The Borrowers and Lenders Act, 2020 (Act 1052) (the New BL Act) came into force on 29 December 2020. Pursuant to its powers under the New BL Act, the Bank of Ghana has issued Rules for the Effective Implementation of the New BL Act (together with the New BL Act, the New BL Regime). The New BL Regime regulates borrowing, lending and other transactions that involve the creation of security interests and is by far the most sweeping legislative intervention relating to the creation, registration and effectiveness of security interests in recent times. Prior to the enactment of the New BL Regime, lending transactions were regulated by the Borrowers and Lenders Act, 2008 (Act 773) (the Repealed BL Act) and the Registry Rules under the Repealed BL Act (together with the Repealed BL Act, the Repealed BL Regime).
The New BL Regime is bound to have a profound impact, not only on traditional lenders such as financial institutions, but more broadly on any type of credit transaction that involves the creation of security interests in assets located in Ghana or the assets of a Borrower located in Ghana. This write up is the first release from a multi-part series focused on discussing the key changes introduced by the New BL Regime and the strengths and weaknesses of those key changes. In this edition, we will discuss the amplified scope of the New BL Regime and the effect of the New BL Regime on registered and unregistered security interests.
Amplified scope and application
The Repealed BL Act applied to (i) credit agreements between parties who dealt at arm’s length, provided the agreement was in respect of an amount which was not less than GHS 100 or any other credit agreement made exempt by the Bank of Ghana by a notice issued under the Repealed BL Act, and (ii) credit guarantees where the guarantee was in respect of a credit facility or credit transaction covered by the Repealed BL Act. A credit agreement was defined as an agreement in the nature of a credit facility, a credit transaction, a credit guarantee or any combination of these 3 and credit agreements were regulated by the Repealed BL Act, irrespective of whether or not the lender had a principal office or resided in Ghana. Further, where the Repealed BL Act applied to an agreement, it continued to apply to (i) the parties to that agreement, regardless of whether the lender ceased to reside or have its principal office in Ghana, and (ii) every transaction, act or omission which occurred under that agreement, regardless of the location of the occurrence. These provisions gave the Repealed BL Act significant extra-territorial effect, as it applied to cross-border credit agreements and the transactions that occurred under such agreements.
The New BL Act maintains and further enhances this extra-territoriality by introducing an additional scope in relation to security interests. This is because the New BL Act applies, among others, to (i) the creation of security interest, effectiveness of security interest against 3rd parties and priority of security interest in tangible property located in Ghana, (ii) the creation of security interest, effectiveness of security interest against 3rd parties and priority of security interest in intangible property if the Borrower is located in Ghana, (iii) security interests in tangible property which is ordinarily used in more than one country, if the borrower is located in Ghana, (iv) security interests in a deposit account if the bank, specialised deposit-taking institution or other financial institution that maintains the relevant deposit account has a place of business in Ghana, (v) security interests in the proceeds from the disposition of collateral by a borrower, if the New BL Act regulates the security interest in the collateral that was realised, (vi) the creation of security interest in pension benefits as security for a mortgage to acquire a primary residence and (vii) and the enforcement of security interests in intangible property if the borrower is located in Ghana or if the enforcement takes place in Ghana. A borrower is located in Ghana if the borrower is ordinarily resident in Ghana, has a place of business in Ghana or has a place of business in more than one country but maintains its principal office in Ghana.
It is worth emphasising here, that, although both the Repealed BL Act and the New BL Act apply to credit guarantees and credit agreements, there has never been a requirement to register credit guarantees or credit agreements with the Collateral Registry to make them effective; the registration requirements under the Repealed BL Act only related to charges, while the registration requirement under the New BL Act only relates to security interests. Indeed, the Supreme Court of Ghana almost seems to lend credence to the false but widely held notion that credit guarantees must be registered with the Collateral Registry and that unregistered credit guarantees are unenforceable in the case of Dalex Finance and Leasing Company Ltd v. Ebenezer Denzel Amanor & 2 Others where the Honourable Court stated that there
“…was neither a credit agreement nor a credit guarantee between the plaintiff and John Oseku Ankrah so Act 773 is not applicable on the case that was made on the pleadings against the 3rd defendant. In fact, 1st defendant who could have argued that the credit guarantee he provided to the plaintiff was not enforceable against him because it was not registered as required by Act 773 did not plead that in his defence.”
