LEGAL ASPECTS OF STRUCTURED FINANCE

PROSPECTS & CHALLENGES FOR NIGERIA

Bidemi Olumide Olowosile

October 2010

A dissertation on the legal relationships and issues of that aspect of financing that utilizes complex legal and corporate structures to transfer credit risks or transform such high risk-bearing assets to low risk bearing assets.

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DEDICATION

This work is dedicated to all those men and women who dutifully carry-

out their responsibilities of promoting and safeguarding the fledging

Nigerian economy, even in the face of the characteristic volatility and

uncertainty that unconventional yet financially-rewarding commercial

relations are wont to present.

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CONTENTS

CHAPTER CONTENT PAGE Abstract 3

1. Introduction 4 2. Nature of Structured Finance 10

A. Definitions and Descriptions 10 B. Aspects and Development 15

i. Investment Banks 16 ii. Special Purpose Vehicles 19

iii. Securitisation 22 3. Legal Aspects of Structured Finance 34

A. The Consent and or Notice Requirement 35 B. The Risks of Re-Characterisation 45 C. Subsidiarisation 56

4. Attempts, Challenges and Prospects of Institutionalizing Structured Finance in Nigeria

61

A. Introduction 60 B. The Central Bank of Nigeria (Establishment Act) 2007

& the Banks and other Financial Institutions Act, 1991 (as amended): A Critique

62

C. The Investments and Securities Act, 2007: Highlighting the Limited Provisions

66

D. The Asset Management Corporation of Nigeria Act, 2010: A Review

68

i. General Statement of Nature and Purpose of the Act 68 ii. Objects, Powers and Functions of the Corporation 70 iii. Acquisition of Eligible Bank Assets 74 iv. Issuance of Bonds and other Debt Securities 78

v. Administration of the Corporation 79 E.

The Nigerian Securitisation Bill 2009: A Comparative Review with the Indian Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

81

i. Nature, Scope, Objects & Limitations 81 ii. Meaning of Key Terms 85

iii. Operations 85 iv. The Concepts of “True Sale” and “Effective

Assignments” 88

v. Regulation and Supervision 91 vi. Other Aspects of the ‘SRFAEASIA” 92

5. Conclusion 98 Bibliography 103

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ABSTRACT

The bid of businesses to stay afloat in the unsure waters of solvency; to guarantee capital

adequacy while not neglecting the demands of liquidity; to quell shareholder dissatisfaction with

profitable returns on capital and to generally maintain a profitable organization has demanded

that corporate managers devise schemes that aim at ensuring two objectives: the real viability of

the business at balance sheet value and the adequate projection of the business in the market for

corporate control.

The “reconfiguration” of credits or receivables either in the form of credit derivatives or

securitization has come to be appreciated as the presently defined dimensions of structured

finance. The commercial relationships which these concepts and practices give rise to are such

that should derive validity from the diverse aspects of commercial law. Nomenclature will

essentially not serve any purpose for the law, as indeed, these relationships defy any traditional

classification of commercial law.

The bid to have the Nigerian legal system appreciate the complexities, yet dynamism of

structured finance is what this work is about. Indeed, from its standpoint of a general overview of

what constitutes structured finance to the essentialities of the legal issues involved therein, the

work attempts to lay the requisite foundation for more detailed discussions on the prospects of

structured finance in Nigeria.

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CHAPTER 1

INTRODUCTION

Background

Conventional forms of finance in debt and equity have been elevated to new platforms that blur

the distinction between the traditional securities that give a right to participation in a company

and those that principally guarantee the right to a return of sums lent plus interest. The regime of

structured finance can for now be surmised as referring to all financing or capital-raise

arrangements schemed to refinance and hedge existing assets in the form of receivables beyond

the conventional forms of debt and equity with the ultimate aim of lowering both the cost of

capital and the effects of insolvency. On this platform, huge amounts of capital continue to

change hands at a pace the law never appears to catch up with, particularly with regards to the

identification of the relationships that arise there from. The exposures that structured or high

finance has meted on the global economy in recent times has validated the demand that legal

scholarship must recognize and engage the unconventional rights and obligations that arise from

the relationships that this aspect of finance brings in its wake.

Scope of Work

This work explores the dimensions of what is today referred to as structured finance; particularly

it appreciates this breed of finance from both the legal nature of the different transactions that are

called by the name and also the nature of the commercial relationships that they birth. The

objective of these is to place the international dimensions of structured finance within the context

of contemporary Nigeria financing market with the aim of appreciating what extent Nigerian

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Laws does recognize these transactions. Quite naturally, as it is with most developing countries,

Nigerian Laws will prove to be inadequate in securing the rights and obligations that these

complex transactions may often times create, thus it is this discussant’s overriding objective to

appreciate and highlight these challenges.

To achieve an optimum discussion on the various aspects that encompass the scope of work, the

work has been divided into four other chapters. Chapter two is dedicated to explaining the nature

of structured finance, commencing with an attempt at a definition. Since certain concepts are best

described than defined, the chapter will still undertake an attempt at tracing the international

historical development of this nature of finance into explaining the scope of its application in

contemporary commercial relationships. This aspect of the work will undertake a brief

appreciation of attempts by various governments to regulate the industry, however a lengthier

discussion on this issue will be undertaken in Chapter four. Further, although structured finance

is an aspect of finance that has not been subjected to extensive theorization, this work will

attempt setting its theoretical foundations.

Securitisation is undoubtedly one of the most popular types of structured finance and it does

appear as a likely next-stop for the Nigerian high finance market,1 hence Chapter two will

conclusively take a review of the nature of the transaction, the parties to it, the documentations,

etc. The discourse on securitisation, it is anticipated, will lay an appropriate foundation for the

discussion on the Nigerian Securitisation Bill 2009 and the Asset Management Corporation of

Nigeria Act in chapter four.

1 See for example in this regard, the discussions of the Nigerian Securitisation Bill in Chapter 4.

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Chapter three undertakes a critical analysis of the legal issues involved in structured finance;

exploring these issues along the lines of the legal nature of the transaction and the commercial

relationships it creates. Exploring common law and equity’s taxonomy of concepts through

attempts by various statutes and judicial interventions to organize and regulate these

relationships, the chapter is saddled with the onerous responsibility of giving legal classification

to the rights and obligations that structured finance creates. The chapter will engage such issues

as the notice and or consent requirement in securitization transactions, the risks of re-

characterisation and the boundaries of subsidiarisation.

Chapter four is dedicated to appreciating structured finance from the view point of existing and

proposed Nigerian laws. From the Central Bank of Nigerian Act, 2007 to the Banks and other

Financial Institutions Act, 1993, the chapter will aim at discovering the statutory provisions that

validates structured finance transactions. The recent Asset Management Corporation of Nigeria

Act, 2010 will be reviewed to appreciate the powers of the Asset Management Corporation of

Nigeria to undertake structured finance transactions for the purpose of meeting its overriding

objective of efficiently resolving the non-performing loan assets of banks in Nigeria. The

proposed Nigerian Securitisation Bill will also be reviewed, although from the comparative stand

point of the Indian Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002. This approach is essentially to assist the draughtsman of the Bill to

borrow from legislative expressions on what appears to be common denominators in the

Nigerian and Indian commercial environments.

Chapter five will conclude this work with suggestions made on policy reform.

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Limitations of the Work

First, the dearth of academic research into the frontiers and contents of structured finance is a

great limitation to this work. The limited engagement of the nature of relationships and

transactions that come under the broad classification of structured finance typically restrict the

academic depths of the study. Indeed, the majority of works on structured finance are practical in

nature; essentially to aid the practitioner rather than the academic. This reality has greatly

affected the language of this work such that save for the attempts during certain aspects of the

work to theorize the nature of the transactions and relationships under the structured finance

umbrella, this work is relatively shallow in the depths of theories.

Secondly, the dearth of research and theories on structured finance in Nigeria creates a great

limitation to this work; such that this discussant has had to largely rely on foreign works to

explain the application of structured finance, even in the national context. Closely related to this

point is the relative novelty of structured finance as a financing option in Nigeria. Hence, this

work is largely unable to understudy sufficient transactions, such as will be sufficient to relate

the challenges that the present legal regime will pose to the adaptation of structured finance.

Thirdly, and as shall be seen in the body of discourse on the historical evolution of structured

finance, the Government of such jurisdictions as the United States of America (US) and Hong

Kong were the first to utilize typical structured finance transactions in their clime and record of

these transactions adequately kept. This, the discussant believes sets a true precedent such that

information on the biggest structured finance transactions in these countries are easily obtainable

from the public domain. There is dearth of such public information on typical Nigerian

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structured finance transactions such that much of the transactions that have been undertaken are

relatively unknown and only lie in the knowledge of the professional advisers that packaged

them. This fact poses a great limitation on the ability of this work to highlight and sufficiently

engage a typical structured finance transaction in Nigeria.

As a venture in legal studies, this work may be unable to identify such sufficient judicial

authorities on cases where structured finance transactions were in issue; of course such judicial

authorities would have provided alternative sources of law in the absence of legislation. Hence

much of the submissions made on the nature of structured finance transactions and the

commercial relationships they birth derive validity from the larger body of general commercial

law. Thus a fourth and last category of limitations to this work is to be found in the fact that,

though a specialized breed of general commercial law, this work, and indeed owing to the

general state of the law, has relatively been unable to satisfy the claim of the specialty of

structured finance through case laws.

Rationale for and Objective of the Work

The financial needs of the Nigerian nation in meeting its developmental objectives remain a

challenge that traditional forms of finance may never be able to adequately surmount. Today, it

is recognized that the developmental needs of the country are such that cannot be wholly within

the remit of the public sector to provide; a partnership between the public and private sector has

consistently been advocated.

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Unarguably being the largest employer of structured finance to meet its capital adequacy needs,

it is anticipated that these public-private partnerships will employ the receivables-financing basis

of structured finance to meet the development financing needs of the country. The continued

international application of structured finance and its progressive elevation as a conventional

finance option will also greatly influence the spate of its development and application Nigeria, if

not now, but definitely in the nearest future.

This work is an attempt to appreciate the dimensions and explain the legal foundations of this

possible next-stop in financing in Nigeria. It aims at highlighting what needs to be known and

understood before attempting to take the full benefits that structured finance has to offer to the

country’s finance needs. The truth be told, whether the legal aspects of structured finance is

appreciated or not, an unregulated market will gravitate towards it, if a glimmer of profitability

shines at its end. Thus, the custodians of the country’s financial system, starting with the

legislature really have no choice than to create the requisite legislative framework for this aspect

of finance that has always been known for its relative volatility, especially if left untamed; and

thus the discussant has undertaken this work with the aim that the discussions herein will have

contributed to the general body of knowledge and policy directives in high finance in Nigeria.

Conclusively and from an academic view point, it is expected that this work will open a vista for

more researches on its very essence.

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CHAPTER 2

NATURE OF STRUCTURED FINANCE

A. Definitions

Defining “structured finance” may well start with attempts at describing it, or better still,

attempts at defining related concepts. This is essentially due to two facts: one, limited academic

research have been undertaken on this aspect of finance; and two, the categories of financial

transactions what will qualify as structured finance are not closed.2 These facts might have

informed Christopher L. Peterson’s3 observation that the finance industry does not have a

universally agreed upon definition of the terms “securitization” or “structured finance.”4

According to Barbara Kavanagh,5 “Structured finance is a term widely used but rarely defined.”

In the High Court of Justice, Queens Bench Division (Commercial Court) case of Mahonia Ltd

v. JP Morgan Chase Bank6 where the Honourable Mr. Justice Cooke was presented with a

definition of structured finance as any “transaction involving the use of a SPV (Special Purpose

Vehicle), credit support arrangements (posting of margin and external third party credit

support) and ancillary transactions which modify the price risk of the underlying asset” his

Lordship reasoned in judgment that: “… the question of nomenclature of the transactions is of 2 According to Henry A. Davis, editor of The Journal of Structured Finance and The Journal of Investment Compliance (please see: Henry A. Davis: ‘The Definition of Structured Finance: Results from a Survey’ The Journal of Structured Finance, Fall 2005, pg. 5 – 10) “…we realized that the definition of structured finance is broad, and not everyone agrees on exactly what it is.” 3 See Christopher L. Peterson: ‘Predatory Structured Finance’ Cardozo Law Review, 2007 (Vol. 28:5) pg. 2185 – 2284. Electronic copy available at: http://ssrn.com/abstract=929118 as at June 5, 2010 4 Please note that Peterson had used the terms “securitization” and “structured finance” interchangeably in his article. 5 Babara T. Kavanagh: ‘The Uses and Abuses of Structured Finance’ Policy Analysis No. 479, July 31, 2003 (CATO Project on Corporate Governance, Audit and Tax Reform). Electronic copy available at: www.socialsecurity.org/pubs/pas/pa479.pdf as at May 21, 2010 6 (2004) All E.R. (D) 10; (2004) EWHC 1938

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little importance. The issue between the parties is the proper way to account for these

transactions, which is a matter of accounting principle and practice, not one of usage of words

in the jargon of banks, financial markets or economists.”

The diverse results recorded by Davis7 in his survey on the definitions ascribed to structured

finance, led to his classification of the various proferred definitions under such heads as:

‘published definitions’, ‘definitions based on instruments and techniques’, ‘definitions based on

usage’, ‘definitions based on benefits’ and ‘definitions that emphasize the securitization aspect of

structured finance’. The numerousness of these definitions and indeed the capacity of structured

finance to defy definition, in his summary of a participant’s view is, “one of the most interesting

attributes of structured finance.” This contribution concludes that the hard-to-define attribute of

structured finance may help in preserving this aspect of finance’s creativity, vibrancy, flexibility

and thus generally contribute to its success “in the face of repeated challenges by accountants,

regulators and others.”

Further reviews of attempts at definition include such professional reports as that by the Bank for

International Settlements8, which while attempting to define structured finance states:

“Structured finance instruments can be defined through three key characteristics: 1) pooling of

assets (either cash-based or synthetically created); 2) tranching of liabilities that are backed by

the asset pool (this property differentiates structured finance from traditional “pass-through”

securitization); 3) delinking of the credit risk of the collateral asset pool from the credit risk of

7 Henry A. Davis: ‘The Definition of Structured Finance: Results from a Survey’ The Journal of Structured Finance, Fall 2005, pg. 5 – 10 8 Committee on the Global Financial System, Bank for International Settlements: ‘The Role of Ratings in Structured Finance: Issues and Implications,’, (2005), sourced from Henry A. Davis: ‘The Definition of Structured Finance: Results from a Survey’ The Journal of Structured Finance, Fall 2005, pg. 5 – 10

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the originator, usually through use of a finite-lived, standalone special purpose vehicle (SPV)”

This indeed is a definition of structured finance instruments and not structured finance.

The Committee on Bankruptcy and Corporate Reorganizations of the Association of the Bar of

the City of New York9 in its attempt describes structured financing thus: “Structured financings

are based on one central, core principal: a defined group of assets can be structurally isolated

and thus serve as the basis of a financing that is independent from the bankruptcy risks of the

originator of the assets.”

Joshua Coval, Jakub Jurek and Erik Stafford10, referred to the essence of structured finance

activities as “the pooling of economic assets (e.g. loans, bonds, mortgages) and subsequent

issuance of prioritized capital structure of claims, known as tranches, against these collateral

pools”.

Ingo Fender and Janet Mitchell11 explained the process when they stated: “Structured finance

involves the pooling of assets and the subsequent sale to investors of tranched claims on the cash

flows backed by these pools.”

Ajayi12 applied the concept ‘structured financing’ solely to securitization when he stated:

“Structured financing typically involves the transfer of an income-producing asset to a

9 ‘New Developments in Structured Finance’ Report 56, Business Lawyer 95, 2000-2001 sourced from Henry A. Davis: ‘The Definition of Structured Finance: Results from a Survey” The Journal of Structured Finance, Fall 2005, pg. 5 – 10 10 See Joshua Coval, Jakub Jurek and Erik Stafford: ‘The Economics of Structured Finance’ Harvard Business School Working Paper 09-060, 2008. Electronic copy available at: http://ssrn.com/abstract=1287363 as at May 21, 2010 11 See Ingo Fender and Janet Mitchell: ‘Structured Finance: Complexity, Risk and the use of Ratings’ BIS Quarterly Review, June 2005, p. 67 – 79. Electronic copy available at http://ssrn.com/abstract=1473644 as at May 21, 2010

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separately created entity. The separate entity is sometimes referred to as a special purpose

vehicle “SPV”. The SPV finances the purchase by issuing securities backed by the asset. This

process is called “securitization” because, in essence, the assets have been converted to

securities … So, structured financing theoretically creates a bankruptcy/insolvency-remote

SPV.”

The dissatisfaction with these attempts must lead us to examining the nature of the transactions

that readily come under the collective term ‘structured finance’ in order to appreciate the limited

academic attempts at a definition and eventually to form the foundation for the adoption of a

working definition for the purpose of this work. By its basic application, the term ‘structured

finance’ is invoked by both financial and non-financial institutions in the money and capital

markets, whenever, it is observed that established forms of external finance are either

unavailable or the traditional sources of financing will rather be too expensive for the issuer to

mobilize sufficient fund for the particular investment.

According to Jobst:13 “The flexible nature of structured finance straddle the indistinct boundary

between traditional fixed income products, debentures and equity on one hand and derivative

transactions on the other hand. Notwithstanding the perceivable difficulties of defining the

distinctive nature of structured finance, functional and substantive differences between

structured and conventional forms of external finance seem to be most instructive in the way they

guide a critical differentiation.” Thus, a typical structured finance transaction affords its issuers

12 Olaniwun Ajayi: Legal Aspects of Finance in Emerging Markets (LexisNexis Butterworth: South Africa: 2005) p. 140, paragraph 8.5 13 Andreas A. Jobst: ‘What is Structured Finance’ Working Paper, 2005: Available at: http://ssrn.com/abstract=832184 as at April 30, 2010

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enormous flexibility to create securities with distinct risk-return profiles in terms of maturity

structure, security design, and asset type, hence providing enhanced return at a customized

degree of diversification commensurate to an individual investor’s appetite for risk. This is a

feature, Jobst submits, contributes to a more complete capital market by offering any mean-

variance trade-off along the efficient frontier of optimal diversification at lower transaction

cost.14

Structured finance instruments allow their issuers to devise almost an infinite number of ways to

combine various asset classes and transfer inherent risks in order to achieve greater

transformation and diversification of risk. Today, the scope of what will qualify as structured

finance transcends the distinctive initial classes of securitisation and credit derivatives15, and

extends to hybrid financial products as collateralized debt obligations of bonds and loans. Thus

and owing to the explanations on the application of ‘structured finance’ as an alternative to

conventional forms of finance it may be safe to refer to structured finance as all advanced

financial arrangements that serve to efficiently refinance and or hedge any profitable

economic activity beyond the scope of conventional forms of debt and equity with the aim

of lowering the cost of capital and mitigating the agency costs of market impediments on

liquidity.16 Put differently, structured finance will be rightly referred to as a collective term for

all financial transactions that differ from conventional forms of financing and are set up

with the objective of credit refinancing and/or the hedging of credit risk.

