangible property that can be physically moved like equipment and livestock, or any intangible property like accounts receivable and bank accounts.
The BLA defines immovable property as all land, whether covered with water or otherwise, together with all buildings if any, thereon.
A security interest is a property right in collateral that is created by agreement to secure the payment or performance of an obligation. It does not matter whether the parties have labelled it as a security interest and includes not only a charge or lien but also retention of title as well as outright transfers of receivables. A security interest is akin to a home mortgage (immovable property). A security interest does not include a personal right against a guarantor or other person liable for the performance of the secured obligation.
A security interest is perfected when the lender has completed a registration in respect of that security interest in the Collateral Registry.
A secured loan is one in which the borrower grants a security interest in some of his or her property (movable/immovable). The security interest is created when the borrower signs a credit (security) agreement with the lender. The loan is “secured” because if the borrower defaults, the lender may satisfy the owed amount extra-judicially from the sale or other disposition of the collateral pursuant to the BLA. In the event of a default on an unsecured loan, the creditor will have to obtain a judgement and enforce it against some of the borrower’s property.
Secured loans are less risky than unsecured loans and usually have lower interest rates. They provide the lender an alternative way of satisfaction if the borrower does not repay the loan. For many MSMEs this may be the most cost-efficient financing option available.
Secured transaction refers to an arrangement between the borrower and the lender which creates a security interest in some of the borrower’s property.
This refers to the amount that a borrower is required to repay to the lender, including the principal, interest, fees, and costs.
Previously, for the purpose of the BLA, only a bank or financial institutions licensed by the Bank of Sierra Leone under the Bank of Sierra Leone Act 2011, can take a security interest in collateral. Under the 2019 BLA, anyone may take a security interest in some assets of another person. For instance, a farmer may sell her tractor on creditor to another farmer and take a security interest to secure the payment of the purchase price.
A security agreement is a contract in any form, and whether denominated as a charge instrument, sale agreement with retention of title, factoring agreement, etc., between the borrower and lender that creates a security interest.
A credit agreement must identify the borrower and the lender, describe the collateral and the secured obligation.
Movable collateral under the BLA includes equipment, inventory, accounts receivable, consumer goods, bank accounts, farm products, motor vehicles, etc.
Immovable collateral under the BLA includes all land, whether covered with water or otherwise, together with all buildings if any, thereon.
No. Individuals may obtain secured loans using consumer goods, household assets or other property (movable/immovable), such as cars. Borrowers can be any type of business, whether informal, formally registered or individuals.
You may only give a security interest in assets in which you have some property right, typically ownership. However, someone else may grant a security interest in their assets to secure your loan but it must be with their consent. Such a person must execute a security agreement. For the purposes of the BLA, that person will be the borrower.
Yes. The BLA allows businesses to acquire new equipment under a financial lease as well as individuals to purchase a car subject to a security interest.
You may only give a security interest in assets in which you have some property right, typically ownership. However, someone else may grant a security interest in their assets to secure your loan but it must be with their consent. Such a person must execute a security agreement. For the purposes of the BLA, that person will be the borrower.
Yes. Individuals may apply for a loan as a group. They may use assets that they own individually or jointly as collateral for the loan.
A secured loan is based on the premise that the lender may exercise rights against whatever property has been provided as collateral if there is a default on the loan. On that note, using immovable property carries certain unwanted risks for the borrower. It stands to reason that a borrower may be more comfortable with losing equipment or other movable property than with losing a house in case of a default. The considerations may be different for immovable property that has a commercial purpose.
Equipment refers to any goods that are not inventory or consumer goods. It covers machinery or other capital goods used in the operation of the borrower’s business. Equipment includes assets like farm equipment, construction machinery, cash registers, taxis or computers used by a business.
Inventory refers to goods that the borrower maintains for sale or lease in the ordinary course of business, such as tables and chairs in a furniture store. Inventory also includes raw materials or work in progress, such as unfinished wood that will be manufactured into furniture.
An account receivable refers to the right of payment that a borrower has earned for providing services or selling goods. For instance, the borrower may have a store that often sells goods on credit to customers who are billed at the end of the month. These outstanding payments are accounts receivable and may be used as collateral. The borrower will not have to wait for 30 or so days to collect payments from his or her customers, but instead may get funds immediately from a lender using those accounts receivable as collateral.
Farm products include crops (growing, grown or to be grown), fish stocks, poultry and livestock (and their unborn offspring), seeds, fertilizers, manure, and other supplies used or produced in a farming operation.
These are goods that are used or intended to be used primarily for personal, family or household purposes. Consumer goods include assets like household appliances, furniture, a personal computer, laptop, etc. that belong to an individual or family.
The Collateral Registry is an electronic public database that contains information on security interests in movable and immovable property.
The Collateral Registry’s main purpose is to:
(i) give publicity to security interests; and
(ii) establish priority of lenders according to the time of registration. The Collateral Registry provides a platform for searches, so that an interested party may find out if there are prior registrations against the assets offered by the borrower as collateral for a loan.
The Collateral Registry is important because it is a publicly available database of registrations relating to security interests in movable and immovable property. As such, it allows lenders to better assess the status of the loan applicant’s assets and its potential priority as against other lenders. For instance, before taking a security interest in the equipment the borrower offers as collateral, the lender should search the Collateral Registry to make sure no other lender already has a security interest in that collateral. Regardless, a borrower may offer his or her property as collateral to multiple lenders who will decide whether the property has sufficient value to secure all the loans.
The Collateral Registry provides standard electronic forms/notices, accessible through user accounts, in which information may be entered and submitted for registration. The borrower has to sign the security agreement or sign some other authorisation before the lender can complete a registration. Note that the Collateral Registry system is accessible online, and registration forms are transmitted by lenders electronically.
