“Did you know that you can secure financing from financial institutions and credit providers using your livestock, crops, negotiable documents, intellectual properties, securities, household items and many other movables assets as your collateral in Kenya?”
In 2017 the Movable Property Security Rights Bill was assented to and became law in Kenya. This was largely considered a departure from the traditional restrictive dispensation of using immovable property as security which was unavailable to the poor and mid-level Kenyans. The dominant use of immovable as opposed to movable property as collateral in most global credit sectors can be attributed to a number of reasons among them:
- the creation of security interests in movables was deemed uncertain and difficult;
- perfection of security interests in movable properties with respect to identification and priority was problematic; and
- the enforcement of security rights in movables is somewhat expensive and slow.
There was a need to establish a new dispensation to deal with the use of movables as collateral in Kenya. The precursor legislation, now repealed, Chattels Transfer Act, Cap 28 was unduly complex, uncertain, and inflexible and involved highly technical documentation. There were different registration regimes under the repealed Act, and enforcement of security interests in movables was problematic. The repealed Act did not factor adequate access to credit by Micro-Small and Medium Enterprises (hereinafter “MSMEs”) using the readily available movables. For these reasons, the repealed Act, did not effectively protect the financiers.
Security interests under the Act are created through a security agreement where the grantor has rights in the movable to be encumbered. A security agreement (hereinafter “the agreement”) under the Act is enforceable if it meets some prerequisites:
- the agreement has to be in writing and signed by the grantor;
- the agreement has to identify both the grantor and the secured creditor;
- the agreement has to sufficiently describe the collateral to be encumbered; and
- the agreement has to describe the secured obligation with the exception of agreements providing for outright transfer of a receivable.
The Act provides for enforcement of security rights under Part VII (sections 65 to 78). Aggrieved parties may exercise their rights under the Act, or any other written law or the security agreement. The options exercisable by an aggrieved secured creditor are to pursue any remedy available under the security agreement, namely; sue for performance of an obligation, appointment of an official receiver, lease, license, sell or take possession of the collateral. However, section 69 of the Act provides for the “equity of redemption” which is a right given to the aggrieved secured creditor, that at any time before the movable property is sold or otherwise disposed of or before the conclusion of an agreement to sell or otherwise dispose of the movable, he/she can buy it back.
In case of default by the grantor, the secured creditor is required to issue a notification stating the nature and extent of default, setting time lines for rectifying the said default as well as consequences for non-compliance. Moreover, if the default entails non-compliance with express or implied covenants in the security agreement, the notification shall state the actions to be taken to rectify the default as well as timelines. Section 67(3) of the Act permits the secured creditor to sell, lease, appoint an official receiver or take possession of the movable if the timelines stipulated in the notifications are not complied with.
It is worth noting that a notification of intention to lease, license or otherwise dispose of the collateral has to be sent to the grantor as well as all other secured creditors pursuant to Section 73. Lastly, a higher ranking secured creditor may take over commenced enforcement pursuant to Section 70. However, the takeover must happen before sale, disposition or acquisition of the movable by a lower ranking secured creditor.
The term “priority” refers to the status of being earlier in time or higher in degree or rank; precedence. The general rule under the Act is that priorities in a security right are determined according to the time of registration where the security right is created by the same grantor for the same collateral.
First, the priority of security rights in proceeds depends on the instant date used to determine priority in collateral. The rights of non-consensual creditors have priority if, before the security right is made effective against third parties, the non-consensual creditor has registered a notice with the registrar.
However, an individual under section 51(1) of the Act, may at any time subordinate the priority of its rights under this Act in favor of any existing or future competing claimant without the need for the beneficiary to be a party to the subordination.
The Act establishes a registry and the office of the registrar to facilitate registration of notices relating to security rights. The Act limits the personal liability of the Registrar and officers acting under the authority of the Registrar for acts done in good faith and under the authority of the Act under section 22. In addition to this, section 33(7) provides that appeals from the decisions of the registrar lie with a court of competent jurisdiction.
Part VI of the Act provides for the following rights & obligations of parties and third-party obligors. These are:
- to exercise reasonable care and preserve the asset – section 56.
- to return the collateral or register a cancellation or amendment notice by the secured creditor upon termination of the agreement – section 57.
- the right of the secured creditor to inspect the collateral – Section 58.
- protection for a debtor of receivables – Section 59
- the defense and right of set-off to the debtor of a receivable – Section 61
- right of modification of the original contract – Sec 62
- right of recovery of payments made by the debtor of a receivable – Sec 63
- rights as against the depository bank – Sec 64.
From the foregoing we can conclude that, access to credit is pivotal in any growing economy as it enables businesses venture into new markets as well as expand the existing businesses. In Kenya, movable properties are more readily available and accessible to most borrowers as opposed to immovable or real property. For sustainability of economic growth and development, MSMEs should be empowered through general access to credit. It is worthwhile to note that the Act has ushered in a new dawn for the Kenyan credit sector since its inception.
The information provided in this article is intended for general legal advice and does not constitute legal advice for any specific transaction or case. Since each transaction presents a unique legal context, it is advisable to retain a legal adviser for specific transactions.
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