14 Ibid 15 Jobst submits that the premier form of structured finance is capital market-based risk transfer transactions whose two major asset classes include asset securitization and credit derivative transactions. Quite arguably, Kavanagh identified “project finance” as a “subsection of structured financing” see Babara T. Kavanagh (ibid. at p.6) 16 This is an adaptation from Andreas A. Jobst’s definition (see footnote 13)

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Today, the structured finance market parades countless number of financial instruments of which

the following three constitute the major categories:

Asset-backed securities (ABS) inclusive of Mortgage-backed securities (MBS)

Collateralized debt obligations (CDOs), including, Collateralized bond obligations

(CBOs), Collateralized loan obligations (CLOs), Collateralized fund obligations (CFOs);

and Collateralized mortgage obligations (CMOs)

Credit derivatives

B. Aspects and Development

The precise origin of the activities that are today called structured finance is uncertain. This is

understandably so especially form the backdrop of the evolving nature of the concept and its

constituent activities. Thus while an author may conclude that modern structured finance only

began in the 1970s with the development of the two phenomena of ‘Securitisation’ and ‘Special

Purpose Subsidiaries’17 more popularly known as “Special Purpose Vehicles”, we may in fact

need only to attach the origins of the concept to the evolution of investment banks as they remain

the major architects of the commercial activities that are conveniently so tagged. This however

may even not provide the sought answers as even the scope of the activities of the investment

banks are not set, for according to J. F. Marshall and M.E. Ellis18, investment banking are what

investment banks do. Suffice to note that the term “investment banking” today refers to a wide

range of financial intermediation activities that are concerned with the movement of long-term

17 Babara T. Kavanagh: ‘The Uses and Abuses of Structured Finance’ Policy Analysis No. 479, July 31, 2003 (CATO Project on Corporate Governance, Audit and Tax Reform). Electronic copy available at: www.socialsecurity.org/pubs/pas/pa479.pdf as at May 21, 2010 18 J.F. Marshall and M.E. Ellis: “Investment Banking and Brokerage’ (Probus Publishing;)

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capital from the surplus sectors of the economy to the deficit sectors, otherwise known as capital

market intermediation.

This aspect of the work, in appreciating the historical evolution of structured finance will

undertake a review of the evolutions of that aspect of structured finance known as

‘Securitisation’, the concept of ‘Special Purpose Vehicles’ as well as the nature and emergence

of investment banks. However, as investment banks emerged earlier in time than the modern

application of Special Purpose Vehicles and Securitisation, an expose on the evolution of

investment banks will first be undertaken.

i. Investment Banks

Investment Banks as institutions largely owe their provenance to the United States of America as

Merchant Banks are most often associated with English banking. The earliest events in the

history of Investment Banks can be traced to the end of the First World War when commercial

banks in the United States were set for economic recovery following the renewed demand for

corporate finance solutions by the recuperating economy. It was the general anticipation at this

time that companies would move from their money market dependence, as was being provided

for by the commercial banks, to the stocks and bonds paraded by the capital markets. This

alternative source of financing indeed appeared cheaper and had a longer gestation period. Thus,

it was in response to this growing demand for capital market funding that the commercial banks

of that era began the acquisition of stock broking or securities firms that provided these capital

market solutions. Since they could not underwrite and sell securities directly, the commercial

banks owned these firms as subsidiaries utilizing a holding company structure. According to

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Pratap Subramanyam,19 the first of such acquisition was in 1916 when the National City Bank of

New York acquired Halsey Stuart & Co.

These stock broking subsidiaries were not maintained as wholly independent subsidiaries as the

banks closely monitored and supervised their activities ensuring that often times the banks

provided the funding for the activities of the securities companies. Thus during the economic

boom of the 1920s commercial banks in the United States through their securities firms affiliates,

now generally known as investment banks, made huge profits from the underwriting and other

fees earned by the securities firms. The presence of the commercial banks at the stock markets

was equally felt as they lent margin loans to customers for both primary and secondary market

operations.

Towards the end of the 1920s, the stock market had become over-heated due to the practices by

the investment banks and their parent commercial banks: the investment banks were in the act of

borrowing money from the parent companies for the purposes of speculating in the shares and

stocks of the parent bank by short selling. According to Pratap Subramanyam,20 as soon as the

general public joined the frenzy, the price-earnings ratios reached absurd limits such that by

October 1929, there was a stock market crash that witnessed the wiping out of millions of dollars

of banks’ depositors’ funds.

In reaction, the government of the United States, sought legislative measures that could restore

confidence back into the economy and the capital market with such enactments as the Banking 19 Pratap G Subramanyam: Investment Banking – An Odyssey in High Finance (Tata McGraw-Hill Publishing Co. Ltd: New Delhi: 2005) 73 20 Ibid

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Act of 1933;21 the Securities Act, 1933; the Securities Exchange Act, 1934; and the later Acts

such as the Maloney Act, 1938; the Investment Company Act, 1940 and the Investment Advisers

Act, 1940. The Banking Act whilst restricting commercial banks from engaging in securities

underwriting and or taking positions or acting as agents for others in securities transactions, it

legislatively secluded these activities as the exclusive domain of investment banks. The

investment banks on their own were barred from dealing in or taking deposits from customers or

engaging in lending activities which were secluded as the exclusive preserve of the commercial

banks. This Act as well as the Securities Act, Securities Exchange Act, Investment Company

Act, Independent Advisers Act as well as other legislations sought to and did regulate the

investment banking business in the United Statees, such that Pratap Subramanyam,22 concludes

that “By 1935, investment banking became one of the most heavily regulated industries in USA.”

ii. Special Purpose Vehicles

The development of special purpose subsidiaries (SPS) dates back to the 1970’s when “certain

corporations believed that their exposure to and capacity to manage particular types of risk were

much better than the rising insurance and reinsurance premiums of the era…”23 Special

purpose and separately capitalized wholly-owned subsidiaries were then set up and licensed to

sell insurance to the parent company at rates relatively lower to fair market prices. According to

Kavanagh: “Self-insurance predated the use of special captive subsidiaries, of course, but those

captive structures had two advantages over straight self-insurance (e.g., insurance provided

through the use of earmarked reserves). As a separate entity, the company had “perfunded” its

21 Popularly known as the Glass-Steagall Act in recognition of Senator Carter Glass and Congressman Henry Steagall that sponsored the Bill 22 Ibid at 74 23 See Kavanagh, Ibid at p.5

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losses – there could be no temptation to spend the money on something else. At the same time,

the premiums collected on writing insurance back to the parent firm gave captives an

independent capacity to service claims arising against those policies, not to mention the

investment income on the premium.”24

Wider application of the SPS concept developed as did the global financial industry such that by

the 1980s, banks such as Merrill Lynch, Goldman Sach and NationsBank had isolated some of

their financial trades in SPS in the bid to provide greater confidence in their credit quality to their

trading counterparties. According to Kavanagh: “Creating subsidiaries – often more highly rated

than their parent companies because of protective mechanisms built into the structures –

segregated a piece of the capital base of the parent explicitly and exclusively to support specific

trades with counterparties.”25 By the 1990s, SPS had become a veritable method for companies

to ring-fence specific businesses or risks for specialized management and capital allocation

purposes, such that by mid-1990s this preliminary aspect in structured financing had become

useful to more categories of assets and the management of liabilities.

A classical example of the utilization of SPS to manage liabilities in Catastrophe Bonds (Cat

bonds) is provided by Kavanagh below:

“Assume a reinsurer underwrites directly or reinsures catastrophic risks

such as property damage arising from California or Japanese earthquakes or U.S.

East Coast hurricanes. Suppose a company retains and reinsures the first $150

million layer of liability for claims it might receive, but, above that amount,

24 Ibid. 25 Ibid.

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classical insurance is not available and the firm’s shareholders do not want to

retain the risk. Despite its limited capacity to continue providing insurance, the

firm may still have strong demand to keep underwriting capacity by buying

reinsurance in excess of $150 million – say, up to $250million – from the capital

market at large.

“Specifically, the reinsurer sponsors (but does not own) an SPE, the primary

purpose of which is to write reinsurance back to the sponsor in return for a premium. The

SPE takes the premium and proceeds from issuing Cat bonds and invests that money in

low-risk securities that can be liquidated to fund future catastrophic insurance claims. In

turn, investors in the Cat bond earn a very high interest rate but run the risk of losing all or

part of their interest or principal, or both, in the event of significant catastrophic claims on

the SPE. The unusual nature of the risk (typically uncorrelated with other major asset

classes) helps investors diversify their portfolios and achieve a relatively substantial

expected return in exchange for a low-probability event – catastrophic losses in excess of

$150 million.”

Today, a SPV, although often described as an entity, may really not exist as a legal entity, as it

may take the business organization of a limited partnership, limited liability partnership or trust;

although in most jurisdictions the limited liability company option is often embraced. Depending

on the business organization adopted, the typical SPV is thinly capitalized with no substantial

business activity other than to hold its assets and issue securities. Where a trust arrangement is

opted for, all the activities ordinarily ascribed to the SPV are executed by the trustee.

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An illustration of how this works is exemplified by a typical securitisation transaction26 where

homogeneous receivables of the originator are sold to the SPV. The SPV raises the value of the

receivables through the issue of debt securities to investors and the yield of same is paid to the

originator as consideration for the receivables with limited or no recourse against the originator

for nonperformance of the receivables. The SPV, through the other appointed parties to the

securitization transaction, e.g the servicer, is structured to control its income and expenses so that

it will be “bankruptcy remote” to the originator. In other words for the SPV to truly serve the

credit risk mitigation of the securitisation transaction, the receivables now owned by it must be

off the balance sheet of the originator as such, the SPV should legally and commercially not be a

subsidiary of the originator.

iii. Securitisation

The origins of Securitisation may very well be traced to two sources; one being the well

established practice of factoring or discounting of receivables in the nineteenth century. In that

era, companies could sell their trade receivables to factors or specialist factoring companies,

either on the basis that the factor bore the risk of non-collection or on the basis that the seller

guaranteed collectability. The second may be the practice of the selling of Bills of Exchange as

was prevalent in continental Europe. This is otherwise known as “forfaiting” According to Philip

R. Wood, “In Continental Europe it was common to sell trade bills of exchange – “forfaiting”27

– with or without recourse to the seller. The advantage of bills of exchange was that it was not 26 Detailed description of this process is provided under the heading “Securitisation” below. 27 Forfaiting is a trade finance concept and practice. It involves the purchase of receivables from exporters. The Forfaiter will assume all the risks involved with the receivables; which receivables are usually evidenced by such debt instruments as Bills of Exchange, Promissory Notes, Letters of Credit and Letters of Guarantee. Forfaiting converts these credit-based transactions into cash-yielding transactions. The difference between forfeiting and factoring is that, whilst factoring is a firm based transaction in which the Factor buys all the receivables of the Firm, Forfaiting is a transaction based operation in which a Firm sells one of its receivables.

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necessary to give notice of a transfer to the debtor: this was (and still is) necessary in the case of

ordinary contract receivables, mainly in Napoleonic countries and also Scandinavia, in order for

the transfer to be valid on the insolvency of the seller.”28

Traditional securitisation is essentially a sophisticated form of factoring or discounting of debts.

The owner of receivables (Originator/Seller) sells receivables to a buyer (Purchaser/SPC/SPV)

which Buyer “borrows” money from third parties (Sophisticated Investors/Bank) to make the

purchase price and for which the third parties are paid from the Receivables collected from the

original Debtor. According to Andreas Jobst29, Securitization started when companies began

exploring new sources of asset funding either through moving assets off their balance sheet or

raising cash by borrowing against balance sheet assets (“liquifying”) without increasing the

capital base (capital optimization) in order to reduce both economic cost of capital and

regulatory minimum capital requirements. He described Asset Securitization as that process and

the result of converting a pool of designated financial assets into tradable liability and equity

obligations as contingent claims backed by identifiable cash flows from the credit and payment

performance of these asset exposures. He concludes that it was the quest for more efficient risk-

adjusted and diversified refinancing tools that steered the financial industry towards large-scale

loan securitization by means of collateral loan obligations (CLOs), which is an efficient

structure of credit risk transfer.

28 Philip R. Wood: Project Finance, Securitisations, Subordinated Debt (Thomson Sweet & Maxwell: London: 2007) 112 29 Andreas Jobst: ‘A Primer on Structured Finance’ Electronic copy available at: http://ssrn.com/abstract=832184) as at April 30, 2010

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Securitisation however long began in the United States of America (US) in the 1970s when the

Federal Home Loan Mortgage Corporation (FHLMC, popularly known as ‘Freddie Mac) and

Federal National Mortgage Association (FNMA, popularly known as ‘Fannie Mae’) acquired

home mortgages from lending institutions, raising the finance for such acquisition through the

issue of securities that were backed by the pools of the home mortgages. The Government

National Mortgage Association (GNMA, popularly known as ‘Ginnie Mae’) gave guarantees to

such securities. Progressively, US Investment Banks set up in-house departments to deal with

such Ginnie Mae papers.

The Bank of America was the first bank to securitise its own home loans in 1977 with the first

non-home loan securitisation occurring in 1985. In March 1987, Sperry Corporation undertook

what is today regarded as the first major securitization involving an engineered security whose

cash flows were backed by the receivables on Sperry Corporation’s computer leasing program.

Shortly after this, General Motors Acceptance Corporation (GMAC) indirectly issued securities

supported by a pool of its car loans. GMAC created a Special Purpose Vehicle (SPV) to which it

assigned a portfolio of its car loans. The SPV in turn issued securities representing claims on the

interest and principal payments received on those loans. According to Kavanagh,30 “Since then,

the population of assets underlying those structured transactions has diversified dramatically

and now includes credit card receivables, corporate trade receivables, aircraft leases, stranded

utility costs, plant projects, patents, and more.”31

30 Babara T. Kavanagh: ‘The Uses and Abuses of Structured Finance’ Policy Analysis No. 479, July 31, 2003 (CATO Project on Corporate Governance, Audit and Tax Reform). Electronic copy available at: www.socialsecurity.org/pubs/pas/pa479.pdf as at May 21, 2010 31 Ibid at p.3

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In 1997, the Hong Kong Corporation (HKC) was set up by the Hong Kong Government to buy

residential mortgages and to use mortgage-backed securities. Presently, the Bank can guarantee

eligible mortgages and securitize mortgages by ‘on-sale’ to orphan Special Purpose Companies.

The HKC is financed by public bond and a revolving credit-line from the Hong Kong Monetary

Authority.

Today, the largest securitisation market, by volume, is the US followed by Europe with the two

largest asset classes of securitization transactions being home mortgage loans and consumer

receivables in automobiles and credit cards. Securitisation has evolved into a specialized

financial transaction type that generally involves the packaging of designated pools of

receivables (generally mortgages and other credits) in a company’s books and selling them

alongside their underlying security, if any, in the form of securities to investors. Explained in

another way, securitization is a form of structured finance that entails an entity, either by itself or

with the aid of professionals, pooling together the company’s interests in identifiable cash flows;

transferring the same to investors either with or without recourse to further collaterals.

Literally speaking though the end result of securitization is financing, it is not ‘financing’ as

such, in light of the fact that the entity securitizing its assets is not borrowing money, in the stead

it sells a stream of cash flows that would otherwise accrue to it. Securitisation is a structured

finance and capital market product as well since on the one hand it enables financing based on

receivables over a certain period of time, yet on the other hand, its objective is to create over-the-

counter products (OTC) for capital market investors.32

32 Pratap G Subramanyam: Investment Banking – An Odyssey in High Finance (Tata McGraw-Hill Publishing Co. Ltd: New Delhi: 2005) 191

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Securitization seeks to substitute capital market-based finance for credit finance by sponsoring

financial relationships without the lending and deposit-taking aspects of conventional banking

(disintermediation). In this wise, the issuer raises funds by issuing certificates of ownership as

pledge against existing or future cash flows from an investment pool of financial assets. This

done with the aim of increasing the issuer’s liquidity position without increasing the capital base

or by selling these reference assets to a SPV, which subsequently issues debt to investors to fund

the purchase. Aside from being a flexible and efficient source of funding, the off-balance sheet

treatment of securitization also serves to:

(i) reduce both economic cost of capital and regulatory minimum capital requirements as

a balance sheet restructuring tool (regulatory and economic motive); and

(ii) diversify asset exposures (especially interest rate risk and currency risk).33

The generation of securitized cash flows from a diversified portfolio represents an effective

method of redistributing asset risks to investors and broader capital markets (transformation and

fragmentation of asset exposures). As opposed to ordinary debt, a securitized contingent claim

on a promised portfolio performance affords investors at low transaction costs to quickly adjust

their investment holdings due to changes in personal risk sensitivity, market sentiment and/or

consumption preferences. Thus, Jobst surmised that securitization is a regulatory arbitrage tool:

an efficient, flexible funding and capital management technique for companies.

33 Ibid Jobst, footnote 25

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Securitization continues to readily register as an alternative and diversified market-based source

for refinancing economic activity, by substituting capital market-based finance for credit finance

and thus sponsoring financial relationships without the intermediation of banks. The off-balance

sheet treatment of securitization also serves to diversify asset exposures (especially interest rate

risk and currency risk), since the cash flow proceeds from the securitized asset portfolio are

partitioned and restructured into several tranches with varying risk sensitivity. The generation of

securitized cash flows also represents an effective method of redistributing asset risks to

investors and broader capital markets. The implicit risk transfer of securitization does not only

help issuers improve their capital management, but also allows issuers to benefit from enhanced

liquidity and more cost efficient terms of high-credit quality finance without increasing their on-

balance sheet liabilities or compromising the profit-generating capacity of assets.

Typical securtisation transaction structures will include the following:

1. A True Sale to an SPV: This structure involves the setting up of a single purpose, Special

Purpose Vehicle (SPV), whose shares are held by an independent Charitable Trust

(Trustee) or Foundation. The essence of the independent Charitable Trust (Trustee) or

Foundation is to ensure that the SPV is by no means a subsidiary of the Originator of the

transaction or subject to its control. The SPV, which is formed as a public company34,

purchases the receivables from the Originator in a true sale transaction, with the objective

being that the SPV should not be consolidated on the Balance Sheet of the Originator.

