Quasi-security transactions in Nigeria: sidestepping the adverse effects of insolvency proceedings by taking back what is yours




The importance of a security interest is highlighted when a company is unable to pay its debts. A security interest primarily secures the debtor’s payment obligation and insulates a secured creditor from insolvency. Hence, so long as a company is able to pay its debts as they fall due, a secured creditor has no significant advantage over its unsecured counterpart.

In formal insolvency proceedings, the assets of a debtor must be available for its general body of creditors. Assets which the debtor has proprietary interest in, prior to insolvency, cannot be arbitrarily removed from the insolvent debtor’s estate. On the other hand, insolvency law respects security interests of third parties. Holders of security interests such as charges, mortgages, pledges and liens are often not impeded from enforcing their claims against the insolvent’s assets.

A creditor can enhance his protection by simply retaining his proprietary interest in an asset, pending when the debtor performs his contractual obligation. Transactions involving retention of ownership do not create security interests but constitute a genre of quasi-security arrangements. The primary distinction between these quasi-security transactions and security interests is that security interests can only be granted in the assets of the security provider, i.e., the debtor. By contrast, a creditor in these quasi-security transactions retains ownership of assets. No security interest can be created by a unilateral retention of ownership.

Hire-purchase agreements

In a hire purchase (HP) agreement, goods are hired in return for payment of instalments by the person to whom they are hired (the hirer) with an option to purchase at the end of the bailment. The owner retains proprietary interest in the goods and only passes it to the hirer if the hirer exercises the option to purchase. In a HP agreement governed by common law, the owner may insulate itself from the hirer’s insolvency by inserting a clause for the termination of the agreement at the hirer’s insolvency. The termination and asset forfeiture do not violate insolvency law given that the owner retained ownership of the asset pending when the hirer completes the instalment payments and exercises the option to purchase. Hence there is no removal of assets which ought to be available to the insolvent hirer’s general body of creditors.

Whereas the foregoing analysis is premised on the ground that the hirer’s interest in the hired asset is possessory, there is a school of thought which contends that the hirer’s instalment payments and option to purchase or confer a (limited) proprietary interest in the goods on the hirer, as opposed to a mere possessory right. The veracity or otherwise of this proposition is outside the scope of this piece. However, assuming this proposition is correct, a termination or forfeiture at insolvency will deprive the insolvent hirer of a valuable asset in breach of insolvency law. The foregoing analysis is restricted to HP agreements under common law. Different considerations will apply to transactions under the Hire Purchase Act 1965 where sections 9 and 10 place restrictions on recovery of goods by owners.

Retention of title clauses

Where there is a credit sale with a part or the whole purchase price outstanding, a creditor may use a retention of title (ROT) clause in the contract to retain ownership of the asset, pending when the debtor or buyer completes the performance of his contractual obligation. Where properly drafted and utilised, ROT clauses can insulate the creditor’s asset from insolvency; notwithstanding that the insolvent buyer is in possession of the asset. At the buyer’s insolvency, the asset will not fall into the insolvent buyer’s estate. Section 19(1) of the Sale of Goods Act 1893 provides a doctrinal basis for ROT clauses.

ROT clauses do not create security interests; rather there is a mere unilateral retention of ownership. A simple ROT clause may not offer foolproof protection. For instance, if a buyer sells the goods to a bona fide purchaser for value without notice, the clause will be worthless: s. 25(1) SOGA. To maximise the efficacy of ROT clauses, complex ROT clauses have evolved. Some of these clauses attempt to extend the sellers’ proprietary rights beyond the original goods to by-products, proceeds, etc. These complex ROT clauses are often at risk of being re-characterised as security interests and consequently being void for non-registration. For instance, a court may re-characterise an ROT clause, which extends to by-products or proceeds as a charge on the ground that since the seller’s interest in the by-products is defeasible by payment of the purchase price, the interest created is security as opposed to a retention of ownership.

Chattel lease agreements

Chattel leases may be categorised into operating or finance leases. An operating lease is an agreement of hire of a machinery or plant, where the lessee rents the equipment for a time period that is less than the equipment’s useful life, and makes payments the total of which is less than the purchase price of the equipment. By contrast, in a finance lease, the period of rental is designed to enable the lessor to recover the cost of purchasing the equipment, as well as other financing costs, while also earning returns on the investment in the lease. The period of a finance lease is usually the equivalent of the estimated useful life of the equipment and all financial risks and rewards associated with ownership are transferred to the lessee.

Given that lessors in finance and operating leases retain ownership of their assets, insolvency-termination or asset forfeiture clauses in these transactions are valid and enforceable. This may be harsh on a lessee in a finance lease, considering that in practice: (i) at the time the agreement is entered into, there is often a reasonable expectation that the chattel will not be returned to the lessor; (ii) the lessee amortises the full value of the chattel over the term of the lease by rental payments; (iii) the lessee bears the risks and enjoys the rewards associated with ownership; and (iv) the lease is expected to run throughout the life period of the chattel. To mitigate this harshness, a liquidator may consider seeking equitable relief from forfeiture.

Conditional sale agreements

A conditional sale agreement is a contract for the sale of an item where the buyer takes possession of the item but the seller retains title (and right to repossess), pending when the seller fulfils conditions specified in the agreement. A termination or forfeiture clause in a conditional sale agreement entitling the seller to repossess the goods if the buyer becomes cash flow insolvent is valid and enforceable. Given that the seller has retained ownership, the insolvent buyer’s general body of creditors will not be deprived of any asset which ought to be available to them.

In cases where there has been substantial payment, the above position may be harsh on the insolvent buyer while granting the seller a windfall. A liquidator may mitigate this hardship by an action for the recovery of paid instalments on the ground of total failure of consideration. This will be based on the ground that the item which was the primary aim of the contract is no longer available. A recovery action may be futile where the agreement stipulates for forfeiture without a right of recovery.


A creditor may enhance its protection against insolvency by retaining ownership of its assets, pending when a debtor performs its contractual obligations. These types of quasi-security arrangements have the same functional effect as security interests. However, these quasi-security transactions must be meticulously drafted or documented to avoid being re-characterised as security interests. If re-characterised, they may be void for non-registration under applicable laws.


Dr Kubi Udofia is a senior associate and head of the corporate and commercial law practice group at Fidelis Oditah & Co. He can be contacted on +234 81 0289 1800 or by email: kudofia@oditah.com.

© Financier Worldwide


Dr Kubi Udofia

Fidelis Oditah & Co.

©2001-2019 Financier Worldwide Ltd. All rights reserved.