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 installments 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.
A lender, under the BLA, is a financial institution who, as part of business, enters into a credit agreement. This includes a chargee under any type of charge, chattel mortgagee or holder of any type of consensual lien. 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.
Movable property refers to tangible property that can be physically moved like equipment and livestock, and intangible property like accounts receivable (book debts) and bank accounts.
Collateral is any movable property, whether tangible or intangible, that is subject to a security interest.
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. 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 movable property. This grant is completed when the borrower signs a credit (security) agreement with the lender. The loan is called “secured” because if the borrower defaults, the lender may satisfy the owed amount from the sale or other disposition of the collateral. 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 micro and SMEs this may be the most cost-efficient financing option available to them.
A secured transaction refers to an agreement 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.
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.
A credit agreement is a contract in any form, and whether denominated as a charge instrument, sale agreement with retention of title, 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, household items, bank accounts, farm products, motor vehicles, etc.
No. Individuals may obtain secured loans using consumer goods, household assets or other movable property, 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 credit 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 property that you actually own. 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 as if he/she is the one obtaining the loan. For the purposes of the Collateral Registry Regulation, that person will be the debtor.
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 granted 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.
Equipment refers to any goods that are not inventory or consumer goods. It refers to 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 that retain an account with the borrower, and that is 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 money 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 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 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 secured creditors who will decide whether the property has sufficient value to secure all the loans.
The Registry provides electronic forms, accessible through user accounts, in which information may be entered and submitted for registration. The Collateral Registry provides standard forms for this purpose. 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 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; b) Identity and address of the lender; c) A description of the collateral; d) The maximum amount for which the secured obligation may be enforced; and e) The period of time for which the registration is to be effective. 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 registration form and pay the appropriate fees.
The Collateral Registry is not responsible for scrutinizing or verifying information contained in the registration form. 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 open at all times 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 form. This does not mean that a lender is barred from disclosing such information in the registration.
For the purpose of the BLA, where the borrower enters into a security agreement, the borrower automatically authorizes the registration of a form. 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 power to register a form and must discharge 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.
What happens if information about the borrower or the collateral changes after the original registration?
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.
A registration will remain in the Collateral Registry until the expiration of the term indicated in the form, or until the registration is discharged. 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.
After the repayment of the loan, how does the borrower ensure that the collateral is no longer included in a registration?
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 discharge 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 arises 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 with regard to 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 credit 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 remainder 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.
What happens if the proceeds from the collateral’s disposal are inadequate to satisfy the secured obligation?
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 form 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 credit 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.