Thursday, September 8 , 2016 6:55 PM / Oserogho & Associates/ Legal Alert - August 2016
From the late twentieth century, Equipment Leasing practices became a viable financial vehicle for stimulating a country’s trade, commerce and industry. In countries like Nigeria however, save for the Hire Purchase Act (as amended), which only regulated hire purchase practices, and the general common law implied terms of contract to hire purchase or equipment leasing transactions, there was no robust and expansive Equipment Leasing legislation until the Equipment Leasing Act was passed into Law in 2015.
An ordinary definition of what Equipment Leasing entails will be that Equipment Leasing is the renting of equipment from its Owner/Lessor, by a Lessee, who in return for enjoying the use of the Equipment leased, makes an agreed periodic payment for the use of the Equipment to the Owner/Lessor of the Equipment.
According to the Federal Board of Inland Revenue Service (“FIRS”), Equipment Leasing is now recognised as a very attractive means of financing the acquisition of Fixed Assets. This is in the light of the scarcity of foreign exchange to pay for the importation of these fixed assets; and the high cost of obtaining credit finance from local financial institutions to purchase such fixed assets outright.
Equipment Leasing Act 2015
The Equipment Leasing Act was passed into Law in 2015 to regulate the businesses and practices of Equipment Leasing, so that the relationship between the Lessor and the Lessee and third parties with Notice are properly identified and protected.
The Equipment Leasing Act, in furtherance of the above objective, created the Equipment Leasing Registration Authority with one of the principal function of this Authority being to register all Equipment Leasing Agreements and certify Professional Equipment Lessors.
Agreements Must Be In Writing
The Equipment Leasing Act requires that all Equipment Leasing Agreements must be in writing, with a detailed description of the equipment that is been leased, the cost or the price of the equipment, the selection process for the contracted equipment been leased, the installmental lease rental payments that the parties to the equipment lease have agreed on, among other terms and conditions.
All Equipment Leasing Agreements must also include a provision that the Lessee shall, during the duration of the lease, remain a mere Bailee or Trustee of the Owner/Lessor of the equipment, with no proprietary or ownership rights of any kind except where expressly provided for at the completion of the lease payments, as in the case of Equipment Finance Leases.
Lastly, all Equipment Leasing Agreements must also contain the provision that until the Equipment Leasing Agreement is renewed or the Lessor agrees to sell the equipment to the Lessee, the Lessee will compulsorily deliver the equipment to the Lessor in good order and condition, reasonable wear and tear exempted, once the lease rentals are paid in full, and the Equipment Leasing Agreement is extinguished or terminated.
A Registration Certificate is required to be issued for every Equipment Leasing Agreement which satisfies the Registration Requirements under the Equipment Leasing Act (“ELA”).
It is now also mandatory that a copy of the Equipment Leasing Agreement, after its execution by both parties, must be delivered or given to the Lessee.
Equipment Leasing Registration Authority and Companies
Only an incorporated limited liability company, with the express object of carrying on business as an Equipment Leasing Company that is subsequently registered by the Equipment Leasing Registration Authority (“ELRA”) can legally carry on business as an Equipment Leasing Company.
In addition to registering Equipment Leasing Companies, the ELRA is also charged to register all Equipment Leasing Agreements and maintain a Register for all such Agreements, as any Agreement that is not registered by ELRA is of no legal effect whatsoever between the Lessor and the Lessee. Third parties without notice of a registered Equipment Leasing Agreement, who acted in good faith for value, can enjoy an exemption from the terms of such an Agreement without prejudice to the rights of the Lessor and the Lessee.
Ownership of Leased Equipment
The ELA requires the Lessor to conspicuously inscribe or affix his or her or its name on all equipment that is/are leased.
The ELA also ascribes to the Lessor an implied term of ownership on all registered equipment leased by the Lessor. Thus, the Lessor’s interest to the equipment takes priority in the event that the Lessee is liquidated or wound-up or declared bankrupt.
Lessee’s Rights and obligations
Provided the Lessee abides by the terms and conditions of the Equipment Leasing Agreement, the Lessee has the right to use and quietly enjoy the possession of the leased equipment. This right includes protection from a unilateral termination of the Equipment Lease even if the Lessor is declared insolvent or bankrupt or wound up.
In addition to paying the Lease Rentals, some of the other obligations of the Lessee under an Equipment Lease arrangement include the proper and reasonable care of the equipment, in the condition in which it was leased, fair wear and tear exempted.
Another very important right that Equipment Lessees’ now have is the right to sue the Equipment supplier or manufacturer for damages and compensation arising from the supplier or the manufacturer’s equipment default. This is without prejudice to the Lessor’s rights against the Lessee or the supplier or the manufacturer of the equipment.
Taxation and Equipment Leasing
Under the ELRA, the Lessor is now entitled to claim all tax allowances and benefits permitted under the Companies Income Tax Act. This may however pose a challenge as the existing tax laws do not allow a Lessor in an Equipment Finance Lease arrangement to claim Capital Allowance from such an Asset. Only Lessors to a Equipment Operating Lease can claim the Capital Allowances to such a leased asset/equipment.
The resurrection of the requirement that a Certificate of Acceptance of Capital Expenditure must be obtained from the Federal Ministry of Industries, Trade and Investment, before a Capital Allowance can be claimed from a capital expenditure will apply to the Lessor or the Lessee’s right to claim any capital or tax allowance or deduction from an Equipment that is leased.
Depending on whether the Lease is a Finance Lease or a Operating Lease, and on whom the eventual ownership or title to the asset will lie at the termination of the Lease, statutory taxes - Companies Income Tax, Withholding Tax, Value Added Tax and Capital Gain Tax, will still apply to incomes and benefits earned under an Equipment Leasing Arrangement.
Termination and Repossession
A Lessor of a Leased Equipment has the right to terminate a Equipment Leasing Agreement and apply ex-parte - i.e. without notice to the Lessee - to a Federal High Court for a warrant of repossession of the Leased Equipment on the condition that the Statutory Notice of Default or Breach was served on the Lessee and the Lessee has failed to remedy the default or breach within the fourteen (14) days stipulated in the Notice.
The Lessor’s right to repossess the equipment leased is without prejudice to the Lessor’s other rights to recover any lease rental amounts that have not been paid, with any damages arising from the Lessee’s breach of the Equipment Leasing Agreement.
The generalisation and treatment of Equipment Leasing in the ELRA, without careful attention been paid to the distinction between the different kinds of Equipment Leasing and their tax treatment under the existing tax laws is a recipe for grave implementation challenges. An amendment of the ELRA, in consultation with the tax authorities and other Equipment Leasing stakeholders is therefore highly recommended.
Another matter deserving of mention is the Central Bank of Nigeria (“CBN”) requirement that Companies engaged in finance leasing businesses must apply to the CBN for a Finance Company License. Such companies shall also be subjected to the CBN’s prudential and regulatory guidelines as may be published by the CBN from time to time. Of concern is the likelihood of over regulation by the Central Bank of Nigeria, the Equipment Leasing Registration Authority and the Equipment Leasing Association of Nigeria (“ELAN”); this is especially as Equipment Leasing is more specially designed for micro, small and medium scale businesses.
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