34 According to Philip R. Wood: Project Finance, Securitisations and Subordinated Debt (London, Sweet & Maxwell, 2007) 120, para. 6-015, the SPV is formed as a public company to in order that it may issue securities to the public (non-private securities)

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Thus, the SPV and the investors therein are insulated from the insolvency of the Originator

and vice versa.

2. The Constitution of a Trust: A Trust exists where a Trustee holds the title to assets on the

terms that the assets are immune from the private creditors of the Trustee, that is, the assets

of the Trust will not attach to the Trustees bankruptcy creditors. This structure will involve

the transfer of receivables to a Trustee which holds them, first for the benefit of the

investors and then for the Originator. It is the Trustees duty to issue pro rata certificates to

the Investors. Usually, the Originator’s financial interests in the Trust is subordinated to the

Investor’s, such that the Investors are primarily settled from the proceeds of the Trust, the

Originator gets the “junior share…the excess profit”35 The Trust takes the form of a close-

ended Unit Trust structure, in the manner of typical Collective Investments Schemes; it

could also be an open-ended Unit Trust investment. The Anglo-American jurisdictions

generally refer to Trusts utilised in securitisation transactions as “Common Funds.”

The Trust structure is usually opted for due to the following reasons:

a. The trust is not capable of being owned by shareholders unlike a single purpose SPV;

thus it is not necessary to arrange for independent Shareholders to hold or own the

Shares of the SPV.

b. Generally, a Trust is not subject to the inconvenient restrictions of capital redemption

c. For regulatory purposes, the Trust is more easily controlled by Regulators since they

can

35 Philip R. Wood, ibid 121, para. 6-017

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i. insist that the Trust must have independent Managers, Supervisors

(Administrators) and Custodians;

ii. lay down prescriptive rules on the types of receivables that can form the Trust,

capital requirements and other forms of conditions for the Trust to enjoy Trust

privileges which may include: the exclusion of compulsory notices to Debtors

for validity of decisions, capital gains or transfer tax exemptions from the

transfer of future receivables. e.t.c

d. A Trust may prove more ideal in instances where the assets of the Trust will vary in

size or composition over a period of time such that their maturity dates will vary, for

example, in the case of credit card receivables. Philip R. Wood36, since it is not

realistic to vary the level of the funding of the Trust, a fictitious (higher) quantum of

receivable is transferred to the Trust with the Investors and the Originator both having

a beneficial interest in the asset pool. Applying an agreed formula for “floating

allocation”, the percentage interests of the investors will rise if the pool falls, in order

to maintain the agreed nominal amount of receivables available to the investors.

The typical Trust structure is diagrammatically expressed below:

36 Ibid., page 122, para. 6-019

TRUST

ORIGINATOR SPV

ISSUER

INVESTORS

Equity Interest

Beneficial Interest Beneficial Interest

Debt Interest

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The diagram above explains this transaction structure, thus: the Originator transfers its

receivables to the Trust. The Trust pays for the receivables by selling its beneficial interest

in the receivables to an SPV set up for the purpose. The SPV raises the price of the

purchase by charging its beneficial interest in the receivables as a security interest to raise a

loan from an Issuing Company; and which Issuing Company raises the value of the loan by

selling short-term securities or Notes issued to Investors. The Issuing Company can also

charge its security interest in the SPV’s beneficial interest as security for its obligations

under the Notes issued to the Investors.

Philip R. Wood’s37 explanation, although along the lines of the Master Trust arrangement,

that an Originator holds a beneficial interest in the receivables under the Master Trust,

albeit, subordinated to the beneficial interest of the SPV would have been curious if we

regard the “transfer” by the Originator to the Master Trust as a sale. However, it does

appear as some of the transactions do reveal that such “transfer” will not constitute a sale

(‘true sale’) but in essence, the constitution of a Trust.

Taking a keener interest at the Master Trust structure, one will appreciate the ability of this

singular structure to spin-off either concurrent or successive Trust arrangements without

the re-constitution of a new Trust; all the Master Trust in this regard is to segregate the

different arrangements by the segregation of the specific receivables allocated to each

series of issues, and by contract, constitute each segregation as an independent Trust such

that the assets and liabilities of one Trust are independent of the assets and liabilities of a

other segregated Trusts. 37 Ibid at page 123 para. 6-019

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The practicality of this structure38, has judicial validation under English law which makes

it unnecessary to specify or identify which receivables in a pool of receivables held by a

Trustee belong to a particular investor or the originator. The law is that where intangible

assts are held as a bulk, provided the whole bulk is identified, only the percentage interests

of the owners in the bulk need be specified.39

3. Sub-Participation: Sub-participation is largely a pure credit risk transfer40 transaction that

involves, a creditor granting to an SPV or other entity, a right to participate in the proceeds

of its receivables only when the underlying debt-obligations are satisfied. This structure

typically involves the SPV borrowing or raising monies from investors via a bond issue and

utilizing the proceeds to place a deposit with the Originator with the consideration being

the right to participate in the proceeds from the receivables. According to Philip R. Wood41,

the terms of the deposit are that the Originator will have to repay the deposit plus the

38 which appears to derive essence from the segregated portfolio companies (SPC) structure obtainable in such jurisdictions as the British Virgin Islands (by virtue of the Business Companies Act, 2006), Luxembourg (by virtue of the Securitisation Law, 2004), Isle of Man (by virtue of the Companies Act, 2006) and Jersey (by virtue of Amendment No.8 of the Companies (Jersey) Law, 1991 amongst others. English law presently does not statutorily recognise the SPC structure, but, often by contractual arrangements, give expression to the structure. Thus, by contract, parties can agree to separate the assets and liabilities of one set of issue made by a company from the assets and liabilities of another set of issues, such that in the event of liability or insolvency, only the assets of the issue at default, and not the assets of the company, can be attached for debt satisfaction purposes. In our jurisdiction, this arrangement is akin to the fixed charge structure. 39 See Hunter v. Moss (1994) 1 WLR 452, CA where in a company with 1000 shares, M held 950 of shares and of which he subsequently expressly declared a trust of 5% of this in the favour of H. When subsequently, the defendant sold the entire share capital, the plaintiff was held to be entitled to a five per cent share. The Court held that the trust was valid and that the failure to expressly state which shares constituted the trust cannot invalidate the trust. The Court in Re Harvard Securities (1997) 2 BCLC 399 whilst attempting to distinguish Hunter v. Moss from the different decision in Re Goldcorp Exchange Limited (in Receivership) [1995] 1 AC 74, [1994] 2 All ER 806 (PC) which suit bordered on chattels (gold bullion) held that shares are not physically identifiable as to be capable of being physically segregated for trust purposes. Moreover, the Court pointed to the fact that whilst there had been an express declaration of a trust in Hunter v. Moss, such was not the case in Re Goldcorp Exchange Limited (in Receivership). 40 Not a sale, legal assignment or charge 41 Philip R. Wood, Ibid at page 124, para. 6-022

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interests accrued or accruable, “…only if and to the extent that the Originator recovers

principal and interest on the receivables – a conduit loan. The Originator is a conditional

debtor to the SPV.”

The implication of this transaction is that the SPV carries two essential risks. The first is

the risk of the non-repayment of the receivables. Thus, where the receivables are not paid

to the Originator, it owes no obligation to the SPV to repay the deposits made. The second

is that the SPV is exposed to the insolvency risks of the Originator. This essentially is

because the receivables are neither the products of a fixed charge or trust in favour of the

SPV. Thus, in the event of the insolvency of the Originator, the SPV can only recover the

deposits made in respect of the receivables as a creditor since it has no rights over the

receivables.

For Philip R. Wood42, the reasons for the use of Sub-Participation include:

1. oftentimes receivables such as bank loans contain contractual restrictions on the

power of the creditor to assign the loans.43

2. the need for the Originator to continue to own the receivables for such reasons as the

need to maintain a close relationship with the customer/client debtor, thus mitigate

confidentiality problems.44

42 Ibid at page 124, para. 6-022 43 Such restrictions will include contractual clauses such as: “the Creditor may not assign this loan without the prior written consent of the Debtor…”; “the Bank may only assign this loan to another Bank or other financial institution…”; “…where the Creditor assigns this loan, the assignment shall not give rise to higher costs to the Debtor including, a Tax Gross-up or Increased Cost Clause in a standard bank term loan agreement…” 44 Since, where receivables are sold to the SPV or constituted in a Trust, either the SPV or the Trustee will have to administer or manage the receivables.

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Today, banks in developed jurisdictions have increasingly looked to reducing their traditional

‘on balance sheet’ borrowing and lending in favour of securitisation. This has had the result of

reducing the typical risks (credit, liquidity, interest rate) which are features of traditional bank

borrowing and lending activities. For example and has stated earlier banks in the United States

have expanded their application of securitisation well beyond the mortgage-backed

securitisations that emerged in the 1970s and 1980s. Today, all types of receivables can readily

form the subject of a securitisation transaction. Conversely, securitization remains of few

application in less developed financial markets, with most of its application coming from

emerging markets. Quite naturally, the attendant risks in these emerging markets, to wit, high

political risk and their uncertain legal framework continues to remain a major bottleneck to the

development of securitization and other major applications of structured finance in these climes.

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CHAPTER 3

LEGAL ASPECTS OF STRUCTURED FINANCE

The nature of the transactions under the broad categories of structured finance gives rise to

diverse contractual rights and obligations that often times defy extant common law or other legal

assumptions. Hiding under the wide umbrella of the concept of freedom of contract, parties have

often been known to contractually impose obligations and establish rights that are relatively

unknown to classical legal provisions. Thus for instance, in securitization, the concept of the

asset-backed securities is aptly a hybrid between the laws on security interests and the law of

company securities, such that whilst under the notional conception of securities as either debt or

equity, asset-backed securities exist as equities with security.

Further, the objective of almost all structured finance transactions, to re-finance or hedge

existing assets using bankruptcy-remote entities often raise the issue of to what extent will a

purposely created investment vehicle be held remote from its creator; will the thick layers of

hiving-off ownership or creating a web of subsidiaries and owners effectively create the

‘distance’ that remoteness demands. Indeed diverse legal issues are bound to arise in a regime

that has not known much judicial pronouncements. Thus, this part of the work shall be

understudying the various legal implications of terminologies, contractual concepts and

provisions readily found in typical modern structured finance transactions.

Such legal aspects of structured finance that this part of the work shall consider include: the

consent or notice requirement; the challenge of re-characterization in light of both true sale and

security interest requirements; the laws and risks of subsidiarisation; and general tax

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considerations. The justification of the proposed approach may only be seen in light of the fact

that the major legal risks are to be taken cognizance of in the course of a structured financing

transaction will include:

The certainty surrounding the transfer of assets (i.e. “true sale”) from the

seller/originator to the issuing special-purpose-vehicle (SPV) – the need to ensure that

holders of securities receive full control over the assets underlying the transaction. This

involves, in particular, reviewing the details of the bankruptcy regime applying to the

seller/originator and checking that appropriate steps have been taken to remove any

uncertainties over the security interest of the SPV.

The bankruptcy remoteness of the issuing SPV. This involves reviewing all the covenants

governing the separation of the SPV from the seller (and checking whether the latter

could be consolidated with the former) as well as corporate, bankruptcy and

securitization (if any) laws of the relevant jurisdiction.

Legal precision regarding the role of the servicer and trustee across all relevant

jurisdictions so that the operational and execution risks associated with the payment and

receipt of interest and principal on any transaction are appropriately contained.

A. The Consent or Notice Requirement

While the common law has settled the law that the obligations of a contract cannot be freely

assigned by the obligor,45 no other system of law, not even the common law, has been able to

establish the circumstances under which the rights that arise under a contact can be assigned or

45 Nokes v. Doncaster Amalgamated Collieries Ltd (1940) A.C. 1014, 1019 - 1020

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sold. In the Nigerian Court of Appeal decision in Julius Berger (Nig.) Plc v. Toki Rainbow

Community Bank Ltd,46 the Court in revisiting the extant common law and statutory position

on the assignability of debts held:

“There are no provisions dealing with assignment of the benefits of a contract by a

party thereto … Nigerian judicial authorities are not many and scarce on the issue. But

because the issue is one that developed in common law in England from which all our

statutory legislations drew heritage, it is applicable in our legal and judicial systems.

Under the common law, a debt or other legal thing in action includes the benefit of a

contract or a debt arising out of contract from which payment was to be made at a future

date. Such a debt is capable of being assigned under section 136 of the Property Act 1925.

See Brice v. Bannister (1978) 3 Q.B. D. 569, James v. Humphreys (1908) 1 K.B. 10;

contrast Law v. Coburn (1972) 1 WLR 1238. Furthermore, is (sic) was held that the benefit

of a contract is only assignable in cases where it can make no difference to the person on

whom the obligation lies to which of two persons he is to discharge it. Tolhurst v. Assoc.

Portland Cement Manufacturing Ltd. (1902) 2 K.B. 660 at 668, (1903) A.C. 414. A party to

a contract can in equity also assign a contractual right in one of ways (a) he can inform

the assignee that he transfers the chose to him or (b he can instruct the debtor to discharge

the obligation by payment to or performance for, the assignee. Thus an agreement by

traders or merchants with a bank that payment for goods sold by them should be remitted

direct by the purchasers to the Bank has been held to constitute a valid equitable

assignment of the amount to the Bank. Brandis Sons & Co. v. Dunlop Rubber Co. (1905)

A.C. 454”

46 (2010) 9 N.W.L.R (pt. 1198) 80, 106 , paragraphs C - G

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As reflected in the dictum above, one issue that often confronts the validity of the sale or

assignment of receivables arises in connection with whether or not notice has been given to the

debtor and or whether the debtor’s consent has been obtained prior to the creditor’s assignment.

In most common law jurisdictions it is legal for parties to, by contract, prohibit the rights of a

party to assign its benefits under the contract, the converse appears to be the case with most civil

code jurisdictions, including common law jurisdictions that have adopted similar codified laws

of contract, which have in an attempt to promote the marketability of such assets as receivables,

make ineffective, contractual provisions that restrict the assignment of such asset classes.

International trade law is today on the side of such laws.

The consent of an obligor under a contract is often required to validate an assignment. Such may

be as a result of the fact that the contract underlying the debt is a personal one or there exists an

express contractual limitation to that effect or there exists some statutory or regulatory

prohibitions. Classical examples of contractual limitations or prohibitions include contractual

terms like: “No assignment or other transfer of the rights and obligations under this contract

without the prior written consent of the borrower shall be valid”). Other limitations include

restrictions on the disposal of the assets in a credit agreement; negative pledges prohibiting a

creditor from granting security interests or engaging in transactions with the semblance of the

grant of security interests.

Thus where the consent of a debtor is required for the assignment of a debt, its unrestricted

assignment and hence its marketability47 becomes both commercially and legally impossible.48

47 This is a basic feature of structured finance transactions such as securitization.

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This position is however not of universal application as some jurisdictions, in the bid to improve

the marketability of such ‘assets’ have laws that override the restrictions on assignments. Wood

has argued that this is “…at the expense of freedom of contract.”49 According to the Nigerian

Court of Appeal in Cooperative Development Bank Plc v. Ekanem,50 the principle of freedom

of contract or laissez faire philosophy “enjoins the courts to enforce the intention of the parties

as demonstrated from the agreement between them.” Far back in 1883, when petitioned to limit

the application of a contract in Tailby v. The Official Receiver,51 Lord Macnaghten held:

“Between men of full age and competent understanding ought there to be any limit to freedom of

contract but that imposed by positive law or dictated by consideration of morality or public

policy? The limit proposed is purely arbitrary, and I think meaningless and unreasonable.”

The position however in English law is that a contravention of a contractual provision that

prohibits an assignment of rights renders the contravening assignment void,52 even if the

assignee was unaware of the prohibition. Although and while such an assignment will be

effective as between the assignor and assignee, same will not bind the debtor, who may pay the

debt or continue the payment of same to the assignee. The law will however regard the assignor

as trustee of the proceeds in favour of the assignee, such that the assignor will be held

48 According to Wood (infra): “In English-based jurisdictions, it is probably the case that the seller would hold these proceeds on trust for the buyer as a super-priority claim if the seller is insolvent, but only if the proceeds are traceable, e.g. have not been paid into an overdrawn account at a bank unaware of the trust. It appears that in most civil jurisdictions, this trust is not available so that the assignment would be totally ineffective on the seller’s insolvency.” (ibid. at p.132, paragraph 6-040) 49 Philip R. Wood: Project Finance, Securitisations, Subordinated Debt (Thomson Sweet & Maxwell: London: 2007) 132, paragraph 6-041 50 (2009) 16 N.W.L.R. (pt.1168) 585, 602 paragraph G 51 (1883) 13 App Cas 523 at 545 52 In re Turcan (1888) 40 Ch. D. 5; Helstan Securities Ltd v. Hertfordshire County Council (1978) 3 All E.R. 262; Linden Gardens Trust Ltd v. Lenesta Sludge Ltd (1993) 3 All ER 417, HL;

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accountable to the assignee for the proceeds.53 The assignee of such proceeds, while he may

join54 the assignor/trustee in an action against the debtor, cannot personally sue the debtor.

By contrast and pursuant to Article 9-406 of the Uniform Commercial Code (UCC) of the United

States of America, a term in an agreement between an account debtor and an assignor is

ineffective to the extent that it restricts, or requires a consent for the assignment55 of the

account,56 chattel paper57 or a payment intangible58 or gives rise to a default, breach or right of

termination.59 It is worthy of note that this provision relates only to assignments and does not

apply to a sale of a payment intangible or promissory note and there is an extension for certain

consumer receivables. Article 9-406 overrides rules of law, statutes and other regulations. It is

not worthy that American law recognizes the assignment of future receivables as a generic class

without the need to specifically identify each receivable.

France has similar provisions as that of the United States of America (US) as ComC 442-6 II c

makes ineffective any commercial contract provision that prohibits assignment or that requires

consent for assignments. Such contractual provisions are ineffective to prevent the assignment or

transfer of rights, both as against the transferor and other third parties and as between the

contracting parties. However and in contrast to the position in US law with regards to the

assignability of future receivables, France and many Napoleonic jurisdictions require that

53 See Helstan Securities Ltd v. Hertfordshire County Council (supra); 54 Barbados Trust Co. Ltd. v. Bank of Zambia (2007) EWCA Civ. 148 55 This will include a ‘surety interest and its enforcement’ and by a similar provision will also apply to promissory notes. 56 Broadly, a ‘commercial receivable’ 57 Mainly, receivables secured on goods and leases of goods; 58 Mainly, loan agreements; 59 Separate provisions exist for letters of credit under Article 9-409; certain leases under Articles 2A-303 and 9-407; and ‘other’ intangibles under Article 9-408.

