U
NIVERSITY
O
F
L
AGO S
S CHOOL O F P O STGRADUATE S TUD IES
F ACUL TY O F L AW
PPL 813 – SECURED CREDIT TRANSACTIONS 1 - 2010/2011
BEING A SEMINAR PRESENTATION IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE AWARD OF LL.M DEGREE PROGRAMME
TOPIC: CREATION AND ENFORCEMENT OF HYPOTHECATION AS A
FROM OF SECURITY IN NIGERIA
BY
- D URU , G EO RGE
N JOKU , C ALL ISTU S
I
WEZE
, O
DIAK ACHUKW U
V
IN CENT
-
- 109061111
O
JEDOKUN
, O
LU SHOL A
O
LO YED E
, T
EMITAYO
O
LAMIDE
S ODJE , P IU S E.
U GBO , N O SAYABA
-
-
-
-
LECTURER: DR. AMOKAYE
M
ARCH
3, 2011

T
ABLE OF
C
ONTENTS
P ART 1
1.
I NTRODUCTION
1.1
Proem
1.2
Definition
1.3
History
2.
C
REATION
O
F
H
YPOTHECATION
I
N
N
IGERIA
P ART 2
P ART 3
3.
E NFORCEMENT
P ART 4
4.
C ONCLUSION
Page 2 of 16

P ART 1
1.
I NTRODUCTION
1.1
P ROEM
Due to the increase in commercial activities and the difficulties in securing a loan with fixed assets such as land which at times is unavailable to the borrower, the use of other forms of security have evolved. Goods of various kinds, fixtures and growing crops when assigned or charged separately, may be the subject matter of security. Trade machinery and other corporeal moveable may also qualify under this head as personal chattels security.
A Creditor who takes personal chattels as security has certain problems to contend with because by the very nature of personal chattels they are movables. Generally, personal chattels have no title deeds which may be appropriated by the creditor to forestall further dealings in such chattels by the debtor. Further, the debtor’s possession of the chattel despite the creditor’s interest enables the debtor to represent that he is still the owner and thus able to sell the chattels or obtain false credit from others.
1
As grave as these problems may appear, the creditor can nonetheless overcome them by taking possession of the chattels or have same registered. Possession typically ensures physical control thereby denying the borrower the opportunity to use the chattels to the detriment of the lender.
Registration on the other hand, gives prospective purchasers or creditors
1 I.O. Smith ‘Nigerian Law of Secured Credit’ p.147
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notice of encumbrance over the chattel. This can be done by pledge of chattel or the creation of a mortgage bill of sale 2
With respect to Hypothecation which is one of the forms of security over chattel, the lender can actually sell the consignment where the bill of lading is endorsed in his name.
1.2
D EFINITION
We shall start this discourse by stating that like most legal terms, there are several definitions of Hypothecation. This term is used principally in the civil law jurisdictions. The Black’s Law Dictionary defined the term as “the pledging of something as security without delivery of title or possession” 3 .The term has further been defined to mean “a collaterizing arrangement which neither the possession nor the title but only the right to sell an asset or property passes on to the creditor or lender” 4.
According to Professor Smith, “Hypothecation involves the passing of neither property in the goods nor the possession of them to the lender” 5 . In other words, the goods remain in the possession of the borrower or a third party while security over them is granted by means of a letter of Hypothecation 6 . The term has further been described as the practice where a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral, but it is "hypothetically"
3
4
2 Ibid
Black Law Dictionary,8 th Edition at Page 759.
See BusinessDictionary.com
5 I.O Smith, Op. Cit, page 210
6 Ibid
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controlled by the creditor in that they have the right to seize possession if the borrower defaults. It therefore means that where; for example, goods are contained in the borrower’s warehouse which cannot be sealed off to enable lender become pledgee of them or where it is impracticable for the lender to have the possession of the goods, the lender can resort to this term.
It must be noted however that under common law, cases of hypothecation, in the strict sense of the civil law, that is, a pledge of a chattel without possession by the pledgee, are scarcely to be found. Cases of bonds and claims for seamen's wages against ships are the nearest approach to it; but these are liens and privileges rather than hypothecations.