The confusion may have been caused, partly by a misunderstanding of the nature of guarantees and, partly by a misreading of the definition of “charges” under the Repealed BL Act (which was a reference to different types of encumbrances (i.e. essentially a claim on property or assets) using examples such as charges, mortgages, security, interest, lien, pledge, assignment by way of security, etc). The New BL Act clears up this misapprehension by augmenting the definition of charges (under the Repealed BL Act) with more colour (under the new defined term) to indicate that the registration requirements relate to a “security interest” which is
“…a proprietary right in a movable or immovable asset that is created by an agreement to secure payment or the performance of an obligation…”
A guarantee does not create a proprietary right in any asset and is therefore not a registrable interest and need not be registered to be enforceable (although the Collateral Registry in practice enables its users to register the particulars of guarantors on its system).
The scope of the New BL Act has also been widened to regulate transactions which were not within the scope of the Repealed BL Act. The definition of credit agreement now includes hire purchase transactions, transactions involving the sale of an asset with a reservation of title and transactions involving an outright assignment of accounts receivable. In addition, the New BL Act applies to credit agreements between related parties (i.e. parties that are not dealing at arm’s length). The Repealed BL Act only applied to credit agreements between parties who dealt at arm’s length, meaning that credit agreements entered into by related parties such as shareholder loans and credit agreements between parties in a familial relationship were not regulated by the Repealed BL Act. The New BL Act does not provide for any such exclusions, meaning that related party lending transactions are within its purview.
The New BL Act does not apply to security interests in a ship, an aircraft, payment rights arising from financial contracts governed by netting provisions as determined by the Bank of Ghana, assignment of wages and salaries, pensions and other similar benefits, a contract of annuity or life insurance policy, deposited securities, a transfer of a right to damages in tort which is not related to commercial activity and credit agreements if the agreement is in respect of a loan of less than GHS 500 and the lender is regulated by the Bank of Ghana.
Effectiveness of unregistered security interests
The New BL Act provides that a valid security interest is created where a borrower (or other third party who has title to collateral) willingly charges an asset in favour of a lender as security for the obligations of the borrower. Under the New BL Act, an unregistered security interest is effective between the parties to the credit agreement under which the security interest is created. This is a significant departure from the position under the Repealed BL Regime, the Companies Act, 2019 (Act 992) (the Companies Act), the Land Act, 2020 (Act 1036) (the Land Act) and the Mortgages Act, 1972 (N.R.C.D. 96) as amended (the Mortgages Act).
Prior to the enactment of the Repealed BL Regime, the registration requirements for the perfection of security were registration at the Lands Commission (in relation to charges over immovable property) and registration at the Companies Registry (in relation to charges created over the assets of a company). The Repealed BL Regime established the Collateral Registry system, introduced a requirement for the electronic registration of charges with the Collateral Registry within 28 days of the charge creation date, and provided that unregistered charges were ineffective as security. These provisions supplemented the already existing registration requirements at the Companies Registry and the Lands Commission as a parallel perfection requirement. Each of the Companies Act, Land Act and Mortgages Act provides that a security interest to which it applies is ineffective unless it is registered in accordance with the relevant provisions thereof. These provisions have now been impliedly amended by the New BL Act, which gives effect to unregistered security interests as between the parties to the security agreement but subjects the enforcement rights of lenders with unregistered security interests to the rights of any lender whose security interest has been registered with the Collateral Registry.
