Intersection Between The Borrowers and Lenders Act and the Corporate Insolvency Act

In 2020, Ghana’s Parliament passed two significant pieces of legislation affecting the right of lenders, and borrowers both in and out of insolvency. The first was the Corporate Insolvency and Restructuring Act, 2020 (Act 1015).

The second was the Borrowers and Lenders Act, 2020 (Act 1052). While these two pieces of legislation barely make reference to each other, their mutual impact cannot be overlooked – especially within the context of an insolvency.

While the Borrowers and Lenders Act aims to guarantee payment or performance of an obligation towards an individual creditor or lender with a secured charge, the CIRA focuses on providing satisfaction to an entire creditor class rather than a single individual within the class. The CIRA therefore significantly impacts the prospects and ability of an individual secured creditor to recover funds and assets from an insolvent debtor or borrower.

According to Phillip R Wood in his “Principles of International Insolvency”, the “main objective of security is to protect the creditor on the insolvency of a debtor.” The author in commenting on the impact of security interest on the insolvency process explained that: “it is clear that a security interest disturbs the equality principle that all creditors should be paid pro rata on insolvency.”

This piece focuses briefly on the intersection between the insolvency legislation (i.e. CIRA) and the Borrowers and Lenders Act. Specifically, the piece will consider the position of the lender who has taken collateral over the property of an entity that is in insolvency.

Who is a creditor under the Borrowers and Lenders Act?

The Borrowers and Lenders Act defines a creditor as “a person to whom money is owed”[1]. However, the creditor contemplated in Act 1052 is not just one who is owed; the creditor here is in fact the person who is owed, and who as part of the terms and conditions for the grant of a loan has a collateral or security (to ensure that the borrower sticks to its end of the bargain).

The Act defines a security interest to include fixed and floating charges, charges on chattels, a mortgage over an immovable property, a contractual lien, a pledge, an outright or security assignment of receivables, reservations of title, a finance lease, and any other encumbrance created by agreement.

For emphasis, the Borrowers and Lenders Act aims to confer on a creditor, a “proprietary right in a movable or immovable asset that is created by an agreement to secure the performance of an obligation[2].”

A creditor who complies with the terms of the Borrowers and Lenders Act obtains the status of a secured creditor and his interest in the property is notionally out of the reach of an insolvency practitioner in the event where the company is declared insolvent. This is not necessarily the case under CIRA.

Who is a creditor under CIRA?

A creditor is simply a person who is owed by the insolvent company. This debt may be secured or unsecured. It may have arisen by the operation of law. It may be past, present, prospective or contingent.

The debt could have been incurred before the date when the company is placed in Administration or Liquidation, or even during the insolvency process. It also includes foreigners whose only tie to the jurisdiction is the debt that is owed to them.

Under CIRA, secured creditor status is not conferred by compliance with the Act. It arises from the incidents of the agreement between the creditor and the debtor for the issuance of the loan or other debt instrument. CIRA defines a secured creditor as a “person entitled to a charge on or over an identifiable property owned by the debtor.”

Position of a Secured Creditor Under CIRA

What is the position of this secured creditor should the borrower or debtor be placed in either administration or liquidation? Do the secured assets become part of the pool of assets that the administrator or liquidator may call in? Or is the secured creditor’s interest excluded from the insolvency process?

Secured Creditor under Administration

In the case of a company in administration, the secured creditor does not have an automatic right to enforce his security. The secured creditor must obtain the permission and clearance of the court first. Section 37 of the insolvency legislation provides that:

(1) A secured creditor affected by the appointment of an administrator may apply to the Court within the decision period, for the grant of leave to the secured creditor to enforce the security of the secured creditor.

Two things are required of the secured creditor before he enforces his security. First, the secured creditor must seek to enforce the security or collateral within the decision period. The decision period starts from the date on which the secured creditor is notified of the appointment of the administrator and ends on the 14th day after the notice is given. Second, the secured creditor must obtain the leave of the court.