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receivables that are to be transferred have to be specified in details, stating the debtor, the

amount of the debt and the contract date; this invariably makes the assignment of future

receivables impossible.

Similarly,Section 354(a) of the German Commercial Code ‘HGB’ (as amended 1994) provides

that receivables due from both private and public sector entities and arising from business

transactions contracted under German law are assignable regardless of prohibitions on

assignment. The law however permits the debtor to pay the original creditor/assignor regardless

of the notice of the assignment.

Nigerian law reflects the English position such that where a contract prohibits the assignment of

rights, a contravention of same will invariably amount to a breach of contract.60 Such assignment

is invalid against the debtor who may continue to pay the debt-sum to the creditor/assignor;

although the law will deem the assignor as a trustee of the proceeds in favour of the assignee for

this purpose.

Further and related to the consent requirement as discussed above is the requirement that the

debtor be given notice of the assignment. There is a distinction between the two concepts as the

giving of notice of an assignment of debt due does not amount to the consent of the debtor

having been obtained before the assignment of the debt. Wood61 notes that notice is normally not

given to debtors because of the inconvenience and expense; or because it is preferable for the

originator (assignor) to continue with the collection; or because debtors might be confused by 60 This position of the law is espoused by the latin maxim: pacta sunct servanda. 61 Philip R. Wood: Project Finance, Securitisations, Subordinated Debt (Thomson Sweet & Maxwell: London: 2007)p. 134, paragraph 6-045

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such notice; or because the originator may want to maintain the relationship with the

debtor/customer.

In the earlier cited Nigerian Court of Appeal decision in Julius Berger (Nig.) Plc v. Toki

Rainbow Community Bank Ltd62 , Garba JSC held:

“In law, the reaction of an assignee i.e. acceptance or otherwise to the assignment is

not a prerequisite for the validity and effectiveness of such an assignment. Though learned

counsel for the appellant had submitted that consent of an assignee is required for a valid

assignment and referred to page 581 of Cheshire, Fifoot and Funston’s Law of Contract,

14th Edition, the consent is only required where liability of a contractual obligation was to

be transferred to (sic) a debtor. That is not the case here since it is benefits of the contract

between the company and the 1st appellant that were transferred and not the liabilities. The

company had no liabilities under the contract in question to be transferred to 3rd parties

whose consent in such a situation would have been necessary in equity and law. That

submission of learned counsel is therefore misplaced and inapplicable in the present

appeal. The authorities cited in support of the submission are not helpful to the appellants

in the circumstance. As seen earlier, all that the law requires is that the assignee be put on

notice in writing of the assignment.”

Such jurisdictions as France, Italy, Spain, Japan, Korea and the Scandinavians63 maintain a

‘compulsory notice to debtors’ regime. Such notice may be formal, for example, by a court

bailiff in France; or informal, for example, by notice in an account statement as obtainable in the

62 (supra) at p. 109 paragraphs B - F 63 Excepting Germany, Austria and Switzerland

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Scandinavian countries. Other jurisdictions, especially civil code jurisdictions, demand

registration at their relevant titles registry, some requiring registration of transfers of security

interests in asset title registers in order for the assignment and transfer to be effective on the

insolvency of the assignor or in the case of a sale, the seller.

By contrast, in England, unregistered assignments known as equitable assignments are

oftentimes opted for in order to avoid such costs of registration as land registry fees. However, to

secure enforcement, the assignee/buyer/chargee obtains from the assignor/seller/chargor a power

of attorney to enforce and to register the debt and will often have custody or control of the title

documents.

The Anglo-American jurisdictions do not normally insist on notice to debtors or registration in

an asset title register for the validity of such assignment or transfer in the event of the insolvency

of the originator. However Article 9 of the US Commercial Code requires filing at a central

debtor-indexed register for the validity of the sale of certain receivables.64

Where the notice requirement is not met, the effect in some jurisdiction is to render the sale

invalid against claimant creditors of the assignor/seller in the event of insolvency. Other

consequences of the failure of notice include: the assignee/buyer/chargee losing priority in the

event the originator assigns, sells or charges the receivables to a third party; the debtors may

continue to pay such an originator65; the assignee will have to join the originator in an action

64 Usually ordinary commercial receivables as opposed to bank loans. 65 For this example, see the case of Paragon Finance Plc v. Pender (2005) All ER (D) 307; (2005) EWCA Civ. 760, where the Court held that the right to possession conferred by a legal charge remained exerciseable by

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against the debtor; the originator and debtor may vary the terms of the debt; the debtors may

continue to acquire new set-offs and other defences.

Some jurisdictions have however, by legislation,66 relaxed these requirements on registration to

enhance the easy marketability of the relevant assets, by requiring notices in official gazettes or a

widely-circulated newspaper in the particular jurisdiction. In other jurisdictions, rating agencies

often accept such assignments that are without notification, provided they are valid and are

prepared to assume that the originators will act in good-faith and with reasonable standard of

care.

At international law and by the provisions of Article 9 of the United Nations Convention on the

Assignment of Receivables in International Trade (“UNCARIT”),67 the assignment of certain

receivables is effective notwithstanding any agreement or contract limiting the assignor’s right to

assign the receivables. These receivables are:

All receivables arising from an original contract for the supply or lease of goods

or services except for financial services, construction contracts or contracts for the

sale or lease of real property;

Receivables arising from an original contract for the sale, lease or licence of

intellectual property or proprietary information;

the originator (as the legal owner), notwithstanding that the originator had transferred the beneficial ownership of the charge to a securitisation vehicle. 66 Wood, commenting on the legislative interventions on securitisation, explains: “The detail of these statutes is daunting. Although there are liberal exceptions, many of them tend to be restrictive so as not to erode the existing policies, so as to keep the chink of light as narrow as possible. Typically, therefore, statutes will restrict the exemptions to receivables owed eligible sellers (eg banks loans to corporate, not consumer loans), to eligible sellers (eg banks and other financial institutions) and to eligible buyers, such as local SPVs which are locally regulated.” 67 Resolution 56/81 adopted at the 85th Plenary Meeting of December 12, 2001

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Receivables representing the payment obligations for credit card transactions;

Receivables owed to the assignor upon net settlement of payments due pursuant to

a netting agreement involving more than two parties;

This provision is meant to only validate and give effect to the assignment, since the assignor in

such situation is not absolved of any liability to the debtor for breach of contract. The debtor

cannot however in such circumstance void the contract on account of the assignor’s breach; and

neither can the debtor hold the assignee or any other person liable on the ground that such a

person had knowledge of the agreement between the debtor and the assignor.

The assignor can in such case be similarly liable to the assignee for breach of an implied term in

the assignment of the receivable. Article 12 states the representations of an assignor, unless

otherwise agreed with the assignee, that at the time of the conclusion of the contract of

assignment, that:

a. it has the right to assign the receivables;

b. it has not previously assigned the receivables;

c. the debtor does not and will not have any defences or rights of set-off.

Further, the notice requirements in the UNCARIT are post-assignment notifications, which

notifications can be at the instance of either the assignee or assignor.68

The UNCARIT is however not without remedies for the protection of a debtor’s interests in the

event of such assignment; for example, under Article 15, an assignment will generally not affect

the rights and obligations on the debtor including the payment terms contained in the original 68 Articles 14, 16 and 17

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contract. While the payment instruction may however change, the person, address or account to

which the debtor will make payment, it cannot change any of the currency of payment or the

country in which payment is to be made69 as specified in the original contract

Regard must be had to the fact that the scope of the UNCARIT is limited to the international

assignment of receivables and to assignment of international receivables. Article 3 defined this

test of internationality by explaining an international assignment as one in which at the time of

the conclusion of the contract of assignment, the assignor and the assignee are located in

different States; on the other hand, an international receivable is one which, at the time of the

conclusion of the original contract, the assignor and the debtor are located in different States.

One of the challenges that the Convention sought to address as stated in its preamble are the

“problems created by uncertainties as to the content and the choice of legal regime applicable to

the assignment of receivables” in international trade.

B. The Risks of Re-Characterisation

An overriding power of the Courts in the determination of the rights of parties under a

commercial contract lies in the power to re-characterize a transaction for what it truly is in the

face of a dispute which highlights inconsistencies in the expressions of the parties and perhaps,

on the availability of evidence, the commercial reality of the transaction. This issue of re-

characterization typically arises in structured finance transactions where a true sale of assets is

required for risks to be completely and effectively transferred from the seller to the purchaser if

69 Other than the country in which the Debtor is located; see Article 15(2) of the UNCARIT

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such assets are to survive the incidence of the bankruptcy of either the seller or the purchaser,

otherwise known as bankruptcy remoteness.

According to Ajayi,70 what will qualify as true sale will be left to the laws of the particular

jurisdiction that the transaction relates to or emanated from or from the international practice in

the relevant industry. Indeed, today re-characterisation will exist as a transaction risk in some

jurisdictions whereby the courts may interpret a transaction outside the expressions of the parties

to give effect to overriding statutory requirements;71 and also in some where the courts will only

construe the intentions of the parties, but that is assuming that those intentions were clearly

expressed and terminologies mutually understood. Of course, it is the absence of the mutuality of

understanding, either genuine of not, that breeds the disputes that the Court are called upon to

adjudicate.

In 1955, Lord Justice Tucker in Kirkness v. John Hudson & Co. Ltd72 expressed that the word

‘sale’ is “…unambiguous and denotes a transfer of property in the chattel in question by one

person to another for a price in money as the result of a contract express or implied.” Indeed his

Lordships decision did not admit of transactions where sales are effected purely to refinance and

or hedge a profitable economic activity beyond the scope of conventional forms of debt and

equity with the aim of lowering the cost of capital and mitigating the agency costs of market

impediments on liquidity: structured finance. Thus, the conventional connotation of a sale has

variously been modified by structured finance transactions such that what may bear the title of a

70 Olaniwun Ajayi: Legal Aspects of Finance in Emerging Markets (Lexis Nexis Butterworth:2005) p. 168, paragraph 9.21 71 Recharacterisation is a risk under Article 9 of the US Uniform Commercial Code which generally provides for “Security Interests” 72 (1955) 2 All E.R. 345 at 366

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sale may in fact not bear the true incidence of sale. The need to ensure an actual sale transaction

where same has been mentioned or represented has evolved into the true sale requirement for

most off-balance sheet refinancing transactions.

In a typical true sale transaction, the buyer, in this case, the securitization vehicle has exclusive

control and dominion over the assets (receivables) and thus, can sell them, exchange them,

pledge them, has no obligation to re-sell them to the originator and can by itself, mange and

collect them. It takes all the profits from the receivables and has no obligation to remit them to

the originator. On the hand, the originator is without liability for the receivables sold, save for

the normal warranties for defects. It neither guarantees recoverability nor does it have a duty to

repurchase or provide additional cash, assets nor does it have any duty to compensate the

securitization vehicle for shortfalls of recovery. The sale is not revocable by the originator on the

bankruptcy of the securitization vehicle; the receivables sold must be isolated, insulated,

“bankruptcy-remote” from the bankruptcy of the securitization vehicle. A failure to meet these

requirements and thus giving the originator a semblance of control over the assets, will indeed

characterize the transaction as not being a true sale; in effect, the assets will be deemed to belong

to the originator and thus be available to its creditors in the event of insolvency.

Two jurisdictions can be readily distinguished in relation to their approach at the re-

charaterisation of transactions, to wit, the English Common law jurisdiction and the Anglo-

American jurisdiction. Whilst the former promotes the form of the transaction over its substance,

the latter adopts the accounting and regulatory substance of the transaction over the form that the

transaction undertakes.

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Thus, while at English law, a properly documented sale of receivables, which is treated by the

parties as a sale will not be classified as a loan by the buyer to the seller secured on the

receivables requiring registration, even if the buyer has recourse to the seller for unpaid

receivables or that the seller has a right of repurchase, or that the profit is paid to the originator or

that the seller continues to collect as agent of the purchaser or ultimately that the economic effect

of the transaction is similar to a loan secured by the receivables. Hence in such authorities as

Olds Discount Co. Ltd v. John Playfair Ltd73; Welsh Development agency v. Export

Finance Co. Ltd74 and Mahonia Ltd v. JP Morgan Chase Bank75, the English Courts leaned

towards the style or title the parties chose as defining their relationship, such that where parties

regarded a transaction as SWAP, the Court was not ready to re-characterise same as a loan.76

According to Wood,77 “The English objectives are: (1) predictability, and (2) a desire to free

transactions from the historical baggage restricting security interests.” Thus in English law,

certainty is esteemed as the hallmark of all contractual transactions and hence ensures that the

Courts enforce nothing else but what the parties had expressed in their written agreement.

This however should not be interpreted to mean that the English Courts will uphold a sham

transaction since there are authorities that are pointed on the principle that in the face of the form

of a transaction being a sham, the Courts will uphold the substance of such rather than its form.

Thus in the Nigerian case of Mohammadu Jajira v. Nothern Brewery78 the Court held that it is

73 (1938) 3 All E.R. 275 74 (1992) BCC 270, CA 75 (2004) All E.R. (D) 10; (2004) EWHC 1938 76 Mahonia Ltd v. JP Morgan Chase Bank (supra) 77 Op.cit. page 159, paragraph 8-006 78 (1972) NCLR 313 at 329

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the substantive transaction that will be considered as opposed to the form of the documents that

expresses the transaction. This intervention of equity to emphasize substance over form is

essentially to guard against situations where, to insist on form will defeat the substance of the

transaction. This principle was aptly described by Romilly, M.R. in Parkin v. Thorold79:

“Courts of equity made a distinction in all cases between that which is a matter

of substance an that which is a matter of form; and it finds, that by insisting on the

form, the substance will be defeated, it holds it to e inequitable to allow a person to

insist on such form, and thereby defeat the substance.”

It must however be similarly noted that the courts law will only uphold the substance of a

transaction rather than the form in which it is expressed only on the basis of the intention of the

parties as expressed. Thus, according to Winn LJ in Kingsley v. Sterling Industrial Securities

Limited80 in the application of the principle of ‘substance over form’ in a financing transaction,

his Lordship held that:

“In my definite view the sole or entirely dominant question …is whether in

reality and upon the true analysis of the transaction and each of them, and having

regard in particular to the intention of the parties, they constituted loan or sales

… it is equally clear that each case must be determined according to the proper

inference to be drawn from the facts and whatever the form of transactions may

take the court will decide according to its real substance.”

79 (1852) 16 Beav. 59 80 (1967) 2 Q.B. 747 at 780

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The clear irony in this judicial attitude is in the fact that, the intentions of parties can only be

expressed in the form of the contract that binds the parties themselves. Thus, the Courts will not

form intentions for the parties but will rather glean their intentions from the words used in their

contract. The courts are loathe, save in limited instances, to abandon the express agreement of

parties in order to search for their abstract intentions or the meaning of their contract. In

McEntire v. Crossley Brothers Ltd.81, Lord Watson held:

“… the duty of the Court is to examine every part of the agreement, every

stipulation which it contains, and to consider their mutual bearing upon each

other; but it is entirely beyond the function of a court to discard the plain meaning

of any term in the agreement unless there can be found within its four corners

other language and other stipulations which necessarily deprive such term of its

primary significance.”

This principle finds expression under Nigerian law by virtue of Section 132 of the Evidence

Act82 which generally and for this purpose provides that the only evidence of a contract that has

been reduced into writing is the written contract itself and that the contents of such written

contract cannot be “contradicted, altered, added to or varied by oral evidence…”83 The proviso to

the section has however provided instances where not only can the Courts look outside the

parties written contract to discover their true intentions, but such instances where the written

contract of the parties may however not convey their intentions. These are:

81 (1895) AC 457 at 467 82 Evidence Act, 1945 (as amended and now compiled as Cap. E14, Laws of the Federation of Nigeria, 2004) 83 See also Union Bank of Nigeria Plc v. Sax (1994) 8 NWLR (pt. 361) 150

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1. Such vitiating elements as: fraud; intimidation; illegality; lack of due execution,

wrong dating; the non-existence, lack or failure of consideration; mistake in fact or

law; lack of capacity e.t.c. can be used to defeat the form of the contract;

2. Separate oral agreements on which the written contract is silent but which is not

inconsistent with the terms of such written contract can be used to further establish

the intention of the parties; provided that the court can infer that the parties did not

intend the document to be a complete and final statement of the entire transaction.

3. The existence of any separate oral agreement that constitutes a condition precedent to

the accrual of an obligation under the written contract can be used to further establish

the intention of the parties.

4. The existence of any “distinct subsequent oral agreement” to rescind or modify the

contract, subject however to the provision of the contract on the manner of rescission

or modification, may be used to prove the continuing existence or non-existence of

the contract as originally written.

5. The existence of any usage or custom, although not expressly mentioned in the

particular contract, but which are usually annexed to contracts of such description can

be used in establishing the intention of the parties; provided that the annexure of such

usage or custom would not be repugnant to or inconsistent with the express terms of

the contract.

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In the English case of Gisborne v. Burton84, the court held that in finding the intention of the

parties, it will look into both the entire scheme of pre-ordained series of transactions in the stead

of only considering each pre-ordained step; and all the documents involved in the transaction.

Using this test, the court came to the conclusion that the entire series of transactions constituted a

composite that was intended to avoid a mandatory statutory provision. In Kaydee Ventures Ltd.

v. Honourable Minister of Federal Capital Territory85, the Nigerian Supreme Court held that:

“it is a well established rule that no evidence of custom or practice can override the terms of a

written contract, though a contract may be subject to terms that are implied by custom or trade

usage…. Leyland (Nig.) Ltd v. Dizengoff (1990) 2 NWLR (pt. 134) pg . 610; British Crane Hire

Corporation v. Ipswich Plant Hire Ltd. (1975) Q.B. 303” at 142 – 143, lines 45 – 5.”

In McNiven v.Westmoreland,86 Lord Hoffman held that it is right to give effect to the economic

connotation of a term where from the preponderance of facts, it is established that the term was

intended to be used as a commercial concept rather than a legal one. In Investors

Compensation Scheme v. West Bromwich Building Society,87 this functional approach to

interpretation was seen by the House of Lords in the light of a broad purposive approach to the

general construction of statutes and documents as opposed to a strict formalistic approach which

might undertake a step by step examination of what eventually is a complex and composite

transaction.

84 (1988) 3 All E.R. 760; (1989) Q.B. 390 85 (2010) 1 CLRN 108 86 (2003) AC 311 87 (1998) 1 All ER 98; (1998) 1 WLR 896

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In the House of Lord Decision in National Westminster Bank Plc v. Spectrum Plus Ltd88

which overruled the earlier English law position established in Siebe Gorman & Co. Ltd v.