Effect of registration of security interest
As has already been stated, a security interest is now effective between the parties to the security creating agreement from the date of its creation, even if it is unregistered. However, registration with the Collateral Registry makes a security interest enforceable against third parties for as long as the registration of the security has not been discharged. The New BL Act further provides that (i) security interest in property which is registered in any other registry pursuant to any other enactment is made effective against third parties upon registration with the Collateral Registry, (ii) security interest registered with the Collateral Registry shall (irrespective of the time of registration) have priority over any other security interests registered under any other enactment, (iii) where a mortgage has not been registered with the Collateral Registry, the buyer of the immovable property that is charged under that mortgage shall take the immovable property free of any security interest that has only been registered under the Mortgages Act and the Home Mortgage Finance Act, 2008 (Act 770) (the HMF Act), and (iv) where there is any conflict between the New BL Act and any other enactment regarding the creation, perfection, effectiveness of security interests against third parties, priority and enforcement, the provisions of the New BL Act shall prevail.
These novel provisions will have a seismic legal effect and raise interesting questions for lawyers and the finance sector. For instance, has the New BL Act essentially repealed the need to register security interests under enactments such as the Companies Act, the Land Act and the Mortgages Act? Section 17(2) of the New BL Act seems to answer this question in the negative, since it states that registration of security interests with the Collateral Registry does not dispense with the requirement to register security interests under any other applicable legislation. However, a wholistic construction of the New BL Act suggests that the response to this question is more nuanced than simply referring to section 17(2). This is because the New BL Act deprives the parallel statutory perfection requirements of their legal effect by (i) stating that unregistered security interests are effective between the parties to the security agreement (since this provision is contrary to the provisions which require security interests to be registered under other applicable law for effectiveness and does not condition the effectiveness of the security interest on the satisfaction of the other parallel registration requirements) and (ii) by providing that a security interest is enforceable against 3rd parties upon registration with the Collateral Registry (since this provision does not make the effectiveness or enforcement of the security interest conditional on registration with any other parallel registries).
Other provisions of the New BL Act further undermine the operation of the pre-existing security and property laws. For instance, registration of security interests under the Companies Act and Land Act constitutes actual notice of the fact that a security interest has been created in respect of the relevant property. However, the New BL Act states that the purchaser of immovable property (which has previously been used as collateral) takes the property free of any security interest (which has only been registered pursuant to the Mortgages Act or the HMF Act)) if the security interest has not been registered with the Collateral Registry. For purchasers of collateral in the form of movable property, they can only acquire that property free of security interest (where the security interest has not been registered with the Collateral Registry) if they purchase the property for value without notice. Thankfully, this formulation protects lenders with secured interests in the movable property of a company (which has been registered at the Companies Registry) because registration at the Companies Registry constitutes actual notice, meaning that a purchaser of such movable property will acquire the property with notice of the security interest which has been registered at the Companies Registry. In the case of immovable property, the specific reference to the Mortgages Act and the HMF Act provides basis for an argument that a purchaser of immovable property will not acquire it free of security interest if that security interest has been registered with the Companies Registry or with the Lands Commission (in respect of titled land under the repealed Land Title Registration Act, 1986 (P.N.D.C Law 152) (the Land Title Registration Act) or the Lands Act). This is because from the date the Land Title Registration Act came into force, the creation of mortgages over titled land became regulated by that law and now the Land Act (not the Mortgages Act) and section 44(3) of the New BL Act refers solely to the HMF Act and the Mortgages Act (not the Land Title Registration Act, Land Act or the Companies Act).
The upshot of all the above novel provisions, therefore, seems to be that although the New BL Act has not repealed the requirement to register security interests under the other applicable enactments, the New BL Act renders the need to comply with these statutory requirements nugatory. If this was the legislative intent, it is doubtful that the objective of discounting the other relevant registration requirements has been completely achieved, considering the alternative arguments we have considered above.