1.3
H ISTORY
The security of hypothecation was borrowed from the Civil Law. It marked the final stage of the right in rem which the Roman jurisprudence gradually developed and recognized. The earliest form of the Roman security, called fiduciae, may be regarded as the prototype of the English mortgage. In this security an actual conveyance was executed by the debtor to the creditor on condition (contractus fiduciae) that if the purchase money were repaid by the day named, the creditor would re-convey the property to the debtor.
In this of security credit transaction, the debtor naturally ran a great risk for having parted with his ownership; he had only a personal action against the creditor. The intervention of the proctor was only a matter of time.
Page 5 of 16

The law was next modified by an edict declaring that while the creditor retained possession of the property, its ownership remained with the debtor. This is Pignus and marked the second stage in the history of civil mortgages. But the creditor did not always care to take possession of the thing pledged, nor did the debtor always wish to part with the possession.
And so Servius dispensed with the transfer of possession and thus arose the
hypotheca or pledga of a thing by mere agreement, without any formality and without the delivery of possession. Servius gave the creditor remedy not only against the debtor, but against all other persons, and thus established a true right in rem. The creditor’s remedies in a hypothecation were (a) rights in rem, i.e., he could recover the very thing pledged (b) the right of sale. As regards the latter right Justinian enacted that if the creditor had possession of the hypotheca he could not sue without giving a previous formal notice to the debtor, and if he had no possession he must obtain a judicial decree. In either case he could not sell except after two years from either the notice or the decree.
The security given by the debtor was collateral to his own personal security, which was not determined by sale of the hypotheca except insofar as the amount obtained sufficed. Hypothecation, as such has long since ceased to exist except that it survives only in a modified form in cases of holders of bonds and of seamen in merchant service in respect of their unpaid wages and who have a claim against the ship in rem. But even these cases are, strictly speaking, cases of liens rather than of hypothecation. A mortgage of movable property without possession is perhaps the nearest survival of this form of absolute security.
Page 6 of 16

However, the first recorded case in respect of Hypothecation is Re Hamilton
Young & Co 7 , a bank made advances to its customers who gave the bank
“letters of lien (hypothecation)” accompanied by bleacher’s receipts. The letter of lien was couched as follows; “We beg to advise having drawn a cheque on you for £_____, which amount please place to the debit of our loan account, as a loan on the security of goods in course of preparation for the shipment to the east. As security for this advance, we hold on your account and under lien to you the under mentioned goods in the hands of
(here followed list of goods and names of bleachers) as per their receipt inclosed. These goods when ready will be shipped to Calcutta and the bills of lading duly indorsed will be handed to you, and we undertake to repay
the above advance”. The bank gave notice of the transaction to the bleachers. Upon the customer becoming bankrupt, it was held that the charge in favour of the bank was valid and therefore, the creditor had priority over the customer’s assignees in bankrupty.
7 (1905) 2 K.B.
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P ART 2
2.
C REATION O F H YPOTHECATION I N N IGERIA
Hypothecation is quite often regarded as an alternative name for a charge.
Thus, it is an equitable interest in a secured chattel entitling the chargee to attach that chattel or the proceeds there from for the settlement of debt owed upon default of the chargor. This could be through insolvency. 8 Although quite often than not, hypothecation and lien have been used by some scholars interchangeably, we believe that it will be a misnomer to describe
“hypothecation” as a “lien” and ipso facto “letters of hypothecation” as
“letters of lien”. While both concepts share a common denominator in the sense of creating an incumberance over the goods in question as opposed to a transfer of either a proprietary or possessory interest in them, both concepts arise under different scenarios in the sense that; while Hypothecation arises mainly from the acts of the parties, a lien generally arises by operation of law or rules of equity from the relations between the parties.
9 Therefore, no hypothecation can be created unless by the ACT OF THE PARTIES.
In the creation of hypothecation by the act of the parties, no special or particular form is required and may therefore be by a letter instructing the borrower’s banker to hypothecate the chattels to the borrower’s indebtedness.
To however qualify as hypothecation, the following must be in existence:
8 Jelili Omotola, The law of secured credit, Evans Publishers, p 113.
9 I.O Smith “Secured Credit Transaction” Chap.9
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1.
The said letter must be couched in such a manner as to constitute a document used in the ordinary course of that business as proof of possession or control of the goods.
2.
The chattels must also have been in existence as at the time of the transaction.
3.
The list of goods or chattels to be hypothecated must also be made available for purposes of attachments upon debtor’s default or bankruptcy.