Barclays Bank Ltd89, the House of Lords held a charge over book debts which was

contractually expressed as “[a] specific charge [of] all book debts and other debts…” but which

gave the chargor company the right to collect the book debts, pay them into a current account

with the chargee bank and draw on the current account in the course of business without first

seeking or obtaining the consent of the chargee bank, to be a floating charge and not a fixed

charge. In its unanimous decision, the House of Lords emphasized the need for courts to look at

the commercial realities of each situation as the “wish to achieve legal certainty by use of a

standard precedent cannot override the need to construe any document in its commercial

context.”90 According to Lord Scott of Foscote: “…the debenture, although expressed to grant

the bank a fixed charge over Spectrum’s book debts, in law granted only a floating charge.”91

The decisions discussed above notwithstanding, the courts may still be swayed to favourably

consider the terminologies employed in any particular contract. Thus where loan terminologies

were adopted as opposed to sales terminologies, the transaction will be classified as a loan in the

stead of a true sale. In Major’s Furniture Inc. v. Castle Credit Corporation92 the United

States Court of Appeals, Third Circuit was saddled with the question of ‘when is a sale not a sale

but rather a secured loan’ both in light of Article 9 of the US Uniform Commercial Code as

enacted in Pennsylvania and in light of the Agreement of the parties which expressly referred to

‘sales’ and ‘purchases’. The Court in coming to its decision adopted such reasoning in cases such

88 (2005) 2 (part 5) Lloyds Law Reports 275 (HL); (2005) UKHL 41 89 (1979) 2 Lloyd’s Report 142 90 Per Lord Walker of Gestingthorpe at page 308, paragraph 159 91 At page 301, paragraph 120 92 602 F 2d 538 (3rd Cir 1979)

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as Kelter , Tr. v. American Bankers’ Finance Co.93 where the Court held that: “Courts will not

be controlled by the nomenclature the parties apply to the relationship”94. In effect the Court

considered the nature of the transaction between the parties to hold that what operated between

the parties was a security interest transaction of a debtor and creditor and not that of a true sale of

receivables as the Defendant had sought to claim. In highlighting the specific feature of total

transfer of risks which was absent from the parties’ transaction, the Court held:

“In the instant case, the allocation of risks heavily favours Major’s claim

to be considered as an assignor with an interest in the collectibility of its

accounts. It appears that Castle required Major’s to retain all conceivable risks

of uncollectibility of these accounts. It required warranties that retail account

debtors e.g., Major’s customers meet the criteria set forth by Castle, that Major’s

perform the credit check to verify that these criteria were satisfied, and that

Major’s warrant that the accounts were fully enforceable legally and were “fully

and timely collectible.” It also imposed an obligation to indemnify Castle out of a

reserve account for losses resulting from a customer’s failure to pay, or for any

breach of warranty, and an obligation to repurchase any account after the

customer was in default for more than 60days. Castle only assumed the risk that

the assignor itself would be unable to fulfill its obligations. Guaranties of quality

alone, or even guarantee of collectibility alone, might be consistent with a true

93 306 Pa. 483, 492, 160 A. 127, 130, 82 A.L.R. 999 94 See also Smith-Faris Co. v. Jameson Memorial Hospital Association, 313 Pa. 254, 260, 169 A. 233, 235 where the Court held: “Neither the form of a contract nor the name given it by the parties controls its interpretation. In determining the real character of a contract, courts will always look to its purpose, rather than to the name given it by the parties … The proper construction of a contract is not dependent upon any name given it by the parties, or upon any one provision, but upon the entire body of the contract and its legal effect as a whole…” In Re Joseph Kanner Hat Co., Inc., 482 F.2d 937, 940 (2d Cir. 1973) it was held: “(Courts) will determine the true nature of a security transaction, and will not be prevented from exercising their function of judicial review by the form of words the parties may have chosen.”

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sale , but Castle attempted to shift all risk to Major’s, and incur none of the risks

or obligations of ownership. It strains credulity to believe that this is the type of

situation referred to in Comment 4, in which “there may be a true sale of

accounts…although recourse exists.” When we turn to the conduct of the parties

to seek support for this contention, we find instead that Castle, in fact, treated

these transactions as a transfer of a security interest.”

Confirming present legal realities, Article 9 of the U.S. Uniform Commercial Code had

identified re-characterisation as a risk in secured credit transactions. The effect of the provision

is to regard a transaction as a security interest if it has the effect of such, regardless of the form

of the transaction; this underscores David Allan’s95 view that “…anything that performs the

function of security must be a security”. Thus and as obtainable in securitizations, a true sale will

not be deemed to have been effected where the transferor had not wholly transferred the risks

and rewards of the sold assets such that the true sale would have been defeated where the

purchaser has recourse to the seller for its losses. The other tests which have been applied, and

which have proved unpredictable and vague, in determining the true character of what as been

represented as a true sale transaction include the existence or not of terms that demand that:

1. the Purchaser pay any surplus profit to the Originator;

2. the Originator has the right to repurchase the receivables;

3. the management and the administration of the assets be conducted by the

Originator;

4. the Originator hold the title documents to the assets; or

95 David Allan: ‘Security: Some Mysteries, Myths and Monstrosities”’(1989) Monash University Law Review, page 135

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5. the price of the sale be retroactively adjusted to reflect expected losses as opposed

to actual losses.

In summary, it is to be reasoned that in light of the legal challenges that a typical structured

finance transaction may be saddled with, it is only right that both the legal documentation and

the nature of rights and obligations created therein be, in the absence of codified laws, checked

along the lines of established principles and decisions. Terminologies or nomenclatures should

be carefully used or at best where parties are unsure, avoid their use; a lucid description of

contractual rights and obligations may be sufficient.

C. Subsidiarisation

To achieve one of the basic aims of a structured finance transaction, to wit, the bankruptcy

remoteness of the finance vehicle to the originator, it is important that the finance vehicle,

otherwise known as Special Purpose Vehicle (SPV) be structured in such manner as not to

constitute a subsidiary of the originator. In this regard the basic corporate rules on

subsidiarization should be taken cognisance and account of. In some jurisdictions,

subsidiarisation will pose a transaction risk if the originator and its subsidiaries will, in the case

of the bankruptcy of any of the other, be deemed to be as belonging to a group of companies and

as such, whatever happens to the one will have a direct result on the other. Indeed, this is one of

such instances where the laws will refuse to recognize the separate personality of each of the

companies.

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Particularly, and as it is obtainable in some jurisdictions, there may be special rules for the

consolidation of certain affiliated companies even those in which the originator does not posses

the majority shares of. Thus and as it is obtainable under British company law rules, a right by a

company to exercise a dominant influence over the affairs of the SPV will be sufficient in certain

instances for the SPV to be considered a subsidiary of the company. This is regardless of the fact

that the SPV does not have shares in the SPV since in the circumstance such dominant influence

will constitute a sufficient participating interest that is required for the SPV to qualify as a

subsidiary of the originator.

This point appears to have been underscored by Pratap G. Subramanyam96 whilst commenting

generally on the aspects of corporate structuring through either divisionalisation or

subsidiarisation that in such instances where a new business (in this case, the SPV) is not

intended to synergize with an existing company ( in this case, the originator) or where the new

business is anticipated to be financed by equity or debt unrelated to the parent’s, then it would be

unadvisable to allow for either a divisionalisation or subsidiarisation. According to

Subramanyam: “Such business can be kept distinct from the existing business of the parent by

allowing the shareholding pattern to be structured accordingly … such new group companies can

have their growth structured according to their needs and can remain independent of the parent

company. They can raise finance periodically on their own strength or of the promoters and they

can also be taken public at the appropriate time based on relevant considerations”97

96 Pratap G Subramanyam: Investment Banking – An Odyssey in High Finance (Tata McGraw-Hill Publishing Co. Ltd: New Delhi: 2005) pages 561 - 563 97 Ibid. at 563

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For Woods,98 a securitisation transaction must be ‘bankruptcy remote’ from the originator: the

SPV that is utilized must not be at the risk of consolidation, fusion or merger with the originator

such that its assets and liabilities are not merged with those of the originator. Where such

happens, the veil of incorporation of the SPV is pierced and the funding lenders would have to

enforce their security prematurely on the insolvency of the originator and thus subject the SPV to

the bankruptcy situation of the originator. Suffice to note that at common law, the veil of

incorporation may be pierced to discover and establish the legal realities of a given situation, for

example, to establish that one company is a trustee for the other in relation to some specific

property.99

The general effect of such piercing is to negate the concept of the separate legal personalities of

the affected companies and in this instant ensure a consolidation of the originator and SPV with

the far reaching effect of the bond issue of the SPV being treated as a borrowing by the

originator. The accounting effects of this include increase in the originator’s gearing ratio,

increase in debt service and a worsening of the earnings cover of interest.100 However Woods

opines that “bankruptcy consolidation is rare and tends to happen only if there is extreme

commingling ignoring separate legal identities or if the SPV is just an agent of the originator

managing the property of the originator so that it is not totally remote…”101 Thus, he advises

that the documents of the SPV and their implementation must ensure separateness of the SPV;

for example, avoiding commingling, providing for separate officers and records, the observance

of corporate formalities, disclosure in financial statements e.t.c.

98 Philip R. Woods: ibid page 159, paragraph 8-007 99 See DHN Food Distributors Ltd v. London Borough of Tower Hamlets (1976) 3 All E.R. 462 100 Ibid page 161, paragraph 8-010 101 Ibid page 159, paragraph 8-007

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The rules on subsidiarisation in Nigerian law are captured by Section 338 of the Companies and

Allied Matters Act, 1990102 (CAMA) and which section defines a subsidiary company as one

which:

a. another company (defined as the holding company)103 is a shareholder of and the

holding company:

i. controls the composition of the subsidiary’s board of directors; or

ii. holds more than half of the subsidiary’s nominal equity share capital

b. is a subsidiary of the holding company’s subsidiary104

According to Orojo, the composition of a board of directors of a company is controlled by a

holding company if by the exercise of some power exercisable by it, the holding company,

without the consent or concurrence of any other person, can appoint or remove all or a majority

of the directors of the subsidiary. He adds further that, the holding company is deemed to have

power to appoint the directors of the subsidiary if:

a. the subsidiary’s director cannot be appointed unless the holding company exercises

its power in favour of such director; or

b. the director’s appointment follows from his being a director of the holding company;

or

c. the holding company or any of its other subsidiaries holds the directorship the

particular subsidiary company

102 Compiled as Cap. C20, Laws of the Federation of Nigeria, 2004 (CAMA) 103 Section 338(5) 104 See generally Section 338(1)(a) & (b)

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CAMA equally provides for the situation of a wholly-owned subsidiary which it defines as a

situation where the subsidiary has no other shareholders save for the holding company or the

holding company’s wholly-owned subsidiaries and its or their nominees.105

The legal incidence of all of these is to establish the holding company and its subsidiaries

(whether wholly-owned or not) as a group of companies, whether so called or not, and for

accounting purposes, a group financial statement shall be required from the holding company.

By the joint effect of the provisions of Section 336(1) and (2) of CAMA, at the end of every

financial year, the directors of a holding company106 must as well as preparing individual

accounts for that year, also prepare group financial statements, being accounts or statements

which deal with the state of affairs and profit or loss of the holding company and its subsidiaries.

This group financial statement which must, together with any notes to them, give a true and fair

view of the state of affairs and the profit or loss of all the companies may be wholly or partly

incorporated in the balance sheet and the profit and loss account of the holding company. Section

334(5) of CAMA enjoins the directors of the holding company to, except where in their opinion

there good reasons against it, ensure that the financial year of each of the company’s subsidiaries

coincide with the financial year of the holding company.

105 See Section 338(5)(b) CAMA 106 Which by itself is not a wholly-owned subsidiary of another Nigerian company

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CHAPTER 4

ATTEMPTS, CHALLENGES AND PROSPECTS OF INSTTUTIONALIZING STRUCTURED FINANCE IN NIGERIA

A. Introduction

Across jurisdictions, structured finance has proven to be that commercial beast that defies

taming. Indeed, the dynamism of its application and the varied novelty that characterizes the

transaction types that comes under its broad heading has ensured that it is always a step ahead of

the law. Owing its provenance to the innovativeness of investment bankers and other financial

experts that have little or no background in the in the strict quarters of the law, the lawyers and

the judges can only hope that the legislature are responsive and quick enough to rein in the

boundless adventures of these investment bankers into the easily identifiable perimeters of

codified laws. But this has more often not been the case; commerce evolves much faster than

codified laws can catch up with.

Even at that, this aspect of this work attempts to examine the extents that codified Nigerian laws

have been able to identify and regulate varied aspects of structured finance. It highlights both

existing and proposed laws and examines their various provisions and their bid to regulate the

aspects of structured finance most of them have unwittingly provided for.

First an examination is taken of the Central Bank of Nigeria (Establishment) Act, 2007 and the

Banks and Other Financial Institutions Act, 1991 (as amended) in light of their attempts at

providing for both the powers of the Central Bank of Nigeria in commissioning structured

finance transactions and the limited provision on the powers of banks to undertake transactions

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akin to structured finance. Next, a synopsis of the Investments and Securities Act, 2007’s

recognition of derivatives is provided. A comprehensive review is taken next on the Asset

Management Corporation of Nigeria Act, 2010 which exists as Nigeria’s most expressive law on

the utilization of structured finance type transactions to liquidating the debt portfolios of

Nigerian Banks. A comparative review is eventually take of the proposed Nigerian Securitisation

Bill and the Indian Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002.

B. The Central Bank of Nigeria (Establishment) Act, 2007 & The Banks and

other Financial Institutions Act, 1991 (as amended): A Critique

Although the Central Bank of Nigeria is without express power to engage in or supervise credit

refinancing and/or the hedging of credit risks, the sum of its broad powers and the functions of

its various operative arms logically suggests the indispensability of the Central Bank of Nigeria

(CBN) in the regulation of structured finance transactions by financial institutions in Nigeria.

Established pursuant to the Central Bank of Nigeria (Establishment) Act, 2007 No. 63 (the “CBN

Act”), the CBN is with the objective of promoting stability and continuity in economic

management107 and a sound financial system in Nigeria as well as ensuring monetary and price

stability,108 amongst others.

Section 12 of the CBN Act established a Committee of the Bank known as the Monetary Policy

Committee (MPC) to facilitate the attainment of the objective of price stability and to support the

economic policy of the Federal Government of Nigeria. Within the CBN, MPC has the 107 Section 1(3) Central Bank of Nigeria (Establishment) Act, 2007 No. 63 (compiled as Cap. C4, Laws of the Federation of Nigeria, 2004 (updated to May 2007)) (hereinafter “CBN Act”) 108 Section 2(d) CBN Act

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responsibility for formulating monetary and credit policy. On the other hand, Section 43

established the Financial Services Regulation Coordinating Committee for the purpose of

coordinating the supervision of financial institutions, and whose objectives, amongst others,

include, to articulate the strategies for the promotion of safe, sound and efficient practices by

financial intermediaries.

Worthy of note, particularly as it rates to the power of the CBN to undertake securitization

transactions is the power of the CBN to grant temporary advances to the Federal Government in

respect of temporary deficiencies in budget revenue. All such advances are required to be paid

back to the CBN in such form as the CBN may determine provided that such repayment cannot

be by securitization by way of the issuance of treasury bills, bonds, certificates or other forms of

security which is required to be underwritten by the CBN.109 It may be safely assumed from the

import of this provision that the CBN may refinance advances made to the Federal Government

by way of securitization provided that the CBN is not required to underwrite such securitization

transaction. Note that by the proviso to Section 34(d) of the CBN Act, where the CBN considers

any debts due to it to be endangered, it may secure such debt on any real or other property of the

debtor and may acquire such property which shall be re-sold at the earliest suitable time.

The Bank and other Financial Institutions Act 1991, No. 25 (as amended) (”BOFIA” or “the

Act”) as the primary law that regulates banks and other financial institutions in the Federal

Republic of Nigeria provides in general terms, the sort of business that banks can undertake.

What the Act classifies as “banking business” is defined as “the business of receiving deposits

on current account, savings account or other similar account, paying or collecting cheques, 109 See generally Section 38(3)(b) of the CBN Act.

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drawn by or paid in by customers; provision of finance or such other business as the Governor

may, by order published in the Federal Gazette, designate as banking business;”110

The Act further defines “other financial institutions” and the business they can undertake thus:

““other financial institution” means any individual, body, association or group of persons,

whether corporate or unincorporated, other than the banks licensed under this Act which carries

on the business of a discount house, finance company and money brokerage and whose principal

objects include factoring, project financing, equipment leasing, debt administration, fund

management, private ledger services, investment management, local purchases, order financing,

export finance, project consultancy, financial consultancy, pension fund management and such

other business as the Bank may, from time to time, designate;”

The aggregate of the foregoing provisions, and in the view of this discussant, is to the effect that,

while Banks, in the absence of any order by the CBN Governor authorizing them to engage in

structured finance transactions, may undertake such under the wide function of “provision of

finance”, other financial institutions that are duly authorized in that regard may initiate structured

finance type transactions under the relatively limitless categories of “finance company”, “debt

administration” e.t.c. Such institutions that today operate as Investments Banks in the American

financial industry will readily qualify as “other financial institutions” in the Nigerian clime.

It is worth noting that in 2002, the Central Bank of Nigeria had issued the “Guidelines for the

Practice of Universal Banking in Nigeria” (UB Guidelines) which introduced the universal

110 See Section 66 of BOFIA; Guardian Express Bank Plc v. Odukwu (2009) 14 N.W.L.R. (pt. 1160) 43, 67, paragraphs B – C.

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banking regime in Nigeria. Essentially, the UB Guidelines had expanded the range of financial

activities that Banks may engage in to include amongst others, capital market activities. Under

the regime, all that was required for the Banks to engage in a spectrum of banking and non-

banking businesses was to obtain a Universal Banking Licence from the CBN. However, and as

recently announced by the CBN,111 Nigerian Banks will no longer be able to undertake universal

banking as with effect from on or about February 4, 2011.

According to the CBN, as part of its blueprint for reforming the Nigerian financial system, it is

set to implement “strategic imperatives to prevent a re-occurrence of the past events in the

Nigerian banking industry.” The CBN now “intends to fully comply with the statutory

provisions in the BOFIA” to such extent that the types of businesses which will now be licensed

are broadly, commercial banking, merchant banking and specialized banking. Specifically, banks

will now be prohibited from undertaking non-banking business.