A form submitted to the Collateral Registry for registration must contain a) Identity of the borrower, including its name and unique identification number as well as an address; b) Identity and address of the lender; c) A description of the collateral; d) The period of time for which the registration is to be effective. The Registrar may prescribe and require any additional information. If there is more than one borrower or lender, the required information must be entered in the designated field separately for each borrower or lender.
This is done by the lender. To complete the registration, the lender must enter the required information in a notice and pay the appropriate fees.
The Collateral Registry is not responsible for scrutinizing or verifying information submitted for registration. The information is simply entered into the Collateral Registry as received from the lender who remains responsible for the accuracy and legality of the information.
The Collateral Registry is maintained and managed by the Bank of Sierra Leone.
The fee schedule is set out in the Regulations and published on the website of the Collateral Registry. However, these fees may change from time to time, so it is recommended that you check the Collateral Registry website for the up-to-date information.
The Collateral Registry may be accessed only electronically through a user account. All that is required is a computer and an Internet connection. Searches are available without the necessity to establish a user account. The Collateral Registry is always accessible online, except if precluded by maintenance, technical and security constraints.
Any person may search the Collateral Registry and obtain a printed search result of the registrations, without any need to provide reasons for the search. Searches may be carried out using the identity of the borrower or the serial number of the collateral.
The BLA does not require the lender to provide the value of the collateral in the registration. This does not mean that a lender is barred from disclosing such information in the registration, such as including it in the description of the collateral, which however is not recommended.
For the purpose of the BLA, where the borrower enters into a security agreement, the borrower automatically authorises the registration of a notice. The Registrar and employees of the Collateral Registry have no duty to verify whether authorisation for the registration has been properly granted. However, where no security interest has been created, the lender has no legal authority to register a form and must cancel any related registration.
The borrower may obtain a copy of the registration either from the lender or from the Collateral Registry by completing a search.
An error may render the registration ineffective if it is a material error. Material errors are mistakes in the unique identification number of the borrower, or in the serial number of the collateral that prevent the registration from being retrievable in a search. For instance, a bank took a security interest in all assets of Mr. John Smith whose identification number is 12345, but its registration identifies the number as 12346. Such errors render the registration ineffective only with respect to the specific collateral identified by that number or with respect to the specific borrower identified by the erroneous unique identification number. An error in the collateral description (other than the serial number) may render the registration ineffective with respect to only that collateral if it seriously misleads the searcher. Every other error does not render the registration ineffective.
Where a change occurs, the borrower is advised to inform the lender as soon as practicable. Often the security agreement will impose this obligation on the borrower. The lender may then register an amendment form, if necessary or desirable.
A registration will remain in the Collateral Registry until the expiration of the term indicated therein, or until its effectiveness is cancelled. The period of registration does not, however, need to be the same as the duration of the loan, as there may be an expectation between the borrower and lender that the loan will be renewed.
Once all secured obligations have been satisfied, the borrower may send a demand notice to the lender requesting cancellation of the registration. The lender must, within 15 working days of receiving the demand notice, register a cancellation form. Where the lender fails to do so, the borrower may have recourse to the court.
Priority is a concept that refers to the rights a lender has over a borrower’s collateral compared to someone else that has a right to the same collateral. It may arise in situations in which the borrower has granted security interests to multiple lenders in the same collateral. The BLA has specific rules dealing with the determination of priority conflicts between lenders and other claimants. In most cases, the time of registration in the Collateral Registry will determine the parties’ respective priorities.
A junior security interest refers to a security interest held by one lender that has lower priority than another lender regarding the same collateral. A borrower may create more than one security interest in the same collateral. Lenders may also prohibit a borrower from using the same asset as collateral with another lender. The borrower will be in breach of such a prohibition if it creates a junior security interest in that same collateral, but that breach will not affect the validity of the junior security interest.
If the borrower defaults on its obligations, the lender has a right to enforce its security interest in the collateral.
A lender may enforce its rights in the manner agreed to in the security agreement between the parties. Under the BLA, the lender may enforce its security interest by taking possession of the collateral or rendering the collateral inoperative. Subsequently, it may dispose of the collateral through a sale. The BLA permits the lender to proceed extra-judicially without having to obtain a court order. The lender may also choose to apply to the court to authorise enforcement.
Disposal of the collateral is a legal term that basically means selling the collateral in an auction, public tender, private sale, or other means provided for in the security agreement, and applying the proceeds received from the sale to repay the loan. The proceeds received from the sale of the collateral are disbursed first to cover any expenses associated with the disposal of the collateral. Afterwards, the remaining proceeds will be applied towards the satisfaction of the obligation secured by the security interest. Any leftover proceeds will be distributed first to the remaining lenders in the order of their priority. Finally, any surplus goes to the borrower. The borrower will not receive any proceeds from the sale until all secured obligations that were owed to all lenders have been fully satisfied. Where there is a question as to who is entitled to receive payment from the proceeds, the lender may pay the surplus into court.
Where the proceeds of the sale are insufficient to satisfy the loan, the borrower will be liable for the shortfall. The lender may initiate legal action against the borrower for the balance and get a judgement for the amount owed. It may also choose not to take legal action against the borrower and just write off the loss on the loan.
Yes. The fact that a notice with respect to the security interest has not been registered does not mean that it is invalid or otherwise unenforceable against the borrower. Unless the security agreement has some defects, such as in cases where the borrower did not execute (sign) it or if it does not sufficiently describe the collateral, the lender will be able to enforce the security interest.