As stated earlier, the concept of hypothecation has its origin in the Roman idea of the pignus and the hypotheca, both of which apparently were hardly different from each other in the Roman legal theory.
10 A proper understanding of Hypothecation is to view it as a specie of charge. A Charge generally arises from an agreement between a creditor and a debtor whereby assets or class of assets belonging to the debtor are appropriated to the satisfaction of the debt, so that the creditor is entitled to have recourse to the assets or the proceeds thereof to discharge the indebtedness.
11 The creditor secured by a charge claims priority over claims of unsecured creditors and junior encumbrancers.
Since the charge does not transfer ownership to the creditor, it could be described merely as an encumbrance, a weight hanging on the asset. This weight travels with the assets into the hands of third parties, other than a bonafide purchaser without notice.
10 Jelili Omotola, The Law of Secured Credit, Evans Publishers 2006 p.113
11 Ibid p. 121
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The nature of rights transferred by the concept of hypothecation has constantly raged among scholars. There has not been a consensus whether the security transfers proprietary nor possessory rights already in existence at the time of creation. Skyes position is that although a charge “does not comprise any of the rights which make up the bundle of ownership, it is proprietary because in the event of bankruptcy of the guarantor, the creditor has not merely a claim to proof of debt, but a right to exercise remedies against the thing itself and to withdraw it to that extent from
the net cast by the trustee in bankruptcy” 12 As a result, Skyes believes that a charge for which Hypothecation is a specie, is proprietary. In disagreeing with Skyes, Smith posits that the real nature of proprietary security created by act of parties involves originally parting with ownership of the property at the time of creation, to be re-conveyed upon repayment. The true nature of hypothecation does not involve such transfer of ownership rather; it is an agreement to appropriate the asset to discharge the debt.
13
R.M. Goode commenting on the nature of this type of security, describes it as merely an encumbrance or rather a weight on the asset which travels with it into the hands of third parties, except a bonafide purchaser without notice. This description in our view is a more concise way of describing this security. This is so because possession is with the chargor and he can easily dispose off the goods to third party fraudulently to avoid his obligation of repayment under the loan transaction. However, no matter the arguments on the nature of rights (whether proprietary or possessory) one common
12 Skyes. ‘The Law of Securities 5 th ed p18 cited in I.O. Smith ‘Nigerian Law of Secured Credit’ p211-212
13 I.O. Smith ‘Nigerian Law of Secured Credit’ p.212.
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denominator of this type of security is that whatever rights created automatically terminate on repayment of the loan. Thus where a borrower liquidates the loan, the encumbrance hanging on the assets automatically disappears without any conscious effort at reconveying same, since there was no conveyance of proprietary interest in the chattels originally.
14
In Nigeria, there are dearth of authorities on the form of creation of hypothecation. The reason for this can be deduced from the fact that this area of the law of security is yet to develop. However, one certainty is that the creation of hypothecation is by the deliberate act of the parties as against creation by law. A borrower who desires to obtain loan may charge certain chattels either in his possession or with a bailee in favour of the lender for the purpose of appropriation in the event of the borrower’s default or bankruptcy. The formality of achieving this is simple. It need not be in a particular legal form. It usually takes the form of a letter instructing the borrower’s banker to hypothecate the chattels to the borrower’s indebtedness. However, care must be taken to ensure that it does not come within the ambit of the Bills of Sale Act, so as to avoid the trouble of complying with the law as to form and registration. To qualify as a letter of
Hypothecation outside the ambit of the Bill of Sale Act, the letter must be couched in such a way as to constitute a document used in the ordinary course of business as proof of possession or control of the goods; as opposed to a situation where the lender’s title to the security is derived from the document itself. If the title is derived from the document then it is a bill of sale transaction and must come under the Act. Whether an intended letter
14 Ibid.
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of hypothecation comes within the purview of the Bill of Sale Act, is a question of construction. In Brown v Bateman (1867) LL.R. 2 C.P. p.272 15 , the court held that a document creating a charge is not a bill of sale on the ground that it was not an assurance on chattels. However, in Edwards v
Edwards (1986)Ch. D P.291, the court held an agreement to assign chattels contained in a deed was a bill of sale which required registration. Where a document is caught by the Act, the effect is that it is only valid where it complies with the statutory form and registered as a bill of sale otherwise, it is void for all purposes.