The import of the above directive on financial institutions to undertake structured finance

transactions is obviously non-existent. In reality, the CBN continues to remain silent, or rather

chooses to ignore the possibilities of financial institutions undertaking structured finance

transactions in Nigeria. What this fact underscores is the relative novelty of the utilization of

structured finance type transactions to provide the finance needs of corporate concerns in

Nigeria. At best, the transactions that have hitherto been consummated have largely been

unregulated by any codified law and have been left to the mercy of the application of common

law and principles of equity in the event of any dispute. 111 See CBN Circular No. BSD/DIR/GEN/UBM/03/025, dated September 7, 2010. Electronic copy available at http://www.cenbank.org/OUT/2010/CIRCULARS/BSD/CIRCULAR%20ON%20THE%20REVIEW%20OF%20THE%20UNIVERSAL%20BANKING%20MODEL.PDF as at October 2, 2010

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C. The Investments and Securities Act 2007: Highlighting the Limited

Provisions

The Investments and Securities Act, 2007 No. 29 establishes the Nigerian Securities and

Exchange Commission (SEC) as the apex regulatory authority for the Nigerian capital market.

The Act through the instrumentality of SEC regulates the capital market with the aim of ensuring

investors’ protection, maintaining a fair, efficient and transparent market and reducing systemic

risks.112

While SEC generally regulates investments and securities business in Nigeria, it is primarily

concerned with the securities and all offers of securities by public companies.113 The ISA defines

“securities” to mean debentures, stocks or bonds proposed to be issued by a government;

debentures, stocks, shares or bonds issued or proposed to be issued by a body

corporate; any right or option in respect o any of such debentures, stocks, shares, bonds

or notes; or commodities futures, contract, options and other derivatives.114 This

definition carefully excluded such instruments as bills of exchange, promissory notes or

certificates deposited by a bank with tenure of nine months or more; note that these

instruments were included in the definition provided by the preceding Act.115The

inclusion of promissory notes and bill of exchange had been critized as they are

112 See the Long Title to the Investments and Securities Act, 2007 No. 29 (“ISA”) 113 Section 13(c) & (d), ISA 114 §.315 115 §.246 of the Investment And Securities Act 1999

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practically money market instrument not securities market instrument as postulated by

the Act.116

Save for the mention of ‘derivatives’ and ‘derivative exchanges’ in Section 13(b) and the

definition Section 315 respectively, the ISA is relatively silent on any of the registers of

structured finance. This notwithstanding , it is submitted by this discussant that the wide powers

given SEC to register and regulate securities exchanges, capital trade points, futures, options,

derivative exchanges, commodity exchanges and any other recognized investment exchange in

Nigeria is sufficient to conclude that where any public company in Nigeria is to employ any

structured finance type transaction that will involve the issue of securities, whether debt, equity

or hybrid of both, such securities will require registration with SEC. The apposite Section 54 of

the ISA provides that:

“All securities of a public company and all securities of a collective

investment scheme shall be registered with the Commission under the terms and

conditions herein contained and as may be supplemented by regulations prescribed by

the commission from time to time”

A failure to comply with this provision constitutes a criminal offence.117

A corporate law issue that invariably arises from the provision of Section 54 above, particularly

in a typical securitisation transaction remains, whether in such circumstance where the securities

being issued are those of an SPV that does not offend the rules on subsidiarisation, a public

company who is the originator of the transaction is obliged to comply with Section 54? Although 116 Abugu,E.O. Joseph, “Company Securities: Law And Practice” (2005) University of Lagos Press(Lagos) p.2-3 117 See Section 54(6) and (7)

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an obligation is laid by Section 54(2) on the issuer of the securities, to the extent that the

securities being sold do not belong to the public company but to the SPV and further that the

public company does not occupy the role of the issuer, it may be rightly argued that an originator

public company owes no obligation to SEC under Section 54 of the ISA. However and by the

strict provisions of Section 67 of the ISA, the SPV that is not set up as a public company cannot

issue its securities to the public; such that where the securities of the SPV are intended to be

publicly traded, it will be best that the transaction is packaged as that of the public company. But

of this approach only defeats the “off-balance sheet” purpose of the securitisation transaction

The reality of the inadequacy of the provisions of the ISA for a specialized transaction as

securitisation can only now stare us in the face and no cry can be too loud for a specialized

legislation on securitisation.

D. The Asset Management Corporation of Nigeria Act, 2010: A Review

i. General Statement of Nature and Purpose of the Act

The Asset Management Corporation of Nigeria Act 2010 (referred to for this purpose as “the

AMCON Act”) established the Asset Management Corporation of Nigeria (“AMCON” or “the

Corporation”) for the purpose of efficiently resolving the non-performing loan assets of banks in

Nigeria and for related purposes.118 The Corporation is established to operate for a defined

period of ten years and will be funded through the sale of 10year bonds to be guaranteed by the

Federal Ministry of Finance.119 While it is expected to start with a take-off grant of N20billion

minimum to be funded by both Federal Ministry of Finance and the Central Bank of Nigeria

118 See the Long Title to the Act 119 See Punch Newspaper: “AMCON: Nigerian stocks gain most worldwide” Monday, May 10, 2010, page 20

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(CBN), which will invest N250billion and N450billion respectively,120 by law, its authorized

capital is set at N10billion which sum is to be subscribed to by the Central Bank of Nigeria and

the Ministry of Finance in equal proportion.121

The Fund established for the Corporation under Section 20 of the Act is to have chargeable to it

all payments that are incidental to its running and functions; apparently this is to ensure that the

working capital of the Corporation is not diluted with moneys realized in the execution of its

functions. Importantly, the profits of the Corporation have been exempted from the provisions of

the Companies Income Tax Act while the Corporation will also not be subject to the Stamp

Duties Act.

Summarily, it may be safely concluded that the primary functions of the Corporation are: to

acquire eligible assets of licensed banks in Nigeria and to issue debt securities in order to finance

their acquisition. Indeed this amounts to credit financing even as Section 6(e) (ii) of the Act

empowers the Corporation to securitize or refinance such eligible assets in the bid to realize their

value. We shall however take a detailed look at each aspect of this conclusion in the headings

hereunder

ii. Objects, Powers and Functions of the Corporation

The objects of the Corporation as set by the Act are to:

a. assist banks to efficiently manage and dispose of eligible assets whether acquired by

the Corporation or not; 120 See Businessday Newspaper: “Analysts want proper pricing of Toxic Assets by AMC” front page Frday 04 – Sunday , June 06, 2010, 121 See Section 2(1) of the Bill

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b. obtain the best achievable financial returns on eligible bank assets or other assets

acquired by it, having regard to –

i. the need to protect or otherwise enhance the long-term economic value of the

assets;

ii. the cost of acquiring and dealing with the assets;

iii. the Corporation’s cost of capital as well as other costs;

iv. guidelines or directions issued by the Central Bank of Nigeria in pursuance of

the provisions of the Act; and

v. other factors which the Corporation considers relevant for the achievement of

its objects generally.122

The powers of the Corporation are listed as including123 the power to:

a. acquire the eligible assets of banks;

b. hold, manage, realize and dispose off such assets124;

c. issue bonds or other debt instruments as consideration for the acquisition of eligible

bank assets;

d. pay coupons and redeem at maturity, bonds and debt securities issued by it for the

purposes of financing the acquisition of bank assets;

122 See generally, Section 5 of the Bill. 123 These powers can be exercised by the Board:

o within or outside Nigeria; o alone or in conjunction with others; and o by or through an agent, its wholly-owned subsidiary, contractor, factor or trustee o without the consent or approval of any other person or authority “notwithstanding sanything

contrary contained in any other enactment” 124 This will include the collection principal and capital items due, interests and the enforcement of security interests

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e. maintain a portfolio of diverse assets including equities, fixed income bonds and real

estates;

f. provide equity capital on such terms and conditions as the Corporation may deem fit;

g. borrow or raise money whether in the naira currency or not, with or without the

guarantee of the Central Bank of Nigeria or secure the payment of money in any

manner, including issuing debentures, debenture stocks, bonds, obligations and debt

securities of any kind; and charge and secure any instrument so issued by trust deed

or otherwise on the undertaking of the Corporation or on any particular property and

rights, present or future, of the Corporation or in any other manner;

h. initiate or participate in any enforcement, restructuring, reorganization, programme

or arrangement or other compromise;

i. enter into contract options and trade in other financial instruments of such investment

grade and for such purposes as may be approved from time to time by the Governor

in consultation with the Minister;

j. guarantee, with or without security, the indebtedness and performance of obligations

of other entities inclusive of special purpose vehicles; provided that the Corporation

receives valuable and commensurate consideration for, or direct or indirect

advantage from, the giving of the guarantee;

k. form or acquire a wholly owned subsidiary or form or acquire an interest in a holding

company for the purpose of performing any of its functions;

l. sell or dispose of the whole or any part of the property or investments of the

Corporation, either together or in portion, for such consideration and on such terms

as its Board may approve;

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m. appoint:

i. asset managers to manage assets as may be specified by its Board, provided

that such asset managers are selected on a competitive basis; and

ii. recovery agents for the purpose of recovering debts due to the Corporation or

debt arising from acquisition of eligible assets as may be specified by its

Board; provided that such recovery agents are selected on a competitive basis.

n. take all necessary steps to protect, enhance or realize the value of acquired assets and

which steps may include, the:

i. disposal of eligible assets in the market125 at the best achievable price;

ii. securitization or refinancing of the assets;

iii. holding, realizing and disposing of collaterals securing the assets;

o. all such things as its Board considers incidental to or conducive to the attainment of

any of the Corporation’s prescribed functions and or objects.126

From a comparative law perspective, these powers are indeed more expansive than the powers of

a typical asset reconstruction company under the Indian Securitisation and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002. Securitisation or Asset

Reconstruction companies under this Act are required to take any of the following measures in

their asset reconstruction duties, to wit: properly manage the business of the debtor by a change

in or the take over of the management of the debtor’s business; sell or lease a part or the whole of

the debtor’s business; reschedule the payment of the debts or settle the dues payable; or enforce

the security interest or take possession of the secured assets 125 It is worthy of note that the Bill, particularly, Section 6(e)(i) gave no definition to the word “market” as employed. It may be reasoned however that market should mean the Capital Market. 126 See generally the provisions of Sections 6 and 7

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The AMCON Act goes further to provide for special powers of the Corporation, which are listed

as including, the power to:

a. act as or appoint a Receiver127 for a debtor company whose assets serves as security

for an eligible asset acquired by the Corporation;

b. apply to Court via ex-parte applications for orders:

i. for the possession of the movable or immovable properties of debtors;

ii. freezing a debtor’s account with any licensed bank in Nigeria;

such orders which shall only last for a duration of 14days is to enable the

Corporation commence a proper debt recovery action against the debtor;

Where after 1 month128 or 3 months129 since a court decision to the effect that payment of a sum

certain be made to the Corporation and such payment is not so made, the Corporation may

approach the Court for a Receiving Order against the debtor. In the case of a debtor who is a

natural person, such Receiving Order shall operate within the intendments of a bankruptcy

proceeding made under the Bankruptcy Act, such that the debtor can by such proceeding be

adjudged Bankrupt and have attached to him the consequences of such declaration, to wit, the

appointment of an Official Receiver or Trustee over his or her affairs. Similar consequences will

also apply to a body corporate against whom the Corporation applies for a Receiving Order as

same will be deemed a Winding-up Order brought under the Companies and Allied Matters Act

and the Court will consequently appoint a Liquidator over the affairs of the debtor company.

127 Under the Act, a Receiver is empowered to realize the assets, manage the affairs and enforce the individual liability of the shareholders and directors of the debtor company. See Section 47(2) of the Bill on this. 128 In the case of a debtor or debtor company 129 In the case of a corporate debtor

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Note that in all of these instances the Corporation can be appointed as Trustee or Liquidator as

the circumstances of the defaulting debtor may permit.130

iii. Acquisition of Eligible Bank Assets

By the term “eligible bank assets” is meant, the assets of banks specified by the Governor of the

Central Bank of Nigeria through relevant Guidelines as being eligible for acquisition by the

Corporation.131 The Corporation is expected to, within 3 months of a bank asset becoming

eligible, purchase same from such bank at a value or price to be determined in accordance with

guidelines issued from time to time by the Central Bank of Nigeria.132

A bank that is desirous of disposing its assets to the Corporation can apply to the Corporation for

such purpose, providing the Corporation with the requisite information, warranties,

representations, indemnities, credit facility documentations, books and records that will either

affect the Corporation’s decision to acquire the asset and determine the value to be placed on

such asset. Since such a bank is statutorily required to act in good faith, the Corporation may

proceed against it in an action for indemnity where the Corporation suffers a liability or loss as a

result of relying on any information or misinformation provided or not provided by the bank as

the case may be.133

Suffice to note that the Corporation is not bound to acquire an eligible asset if in the opinion of

its Board or the Governor of the Central Bank of Nigeria it is not desirable to do so. However,

130 See generally, Sections 50 and 51 of the Bill. 131 See generally, Sections 25 and 61 of the Bill. 132 See Section 26(1) and 29 of the Bill 133 See generally Sections 41 and 43(a) of the Bill

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the importance of the functions of the Corporation in acquiring these assets from banks can be

underscored by this informed remark: “In an atmosphere of distress and illiquidity, the tendency

is always high for affected banks to dispose precious or valuable assets at their forced sales

value to enhance cash inflows to abate illiquidity”134 Indeed upon its creation, the Corporation

will be able to acquire both performing and nonperforming loans at either their book value or at a

fair value as opposed to a forced sale value.

The Act further provides that such assets shall upon being acquired become vested in the

Corporation which shall exercise all the rights, powers and obligations135 of the bank from which

the assets were purchased from. The Bill specifically provides that “the debtor concerned and

any guarantor, surety or any receiver, liquidator, examiner or any person concerned and the

Eligible Financial Institution shall cease to have those rights and obligations: Provided that the

Corporation may direct an Eligible Financial Institution to exercise any such right of set-off or

combination of accounts and to account to the Corporation for that exercise.” In such instance,

any money received by the bank shall not form part of its assets but that of the Corporation as all

rights exercised y the bank following the disposal of an eligible asset to the Corporation shall be

exercised to the benefit of the Corporation.136

The rights of the Corporation also extends to all rights of set-off, enforcement of security

interest, guarantee, claims in court, debt restructuring and all ancillary rights that are incidental

134 See Businessday Newspaper:“Analysts want proper pricing of toxic assets by AMC”, front page, Friday 04 – Sunday 06 June 2010 135 Please not however that the Corporation under Section 42 shall not be held liable in breach of contract, duty, trust or other legal or equitable wrong committed by a bank as the rights of an aggrieved person can be enforced by an action against the bank and not the Corporation. 136 See generally Sections 35 and 36 of the Bill

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to the asset. Where the asset is secured by a second or subsequent pledge or charge then the

Corporation may regardless of whether there exists a vesting order, redeem or discharge any of

the prior charges in accordance with their terms.137

On the common law requirement of notification of a debtor whose debt is to be assigned, the Act

only requires a bank to make reasonable efforts to notify a debtor, guarantor or surety of a debt

obligation of an acquisition by the Corporation as soon as possible after such acquisition. This

effectively takes such notification outside the remit of seeking the consent of the debtor before

assignment, but rather it is becomes a post-assignment notice. It is important to note that the

Corporation will not be liable for a failure or delay in such notification and neither will the

failure of a notification invalidate the acquisition of the asset.

After the acquisition by the Corporation, it may freely transfer, assign, sell or otherwise dispose

the asset to any person regardless of any requirement for the consent of, notice to or document

from any person or regardless of any prohibition or restriction to such disposal.138 Any

instrument under the seal of the Corporation that purports to convey any interest in an asset is to

be taken for all purposes as valid and shall without any further assurance operate to extinguish

any existing charge or pledge save for an unredeemed charge or pledge that is prior to the

interest of the Corporation.139 Quite curiously however, the Corporation is not required to

register its interest in any acquired eligible asset or security, even though it is to have the powers

and rights of a registered owner of such security.140 Apparently, this is a conflict with the

137 See Section 39 of the Bill 138 See generally Sections 34 and 38 of the Bill 139 Section 40 of the Bill 140 See Section 44 of the Bill

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existing provisions of Sections 197 and 200 of the Companies and Allied Matters Act,

1990141which requires the registration of charges, albeit by the company creating the charge, but

by the provisions of Section 198 and what is obtainable in practice, usually so registered by the

chargor.

The offences recognized under the AMCON Act and for which penalties are prescribed for,

relate essentially to the assets acquisition functions of the Corporation. These offences include:

a. the making of any false claims in relation to a movable or immovable asset used as

security for a loan with a view to defeating the realization of the underlying debt;

b. a debtor or any body connected to a debt negligently, willfully or recklessly making

or giving a false information about the debt

The punishment for these offences and other offences contained in the Act is a fine of not less

than N5million or imprisonment to a minimum term of 3years or both. Ancillary offences such

as aiding and abetting these offences, or being found guilty of a lesser offence will attract the

same punishment.

In instances where a body corporate is found guilty of these offences, its directors, managers,

officers, employers or partners who are found responsible or otherwise connected with the

commission of the offences will serve the stated punishments while the conviction of the body

corporate will be a ground for the winding up of its affairs.

141 Compiled as Cap. C20, Laws of the Federation of Nigeria, 2004 9CAMA)

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vi. Issuance of Bonds and other Debt Securities

The Corporation is with the power to issue bonds and other debt securities. Such bonds or other

debt securities issued by the Corporation can freely be invested into by the Central Bank of

Nigeria, Pension Fund Administrators and will qualify as an Instrument for the purposes of

Section 29(1) of the Central Bank of Nigeria Act.

These debt securities are to be guaranteed by the Minister whose powers in this regard are not be

circumscribed by the provisions of Section 47 of the Fiscal Responsibility Act, 2007.142

Specifically, the Minister will not require the prior approval of the Federal Executive Council to

make such guarantee. Further such guarantees need not be conditional upon the provision of a

counter-guarantee by any State or Local Government; however a bank whose assets are being

acquired is required to enter into a purchase agreement with the Corporation, a term of which

will be that the bank will indemnify the Corporation for any loss it suffers in the event that a

collateral security provided becomes invalid or otherwise unenforceable.143 Any guarantee

provided may be in excess of the debt limits that are set pursuant to the Fiscal Responsibility

Act.