The CIRA details what the secured creditor may do in enforcement:

• appoint a receiver of property of the company under a power contained in an instrument relating to the charge;
• obtain an order for the appointment of a receiver of property for the purpose of enforcing the charge;
• give notice to convert a floating charge into a fixed charge;
• enter into possession or assume control of property;
• appoint a person to enter into possession or assume control as agent for the secured creditor or for the company;
• exercise as secured creditor or as a receiver or person so appointed, a right, power or remedy that exists because of the charge, whether that right power or remedy arises under an instrument that relates to the charge, under an enactment or otherwise.

In deciding whether to grant leave or not, the court must consider the prospect of “serious prejudice that will be caused to the secured creditor if the application is not granted”. Also, the court must be convinced that the need to allow the secured creditor to go into enforcement “… outweighs the prejudice which shall be caused to other creditors arising from the grant of the application”. In simple terms, the court, in deciding whether to grant leave for the secured creditor to enforce a charge, must balance the interest of that secured creditor with that of the entire creditor class.   If serious prejudice will be caused to the secured creditor – then leave must be granted for enforcement. If the enforcement will cause serious prejudice to the entire creditor pool, then leave must be refused. The framing of the factors that the court must take into consideration in deciding whether or not to grant leave is skewed in favour of the collective as opposed to the individual creditor.

In Re Atlantic Computer Systems Plc [1992] 1 All ER 476, the English Court of Appeal in explaining the factors to be taken into consideration in deciding whether to grant leave to enforce a security in administration explained that:

“…the question whether those having proprietary rights against the company should be given leave to enforce those rights depended on the circumstances of each case, including the consequences which the grant or refusal of leave would have, the financial position of the company, the period for which the administration order was expected to remain in force, the end result sought to be achieved and the prospects of that result being achieved, as well as the proprietary rights of the parties concerned.”

Where the secured creditor is unable to obtain leave of the court within the 14-day decision period, that secured creditor may take advantage of the provisions of the restructuring agreement where the restructuring agreement permits secured creditors to enforce or realise their security during the restructuring of the company. A secured creditor who cannot take advantage of the decision period or favourable terms in the restructuring agreement will face the limitations that an unsecured creditor will face in realising their debt during administration.

Secured Creditor under Liquidation

The position of the secured creditor is slightly different in a liquidation. Therefore, even though the secured creditor does not have the freehand to proceed with enforcement as it would under the Borrowers and Lenders Act, the secured creditor may proceed with enforcement with relative ease. Section 93 provides that:

“A person shall not, on the commencement of a winding-up proceed with or commence an action or civil proceedings against the company, other than proceedings by a secured creditor for realisation of the security of that secured creditor, except (a) by leave of the Court; and (b) subject to the terms that the Court may impose.”

Even though the Act does not specifically indicate what the conditions that the judge must consider in deciding whether or not to grant leave for enforcement, it is expected that there will be similar recourse to the grounds considered during Administration.

It is important to note that in liquidation, the right to enforce a secured charge is not unfettered. After the first meeting of creditors, the liquidator may serve a notice on a secured creditor to realise their security or treat it as surrendered after the end of the period specified in the notice. This ‘grace period’ cannot exceed 6 months. Thus, even though the secured creditor does not require leave of the court to enforce or realise their security. They must enforce it quickly or risk losing it to the liquidator who then adds it to the general pool of assets to be distributed to all the creditors.

Conclusion

The Borrowers and Lenders Act, 2020 (Act 1052) and the Corporate Insolvency And Restructuring Act, 2020 (Act 1015) are both legislation that govern creditor interest. However, while Act 1052 seeks to protect the individual secured creditor’s interest, Act 1015 attempts to protect the interest of the entire class of creditors, by whittling down the rights of individual creditors in favour of the general body of creditors. This can sometimes mean chipping away at the rights and protections that secured creditors would have otherwise had under Act 1052.

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