16 There are two situations where letter of hypothecation will be exempted from the Bill of Sale Act, they are: i.
Where the goods mentioned in the letter of hypothecation are abroad or on board a vessel on the sea. In R v Townsend (18186)16 QBD
p.532, a customer applied for an advance. He used certain goods consigned to him which were at sea as security. He gave to the banker an instrument referred to as hypothecation note. By the said note, he undertook to hold the goods in trust for the bank and to hand over the proceeds in due course. The court held that although the instrument was a declaration of trust without transfer and would have qualified as a bill of sale. However, since it was in relation to a bill of sale in foreign parts or at sea, it fell within the exceptions highlighted by the Act. ii.
A letter of hypothecation will also be exempted from the Bills of Sale
Act if by its nature, it is one that is used in the ordinary course of
15 Cited in I.O. Smith ‘Nigerian law of Secured Credit’
16 Bill of Sale Act 1882 S.9
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business as proof of the possession or control of goods. This is not a clear cut exception. In Re Hamilton Young & Co 17 , a bank made advances to its customers who gave the bank a letter accompanied by bleachers receipt for the goods. The bank gave notice of the transaction to the bleachers. Upon the customer becoming bankrupt, it was held that the charge in favor of the bank was valid and therefore, the creditor had priority over customer’s assignees in bankruptcy. Although the letter of hypothecation was called ‘letter of lien’ it is our position that this is a misnomer as the means of creation in the two securities are different. In the Re Hamilton case the document used was clearly in the ordinary course of business.
Other situations may not be as clear as the Hamilton case. In
National Provincial and Union Bank of England Ltd v Linsell (1922)1 KB p.21 a letter signed by the debtor was held not to be a document used in the ordinary course of business as proof of the possession or control of the goods. From the foregoing, the test would seem to be whether the document is that which is regularly used by merchants in that trade. As against a singular transaction by one merchant. It is pertinent to state that the course of business is that of the lender not the borrower.
It appears that from the authorities so far, the letter of hypothecation in
Hamilton Young’s case appears to be the standard form. Thus, where a party desires to extricate the letter of hypothecation from the ‘claws’ of the Bill of
Sale Act, he should use the instrument similar to that in Hamilton Young’s case.
17 Supra
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P ART 3
3.
E NFORCEMENT O F H YPOTHECATION
It must be stated that unlike a mortgage or pledge where the creditor can foreclose since he has some degree of title in the property, there can be no foreclosure in hypothecation since no interest has passed in the property.
According to the decision in Mathews v. Gooday (1861) 31 LJ Ch. P.282 however, the only modes of enforcement open to a creditor in respect of a loan secured by hypothecation over goods are Judicial sale and Appointment of
Receivers.
Where the letter of hypothecation is in respect of goods on board a vessel and the bill of lading in the creditor’s possession is fully endorsed in his name, he is entitled to sell the chattels and pass good title. This position was adopted by
Lord Summer in The Prinz Adalbert (1917) AC P. 586 at 589 18 . It is pertinent to state here that the rights of the creditor is subject to the right of the bona fide purchaser for value without notice of the encumbrance. The nature of hypothecation, makes its enforceability weak. Since the chattels are in possession of the debtor, he can dispose same off before the creditor can exercise his rights. As a result of the nature of security created by a letter of
Hypothecation, the mode of enforcement no doubt will be cumbersome. The creditor will have to bring an application. We note however that where the creditor has a fully endorsed bill of lading in his possession, he is entitled to
18 Cited in I.O. Smith ‘Law of Secured Credit’
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sell the chattels and pass good title to the purchaser without the assent of the debtor.
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P ART 3
4.
C ONCLUSION :
In concluding, we opine that bearing in mind the simple nature of this form of security, it will not be viable in Nigeria for the following reasons:
1.
Since the chattel or goods pledged are not directly under the supervision of the lender, it becomes very hard for the lender to monitor the goods or chattel and to ensure that the borrower does not in any way interfere or deal in the goods and chattels that have been used for the security.
This has become evident due to the inadequacy of storage facilities which may also lead to a depreciation of the price of the goods or chattels.
2.
In many cases also, goods hypothecated are at sea on board a vessel so that the creditor is not given an opportunity of seeing the condition or doing any proper valuations. The creditor or lender may discover on arrival of the goods that they do not fit the description given when the facility was obtained or that they are in fact inadequate as security for the credit facility.
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