The redemption or cancellation of debt securities issued by the Corporation may be done from

time to time after consultations with the Minister and the Governor of the Central Bank. Assets

that remain after the redemption of all debt securities and the discharge of all payment

obligations shall on the dissolution of the Corporation be transferred to the Fund created under

142 Please note that by the provisions of Section 59 of the Bill: “Where there is any conflict between the provisions of this Act and the provisions of the Companies and Allied Matters Act, Fiscal Responsibility Act or any other law, the provisions of this law shall prevail.” 143 See Section 33 of the Bill

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Section 20 of the Act and same shall be distributed by the Governor of the Central Bank between

the subscribers to the Corporation’s capital in accordance with their respective stakes in the

Corporation’s authorized capital.144

v. Administration of the Corporation

The general administration of the Corporation is saddled on a 5-man Board of Directors

appointed by the President145 and comprised of:

a. a ‘part-time’ Chairman who is to be a nominee of the Federal Ministry of finance;

b. a Managing Director who shall be the Chief Executive Officer of the Corporation

and who is to be nominated by the Central Bank of Nigeria;

c. 3 other Directors to be nominated by the Federal Ministry of Finance, the Central

Bank of Nigeria and the Nigerian Deposit Insurance Corporation respectively.

The Managing Director who is responsible to the Board has the responsibility for the day to day

management of the affairs of the Corporation. The terms and conditions of his service shall be

determined by the Board, however subject to the Board’s approval.146

The Board shall only be comprised of persons of at least 10years cognate experience at a senior

management level in investment banking and portfolio management and who possesses such

other relevant experience as may be prescribed by the Central Bank of Nigeria. They are

144 See generally Sections 45 and 46 of the Bill 145 See Section 11 of the Bill 146 See generally, Section 18 of the Bill

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appointed for a term of 5years and may only be reappointed for another term of 5years. This

limitation, it is observed, conforms with the lifespan of the Corporation which is set at 10years.

The powers of the Board are typical of the powers of the Board of Directors of companies; but

specifically, the Board has the power to:

a. appoint for the Corporation, a legal practitioner of not less than 10years;

b. appoint such number of persons as staff that the Corporation will require;

Further, to ensure the absence of conflict of interests in the discharge of the Board’s functions,

all members of the Board are mandated to, within one month of their appointment, declare in

writing, their personal debt and pecuniary obligations to eligible banks as well as those of their

family members, or those of their close associates known to them or any company or firm which

they own such significant shareholding as may be prescribed by the Central Bank of Nigeria.

The power to remove any member of the Board is reposed in the President of the Federal

Republic of Nigeria who can exercise same upon the recommendation of the Central Bank of

Nigeria.

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E. The Nigerian Securitisation Bill 2009: A Comparative Review with the Indian

Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002

i. Nature, Scope, Objects & Limitations

At present, what is described in this discourse as the Nigerian Securitisation Bill (“NSB”) is not

yet document within the formal process of the Nigerian legislature, but same may soon be. The

intention of the discussant herein is to review the document now being paraded as the proposed

NSB in light of achievements and challenges recorded by the Indian Securitisation and

Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

(“SRFAESIA”). It is intended that this discussion will serve useful purpose within the context of

legislative discussions on the NSB.

The NSB is described as “a Bill for an Act to provide for the regulatory framework for

securitisation”147 Its drafted 21 sections span such issues as Special Purpose Vehicles (SPVs),

transfer of asset-backed securities and security rights, contractual rights on assignments, Trustees

and Servicers, taxation and accounting issues of securitisation; and offences and penalties under

the Bill.

From a comparative perspective, the NSB, to the extent that assets that may form objects of

securitisation are not limited to receivables from banks or other financial institutions, appears

wider in scope and application than the SRFAESIA, which although according to Pratap G.

147 See long title to the Bill

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Subramanyam148 is popularly known as the Securitisation Act, extensively provides for such

other ancillary matters as general assets reconstruction and enforcement of security interests,

albeit limited to the assets of banks and other financial institutions. The scope of the NSB, which

must be read subject to its Section 4, extends to both assignments and subsequent assignments of

receivables owed by debtors resident in Nigerian at the time of the contract that established the

receivables.

By the provisions of Section 4, apart from saving the existing laws on the rights and obligations

that accrue to parties on negotiable instruments, transactions made for personal, family or

household purposes, the NSB, similar to Article 4 of the United Nations Convention on the

Assignment of Receivables in International Trade,149 is intended not to apply to assignments

made to or arising under or from:

a. an individual for his personal, family or household purposes;

b. transactions on a regulated exchange;

c. financial contracts governed by netting agreements except a receivable owed on the

termination of all outstanding transactions;

d. inter-bank payment systems, agreement or clearance and settlement systems relating

to securities or other financial assets or instruments;

e. transfer of security rights in sale, loan, holding of or agreement to repurchase

securities or other financial assets or instruments held with an intermediary;

f. bank deposits; and

g. letters of credit or independent guarantees 148 See Pratap G Subramanyam: Investment Banking – An Odyssey in High Finance (Tata McGraw-Hill Publishing Co. Ltd: New Delhi: 2005) page 720 149 Resolution 56/81 adopted at the 85th Plenary Meeting of December 12, 2001

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Section 4 of the NSB is similar to Section 31 of the SFRAESIA which provides for the instances

or transactions in which its provisions would not apply. These transactions are:

a. liens on goods, money or security given by or under the Indian Contract Act, 1872;

the Sale of Goods Act, 1930 or any other law for the time being in force;

b. pledges of movables within the meaning of section 172 of the Indian Contract Act,

1872;

c. security in any aircraft as defined in clause (1) of section 2 of the Aircraft Act, 1934;

d. security interest in any vessel as defined in clause (55) of section 3 of the Merchant

Shipping Act, 1958;

e. conditional sales, hire-purchase or lease or any other contract in which no security

interest has been created;

f. rights of unpaid sellers under section 47 of the Sale of Goods Act, 1930;

g. properties not liable to attachment (excluding the properties specifically charged with

the debt recoverable under the SFRAESIA) or sale under the first proviso to sub-

section (1) of Section 60 of the Code of Civil Procedure, 1908;

h. security interest for securing repayment of any financial asset not exceeding one lakh

rupees;

i. security interest created in agricultural land;

j. any case in which the amount due is less than twenty per cent of the principal amount

and interest thereon

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By Section 2, the objects of the NSB as expressly listed can be paraphrased as including: the

regulation of securitization transactions and thus providing certainty and predictability; the

provision of a modern and comprehensive legislative framework for the development of

securitization as a financing technique and investments in intangible financial assets generally; to

ensure that the rules governing securitisation transactions promote the availability of capital and

credit at more affordable rates by diversifying the capital market to enhance its development and

widespread use; and to institutionalize international best practices in the risk management of

securitisation transactions.

On the other hand, the 42 sectioned SRFAESIA which came into force on June 21, 2002 and

which may be regarded as more expansive in its provisions provide for such subject-matters as:

the regulation of securitisation and financial assets reconstruction companies, the mode and

manner of the acquisition of rights and interests in financial assets, raising of funds by the issue

of registered securities, notification of debtors (obligors), disputes resolution by compulsory

conciliation or arbitration, enforcement of security interest, the central registry for the

registration of all securitisation and asset reconstruction transactions, and offences and penalties.

According to Padmanabhan Iyer,150 the twin objectives of debt recovery and the foreclosure of

security aside from providing for the broad legal framework for asset securitisation and

reconstruction appears to be the aim of the SRFAESIA.

150 See Padmanabhan Iyer: ‘India: The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – An Overview of the Provisions”’2003: Electronic copy available at: http://www.mondaq.com/article.asp?articleid=22031 as at August 28, 2010

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ii. Meaning of Key Terms

The NSB defines “securitization” as “the process by which assets are sold on a without recourse

basis by the Originator to a Special Purpose Vehicle (SPV) and the issuance of ABS, which

depend on the cash flow from the assets sold in accordance with the Scheme for their repayment,

the SPV”;151 comparative to the SRFAESIA which definition defines “securitisation” as

“acquisition of financial assets by any securitisation company or reconstruction company from

any originator, whether by raising of funds by such securitisation company or reconstruction

company from qualified institutional buyers by issue of security receipts representing undivided

interest in such financial assets or otherwise”152 The SRFAESIA further defined “asset

reconstruction” as “acquisition by any securitisation company or reconstruction company of any

right or interest of any bank or financial institution in any financial assistance for the purpose of

realization of such financial assistance”153

iii. Operations

The NSB recognized the all-important role of SPVs as the appropriate securitization vehicles and

thus made extensive provisions for their creation, regulation and dissolution. SPVs as used under

the NSB will mean either a Special Purpose Corporation (SPC) or Special Purpose Trust (SPT).

Whilst the SPC is described as a company created in accordance with the Companies and Allied

Matters Act (CAMA) solely for the purpose of securitization and to which an Originator makes a

true and absolute sale of assets, the SPT is described as a trust administered by an entity duly

incorporated under the CAMA and need not be registered with the Securities and Exchange

151 See Section 5(23) of the NSB 152 See Section 2(1)(z) of the SFRAESIA 153 See Section 2(1)(b) of the SFRAESIA

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Commission to perform trust functions and created solely for the purpose of securitization and to

which the Originator makes true and absolute sale of assets.

The SRFAESIA makes no specific provision for SPVs but in stead provides for ‘securitisation or

reconstruction companies.’ These companies are required to obtain a certificate of registration

from the Indian Reserve Bank before commencing or carrying on any form of securitisation or

reconstruction business. These companies are to have a minimum capital base of two core rupees

or such other amount not exceeding fifteen percent of the total financial assets acquired or to be

acquired by it, subject however to the overriding directives of the Indian Reserve Bank.154

An SPV created under the NSB is to have power to undertake all the following aspects of the

securitisation business, to wit: accept the sale or transfer of assets; issue and offer asset-backed

securities to investors; undertake either by itself or through any person, create any indebtedness

or encumbrances to defray administrative or other necessary expenses; pay out or invest its funds

as approved by the Securities and Exchange Commission (“SEC”); and generally undertake the

activities contained in the authorised scheme of securitisation either by itself or through any

person or entity.155 The SPV is to be tax- exempt on amounts distributed to the holders of its

asset-backed securities. Further where assets are sold or transferred to an SPV that is structured

as a trust (SPT), such sale or transfer is to be exempted from Value-Added Tax (VAT), Capital

Gains Tax and Stamp Duties “or any other taxes imposed in lieu thereof” This exemption will

also apply to the original issuance of asset-backed securities and other securities related to the

154 See generally Section 4 of the SRFAESIA 155 See generally, Section 8 of the NSB in this regard

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securitization transaction, for example, the originator’s equity, originator purchased subordinated

debt instruments and related credit enhancements.156

Similar to the Asset Management Corporation of Nigeria (AMCON), a securitisation or

reconstruction company established under the SRFAESIA is to have the unrestricted power to

acquire the financial assets of any bank or financial institution either by issuing a debenture,

bond or any other security in the nature of a debenture to the bank or other financial institution;

or by entering into an agreement with such bank or other financial institution on mutually

acceptable terms for the transfer of the financial assets to be acquired. Upon such acquisition, the

securitisation or reconstruction company assumes the full rights and obligations of the bank or

other financial institution and specifically, the securitisation or reconstruction company shall be

with the power to enforce or act upon all contracts that relates to the acquired financial asset.157

Under the NSB, an SPV shall be dissolved and its approved asset-backed securities terminated,

cancelled or withdrawn where it fails to accept the transfer of assets or issue asset-backed

securities to qualified institutional investors within 6 months from the date of the approval of the

securitisation scheme, unless the Commission extends the period within which it is to do so.

Also, where a minimum two-third of the holders of its asset-backed securities make a resolution

to the effect of its dissolution and obtain SEC’s approval, the SPV shall become dissolved. The

SFRAESIA did not use the terminology “dissolution” but rather provides for the instances where

the certificate of registration of a securitisation or reconstruction company can be cancelled.

These instances include where such company:

156 See generally, Sections 16,17 and 18 of the NSB 157 See generally Section 5 of the SRFAESIA

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a. ceases to carry on securitisation or assets reconstruction business;

b. ceases to receive or hold any investment from a qualified institutional buyer;

c. fails to comply with any of the conditions under which the certificate of registration

was granted

d. fails to satisfy the initial inspection and further inspection requirements of the

Reserve Bank as enumerated in Sections 3(3)(a) – (g) and 4(1)(e)(i) – (iv) of the

SFRAESIA

iv. The Concepts of “True Sale” and “Effective Assignments”

For the purpose of certainty of what will constitute a transfer of assets by true sale or assignment

to an SPV, the NSB has expressly provided the characteristics of each of these modes of the

transfer of assets. By Section 9 of the Bill, to constitute a true sale, the following characteristics

must be present:

a. the assets must be transferred either by way of a sale, assignment or exchange on a

without recourse basis to the originator;

b. the assets to be sold must be isolated and put beyond the reach and effective control

of the originator and its creditors;

c. the transferee must have the right to pledge, mortgage or exchange the sold assets

and shall have the rights to the profits and earnings from the disposition of the assets;

d. the transferee shall undertake the risks associated with the assets, provided however

that the transferor shall not be excluded from providing the usual representations and

warranties in respect of the asset;

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e. the transferor shall be without right to recover the assets and the transferee shall not

be entitled to reimbursement of the price or other considerations paid for the assets158

In relation to assignments, the Bill makes it lawful to assign or transfer receivables

notwithstanding any agreement to the contrary between a debtor and the present assignor or

transferor and same restriction will be invalid in the case of further assignment or transfer of the

receivables. The effect of this provision does not however absolve the assignor or transferor of

liability to the debtor, save that the debtor cannot void the assignment or transfer of the

receivable to the assignee or transferee even where the transferee had knowledge of the

agreement between the debtor and the transferor. These provisions are aimed to legislatively

negate the consent requirement where a true sale, assignment or transfer of receivables is made

for the purposes of securitisation.159

The ‘no consent’ requirement under the NSB appears slightly different from the discretionary

provision in Section 6 of the SRFAESIA which provides that the bank or other financial

institution (the assignor) “may, if it considers appropriate, give a notice of acquisition of

financial assets by any securitisation company or reconstruction company, to the concerned

obligor and any other concerned person and to the concerned registering authority (including

Registrar of Companies) in whose jurisdiction the mortgage, charge, hypothecation, assignment

or other interest created on the financial assets have been registered.”160In the absence of any

provision to such effect in the NSB, it still remains the law in Nigeria that proper notification be

made at the Nigerian Corporate Affairs Commission (CAC) in the event of a change in the 158 See generally Section 9 of the NSB 159 See Section 11 and 12 of the NSB 160 Section 6 (1) of the SRFAESIA

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particulars of a charged asset of a company, such that the assignor (in practice, it is the

responsibility of the assignee) must, in the manner of the SRFAESIA give the due notification to

the CAC.161

Any property, either personal or real, that secures such receivable shall also be assigned or

transferred without the execution of new assignment or transfer documents. Where however any

existing law that regulates the transfer of the particular property requires the execution of new

instrument of transfer, the assignor shall be statutorily obliged to execute such instrument.162

Further, the NSB intends to make lawful the assignment of more than one receivable in one

transaction, provided that each receivable constituting the assignment is described separately and

each can, at the time of the assignment, or in the case of future receivables, each can at the time

of the conclusion of contract, be identified as the receivables to which the assignment relates.

This effectively establishes a test of specific description and identification to validate the

assignment of a pool of receivables.163

v. Regulation and Supervision

As may be noted from the supervisory duties accorded to it in the foregoing paragraphs, SEC is

proposed to be the major regulatory authority of securitisation transactions in Nigeria.164 This

position may be juxtaposed with the provisions of the SRFAESIA165 which provides for two

161 See generally Section 197 of the Companies and Allied Matters Act, 1990 (compiled as Cap. C20, Laws of the Federation of Nigeria, 2004) (CAMA) 162 See particularly Section 12(1) of the NSB 163 See Section 10 of the NSB 164 Although under Section 6(2) of the NSB, it is not made mandatory for Special Purpose Trusts to be registered with SEC, their scheme of securitisation will however still require SEC approval. 165 See Sections 12, 12(A) and 20 thereof

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different supervisory authorities. The first being the Indian Reserve Bank which is given the

powers to, where it is satisfied that such powers should be exercised in the public interest or to

prevent affairs being conducted in a manner detrimental to both the interest of investors and the

securitisation or reconstruction company, determine policy and issue directions on the affairs any

of such companies in matters relating to income recognition, accounting standards, provisions for

bad and doubtful debts, capital adequacy based on risks weights for assets and the deployment of

funds. Secondly, the SRFAESIA has given the Indian Central Government the power to, by

notification, set up a Central Registry for the purposes of the registration of securitisation and

reconstruction of financial assets transactions as well as transactions that create security interests

under the Act. The Central Registry is to have a Central Registrar who shall maintain a Central

Register for entering of all transactions relating to securitisation, reconstruction and the creation

of security interests. The information in the Central Register can likewise be kept in electronic

form. To ensure administrative efficiency, the Central Registry can maintain branch offices in

such places as the Indian Central Government may think fit.

Much as SEC is set up by law166 to be the apex regulatory authority for the Nigerian Capital

Market to ensure investors’ protection, a fair, efficient, transparent market and the reduction

systemic risks,167 its oversight functions are essentially directed at public companies and their

securities,168 ensuring that the regulation of private company securities are more often than not

outside its regulatory radar. Thus where as it is sought under the Bill, the SEC is to regulate

securitisation transactions generally, it may then be assumed that securitisation transactions may

have been unwittingly taken outside the scope of private companies to structure, or better still, 166 See the Investments and Securities Act, 2007 No. 29 (“ISA”) 167 See long title to the ISA 168 See for example Section 13(c) & (d) of the ISA

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that such transactions are anticipated to be public transactions and not such as can be privately

traded.

vi. Other Aspects of the SFRAESIA

Two aspects of the SFRAESIA worth discussing are the provisions of its Section 11 and those of

Part 3 of the Act, consisting of Sections 13 to 19.

Section 11 of the SFRAESIA provides for the compulsory resolution by conciliation or

arbitration of disputes between or among banks or financial institutions and securitisation or

reconstruction companies and qualified institutional buyers. Such disputes which must be

disputes that relate to securitisation or reconstruction or the non-payment of any amount due

(inclusive of interests) are to be resolved by conciliation or arbitration process and procedure as

provided by the Indian Arbitration and Conciliation Act, 1996.

Section 11 dispenses with the need for a Conciliation or Arbitration Agreement between the

parties as by its operations, it is to be deemed that the parties have consented in writing to

resolve their disputes by conciliation or arbitration. Such an overreaching statutory provision as

this may only be appreciated in light of Section 35 which makes the provision of the SFRAESIA

override the provision of other laws. According to Section 35, the provisions of the SFRAESIA

is to have effect, notwithstanding any inconsistent provision of any other law or instrument for

the time being in force.

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Part 3 of the Act, comprising of Sections 13 to 19 generally provides for the enforcement of

security interests. The revolutionary impacts of these provisions on debt recovery and the

enforcement of security interests may have informed Padmanabhan Iyer’s169 conclusion that the

twin objectives of debt recovery and the foreclosure of security aside from providing for the

broad legal framework for asset securitisation and reconstruction appears to be the aim of the

SRFAESIA. These provisions empower secured lenders to attach and sell collateral security or

other security interests to recover their loans, all without the intervention of the judicial process.

Quite rationally, the SRAESIA has since been the subject of major disputes in Court with

increased advocacy that the powers of a secured creditor under the Act should be whittled down,

or at best, made subject to the judicial process.170

Specifically and by the provisions of Section 13(1), a secured creditor can legally and validly

enforce his security interest without the intervention of the courts or the judicial system,

provided however that such enforcement is in accordance with the express provisions of the

SFRAESIA. It is worth noting that Section 13(1) employed the use of the discretionary word

“may” as it is not mandatory that all secured creditors disregard the judicial process in the

enforcement of their security interests. This position of Indian Law may be juxtaposed with what

is obtainable under Nigerian Law, particularly with regards to what in law is regarded as “self-

help”. It is worthy of note that Nigerian law does not expressly prohibit self-help, for example,

where a deed of mortgage contains a mortgagees power of sale in the event of default by the

mortgagor in a consecutive three months period; however, the law as at today is that such self-

169 See Padmanabhan Iyer: ‘India: The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – An Overview of the Provisions’ 2003: Electronic copy available at: http://www.mondaq.com/article.asp?articleid=22031 as at August 28, 2010 170 See Pratap G Subramanyam: Investment Banking – An Odyssey in High Finance (Tata McGraw-Hill Publishing Co. Ltd: New Delhi: 2005) page 720

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help unless can be executed peaceably, should not be resorted to. Thus where a mortgagee who

intends to exercise a power of sale meets with a debtor’s resistance, the only option left to him is

to approach the Court for an order to enable him execute his right. The apt conclusion on this

point of law is that, in civil society, only through the machinery of the judicial process can one

seek to apply force in the enforcement of his right and in any event, the enforcement of his right

remains not within his remit, but within the powers of the appropriate authorities established for

such purposes, for example, the Sheriffs of Court, the Police, the Civil Defence Corps, e.t.c.

While subsection (4) of Section 13 of the SFRAESIA provides for the rights of a secured creditor

in the process of enforcement of his security interest, Section 13(2) and (3) states the criteria that

must be fulfilled by the secured creditor before exercising his right of enforcement. By Section

13(2)(3) & (3A), it is mandatory that the following must be established:

a. there must have been default in the repayment of the secured debt;

b. the secured creditor has classified the debtor’s account as non-performing;

c. the secured creditor has by notice in writing required the debtor to discharge its

liabilities in full within 60 (sixty) days from the date of the notice;

d. the notice shall give details of the amount payable and the security intended to be

enforced by the secured creditor in the event of non-payment;

e. where on receipt of the notice, the debtor makes any representation or objection, the

secured creditor shall consider such;

f. where the secured creditor finds the representation or objection untenable, he shall,

within one week of receipt of the debtors representation or objection, communicate

his non-acceptance and the reasons for such to the debtor.

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It is worthy of note that by the proviso to Section 13(3A), such reasons communicated by the

secured creditor under step (f) above cannot confer any right on the debtor to prefer an

application to the Debts Recovery Tribunal or other judicial forum.

The measures which a secured creditor may make recourse to for the recovery of the secured

debt include:

a. taking possession of the collateral security including the debtor’s right of alienation;

b. take over the management of the debtor’s business including his right of alienation of

same; provided however that the secured creditor may only lease, assign or sell the

business where it was a substantial part of the business that was so held as security;

and also, where the management of the business is severable, the secured creditor

shall only take over the management of that aspect of the business that is related to

the security.

c. appoint a manager to manage the security which is now in the secured creditor’s

possession;

d. by notice in writing, require any person who purchased the security from the debtor,

to pay to the secured creditor any sum that becomes due to the debtor as will be

enough to satisfy the debt; such payment when made, shall be deemed a valid

payment to the debtor.

Any of these measures can be taken singly or together; and with regards to the power of taking

possession and selling or otherwise transferring the collateral security, the secured creditor may

write to the Chief Metropolitan Magistrate or the District Magistrate of the jurisdiction where the

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security is situated, to take possession of the security alongside the documents relating thereto.

Upon taking possession, whether by use of force or not, he shall transfer such security and its

documents to the secured creditor and no action so taken by the Chief Metropolitan Magistrate or

the District Magistrate shall be called into question before any court or any other authority.171

Further, the costs, charges and expenses properly incurred by a secured creditor in the process of

an action against a debtor, shall be recoverable from such debtor. However, worth noting is that

the power of a secured creditor to sell or transfer the security becomes abated, where before the

date fixed for the sale or transfer, the debtor discharges his debt obligations alongside all the

costs, charges and expenses incurred by the secured creditor.172

These powers of a secured creditor may however not be exercisable freely in instances where

more than one secured creditor financed a particular security. In such instances no secured

creditor will be entitled to exercise any of the rights stated above unless the exercise of any right

by any secured creditor is agreed upon by secured creditors who have an aggregate three-fourths

of the outstanding value of the debt (that is, the principal, interest and any other dues payable by

the debtor to the secured creditor); and whatever decision reached shall be binding on all the

affected secured creditors.

Whether a procedure such as that under Section 13 of the SFRAESIA can be obtainable in

Nigeria is largely a prerogative of legislative enactment; since for now, both under the common

law and nascent Nigerian judicial authorities, any process which enables an individual to enforce

171 Section 14 of the SFRAESIA 172 See Section 13(8) of the SFRAESIA

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his right without the instrumentality of the judicial process will be deemed ‘self-help’ and same

is frowned at.

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CHAPTER 5

CONCLUSION

This work proceeded with the challenge of providing a definition for “structured finance”; at the

end, it was discovered that term is a collective noun for all advanced financial arrangements that

serve to efficiently refinance and or hedge any profitable economic activity beyond the scope of

conventional forms of debt and equity with the aim of lowering the cost of capital and mitigating

the agency costs of market impediments on liquidity. In succinct terms we defined it as a

collective term for all financial transactions that differ from conventional forms of financing and

are set up with the objective of credit refinancing and/or the hedging of credit risk. It was on this

foundation that we proceeded to examine some transactions that readily come under the

structured finance classification

Indeed we have come to realize that “structured finance” is an amorphous concept that is more

easily recognized than defined. This realization and as exemplified through the cases allows us to

view the complex commercial transactions that are variedly called different names not form the

backdrop of their appellation but what they are actually set to achieve. The central theme is

credit refinancing or the hedging of credit risk.

After an extensive foray into the international aspects and development of structured finance

through the lens of such key concepts as “Investment Banks”, “Special Purpose Vehicles” and

“Securitisation”, we were introduced to the three core legal issues that defines the limits and

application of structured finance. These issues: “the consent or notice requirement”, “re-

characterisation” and “subsidiarisation” exposed us to the current non-convergence of the laws

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that would invariably affect how structured finance transactions are interpreted in various

jurisdictions. Apart from the broad differentiation in the civil code and common law countries,

we were able to appreciate the further divergence of legal considerations in the countries that

will commonly be constituted in any of them. This led us to the conclusion that in the absence of

codified laws that are generally tailored to address the challenges of structured finance, the broad

application of legislations on commercial relations may prove in adequate.

Our venture into the Nigerian legal regime, examining the current finance-focused legislations

left us with the conclusion of the country’s present non-appreciation of the dynamics of

structured finance. With virtually non-existent laws to either approve of or prohibit structured

finance, and very negligible approval of securitization in transactions with limited purposes, it

indeed became evident that Nigeria is without the legislative framework to support, or rather

regulate structured finance transactions.

Indeed, the axiom that finance is the lubricant that oils the wheels of developmental efforts is

more often true. The creation of money remains within the remit of the bankers who would

rather prefer to do what they have to do than take relish in most legal considerations with the

complex letters of the law being of little interest to them. Indeed, where the law exists, it more

often is unable to capture the full essence of the limitless boundaries that bankers are ready to

explore to achieve their objectives. In such times, their capacities to unleash acute creativity and

novelty in bridging the finance gap are rarely surpassed by the promptness of the law in filling

the void of legislative or other regulation.

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In the absence of regulation, chaos often becomes inevitable. The law as that instrument that

stems the tide of societal relationships cannot afford to be non-responsive to the changing times.

Indeed the law should set out as that ubiquitous watchman, ready to wield its stick of regulation

whenever it discovers the directions of societal activities. Structured finance and the complex

relationships it breeds should never be below the radar of the legislature. The realities of the

2007 and 2008 financial crises and the various corporate financial scandals that precipitated it

has revealed that the financial market cannot be wholly left to determine its rules; the laws must

never be too far away.

The prospects of structured finance for the Nigerian clime cannot be overemphasized particularly

in light of the present lofty dream of becoming one of the top 20 economies in the world by year

2020. This dream notwithstanding, the present realities are that the nation’s economy lacks the

requisite infrastructures on which such lofty aspiration can be built. Hitherto, the provision of the

major infrastructure types, including, public transportation (including roads), communication,

energy (including electricity, water e.t.c. had been the responsibility of the federal government.

However and in recent times, private investments in these areas have been on the increase and

with the attendant huge demand for finance.

These developments can only bring the prospects of existing financial intermediaries to the fore.

Banking business in Nigeria remains largely remitted to the perimeters of “the business of

receiving deposits on current account, savings account or other similar account, paying or

collecting cheques, drawn by or paid in by customers...” and the question whether other financial

institutions can undertake structured finance transactions remaining without an assertive answer.

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When this position of things is reviewed in light of developments in other countries, the fact that

the regulation of the Nigerian financial system is innately conservative becomes a truth.

This work advocates that the positive prospects of structured finance should be embraced with

the circumspection of the provision of adequate laws to regulate the commercial relationships it

breeds. The wide indeterminate boundaries of the concept of ‘freedom of contract’ will prove

inadequate to rein in the volatile aspects that have come to characterize structured finance type

transactions in many jurisdictions around the world.

Laws must determine the principles that will regulate the general aspects of structured finance

while empowering regulators to administer such laws in accordance with the principles. Quite

rationally, legislative acts may be incapable of providing for every aspect of a fast-evolving

aspect of finance as structured finance; hence the special place reserved for regulators. Howbeit

and judging from the Nigerian experience where regulators are known to wield enormous powers

that take on a retrogressive form as a result of bureaucratic bottle-necks, it will serve the interest

of commerce more that the legislature is also relatively proactive in checking the excesses of the

regulators through amendments whenever the need arises.

The future of structured finance is such that cannot easily be fathomed, but the fact that at

whatever stage of its development, laws must be on hand to bridle the economically ruinous

aspects of its application is certain. This work advocates that the boundaries of the relationships

in structured finance be set by laws and progressive regulation even as its legal aspects become

known with more research

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It is anticipated that this work will engender a new vista of studies into the legal aspects of

structured finance, with greater attention given to what Government needs to do to adequately

regulate the relationships that it breeds. The fact of its utility is incontestable; it is the fact that

adequate laws and regulations need to be in place that demands our present and continued

attention.

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BIBLIOGRAPHY Books:

Abugu,E.O. Joseph: Company Securities: Law And Practice (University of Lagos Press: Lagos: 2005)

Olaniwun Ajayi: Legal Aspects of Finance in Emerging Markets (LexisNexis Butterworth: South Africa: 2005)

Philip R. Wood: Project Finance, Securitisations, Subordinated Debt (Thomson Sweet & Maxwell: London: 2007)

Pratap G Subramanyam: Investment Banking – An Odyssey in High Finance (Tata McGraw-Hill Publishing Co. Ltd: New Delhi: 2005)

Journals:

Andreas Jobst: ‘A Primer on Structured Finance’ Electronic copy available at: http://ssrn.com/abstract=832184) as at April 30, 2010

Andreas A. Jobst: ‘What is Structured Finance’ Working Paper, 2005: Available at: http://ssrn.com/abstract=832184 as at April 30, 2010

Babara T. Kavanagh: ‘The Uses and Abuses of Structured Finance’ Policy Analysis No. 479, July 31, 2003 (CATO Project on Corporate Governance, Audit and Tax Reform). Electronic copy available at: www.socialsecurity.org/pubs/pas/pa479.pdf as at May 21, 2010

Christopher L. Peterson: ‘Predatory Structured Finance’ Cardozo Law Review, 2007 (Vol. 28:5) Electronic copy available at: http://ssrn.com/abstract=929118 as at June 5, 2010

David Allan: ‘Security: Some Mysteries, Myths and Monstrosities’ (1989) Monash University Law Review,

Henry A. Davis: ‘The Definition of Structured Finance: Results from a Survey’ The Journal of Structured Finance, Fall 2005

Ingo Fender and Janet Mitchell: ‘Structured Finance: Complexity, Risk and the use of Ratings’ BIS Quarterly Review, June 2005. Electronic copy available at http://ssrn.com/abstract=1473644

J.F. Marshall and M.E. Ellis: ‘Investment Banking and Brokerage’ (Probus Publishing;) Joshua Coval, Jakub Jurek and Erik Stafford: ‘The Economics of Structured Finance’

Harvard Business School Working Paper 09-060, 2008. Electronic copy available at: http://ssrn.com/abstract=1287363 as at May 21, 2010

Padmanabhan Iyer: ‘India: The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – An Overview of the Provisions’ 2003: sourced Electronic copy available at: http://www.mondaq.com/article.asp?articleid=22031 as at August 28, 2010

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Case Laws:

Nigerian Cases Cooperative Development Bank Plc v. Ekanem (2009) 16 N.W.L.R. (pt.1168) 585 Guardian Express Bank Plc v. Odukwu (2009) 14 N.W.L.R. (pt. 1160) 43 Julius Berger (Nig.) Plc v. Toki Rainbow Community Bank Ltd, (2010) 9 N.W.L.R

(pt. 1198) 80 Kaydee Ventures Ltd. v. Honourable Minister of Federal Capital Territory (2010) 1

CLRN 108 Leyland (Nig.) Ltd v. Dizengoff (1990) 2 NWLR (pt. 134) 610 Mohammadu Jajira v. Nothern Brewery (1972) NCLR 313 at 329 Union Bank of Nigeria Plc v. Sax (1994) 8 NWLR (pt. 361) 150

Foreign Cases

Brandis Sons & Co. v. Dunlop Rubber Co. (1905) A.C. 454 Brice v. Bannister (1978) 3 Q.B. D. 569 British Crane Hire Corporation v. Ipswich Plant Hire Ltd. (1975) Q.B. 303 DHN Food Distributors Ltd v. London Borough of Tower Hamlets (1976) 3 All E.R.

462 Gisborne v. Burton (1988) 3 All E.R. 760; (1989) Q.B. 390 Helstan Securities Ltd v. Hertfordshire County Council (1978) 3 All E.R. 262 Hunter v. Moss (1994) 1 WLR 452, CA Investors Compensation Scheme v. West Bromwich Building Society (1998) 1 All ER

98; (1998) 1 WLR 896 James v. Humphreys (1908) 1 K.B. 10 Kelter , Tr. v. American Bankers’ Finance Co. 306 Pa. 483, 492, 160 A. 127, 130, 82

A.L.R. 999 Kingsley v. Sterling Industrial Securities Limited (1967) 2 Q.B. 747 Kirkness v. John Hudson & Co. Ltd (1955) 2 All E.R. 345 Law v. Coburn (1972) 1 WLR 1238 Linden Gardens Trust Ltd v. Lenesta Sludge Ltd (1993) 3 All ER 417, HL; Mahonia Ltd v. JP Morgan Chase Bank (2004) All E.R. (D) 10; (2004) EWHC 1938 Major’s Furniture Inc. v. Castle Credit Corporation 602 F 2d 538 (3rd Cir 1979) McEntire v. Crossley Brothers Ltd.(1895) AC 457 McNiven v.Westmoreland (2003) AC 311 National Westminster Bank Plc v. Spectrum Plus Ltd (2005) 2 (part 5) Lloyds Law

Reports 275 (HL); (2005) UKHL 41 Nokes v. Doncaster Amalgamated Collieries Ltd (1940) A.C. 1014, 1019 - 1020 Olds Discount Co. Ltd v. John Playfair Ltd (1938) 3 All E.R. 275 Paragon Finance Plc v. Pender (2005) All ER (D) 307; (2005) EWCA Civ. 760 Parkin v. Thorold (1852) 16 Beav. 59 Re Harvard Securities (1997) 2 BCLC 399 Re Goldcorp Exchange Limited (in Receivership) (1995) 1 AC 74, (1994) 2 All ER

806 (PC) Re Joseph Kanner Hat Co., Inc., 482 F.2d 937, 940 (2d Cir. 1973)

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Re Turcan (1888) 40 Ch. D. 5 Siebe Gorman & Co. Ltd v. Barclays Bank Ltd (1979) 2 Lloyd’s Report 142 Smith-Faris Co. v. Jameson Memorial Hospital Association, 313 Pa. 254, 260, 169 A.

233, 235 Tailby v. The Official Receiver (1883) 13 App Cas 523 Tolhurst v. Assoc. Portland Cement Manufacturing Ltd. (1902) 2 K.B. 660 at 668,

(1903) A.C. 414 Welsh Development agency v. Export Finance Co. Ltd (1992) BCC 270, CA

Statutes: Nigerian Statutes

Asset Management Corporation of Nigeria Act, 2010 Bank and other Financial Institutions Act 1991, No. 25 (as amended) Central Bank of Nigeria (Establishment) Act, 2007 No. 63 Companies and Allied Matters Act, 1990 (compiled as Cap. C20, Laws of the Federation

of Nigeria, 2004) Evidence Act, 1945 (as amended and now compiled as Cap. E14, Laws of the Federation

of Nigeria, 2004) Investments and Securities Act, 2007 No. 29

Foreign Statutes

Indian Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

German Commercial Code (as amended 1994) Uniform Commercial Code (UCC) of the United States of America United Nations Convention on the Assignment of Receivables in International Trade

Circulars & Newspaper Reports:

CBN Circular No. BSD/DIR/GEN/UBM/03/025, September 7, 2010. Electronic copy available at: http://www.cenbank.org/OUT/2010/CIRCULARS/BSD/CIRCULAR%20ON%20THE%20REVIEW%20OF%20THE%20UNIVERSAL%20BANKING%20MODEL.PDF as at October 2, 2010

Punch Newspaper: “AMCON: Nigerian stocks gain most worldwide” Monday, May 10, 2010, page 20

Businessday Newspaper: “Analysts want proper pricing of Toxic Assets by AMC” June, Friday 04 – Sunday 06, 2010, front page