Further to our alert of 11th May, 2017 informing you that The Movable Property Security Rights Act, 2017 (the “Act”) was signed into law, we wish to update you on the salient features of the Act as set out below. The Act provides that it will come into force on the date appointed by the Cabinet Secretary which shall be published in the Kenya Gazette. A Legal Notice Number 77 (Legislative Supplement, 2017) was published in The Kenya Gazette on 26th May,2017 indicating that the Act’s commencement date may be contained in that Notice. However, the Legal Notice is yet to be printed and for this reason, we can only ascertain the date of commencement once we have sight of the contents of the printed Notice.
- PURPOSE OF THE ACT
The Memorandum of Objects and Reasons in the bill proposing this law describes the intention of this law as follows:-
i) to provide for the use of movable property as collateral for credit facilities;
ii) to establish the office of the Registrar of security rights;
iii) to promote consistency and certainty in secured financing relating to movable assets;
iv) to enhance the ability of individuals and entities to access credit using movable assets; and
v) to establish a Registry to facilitate the registration of notices relating to security rights in movable assets.
- SCOPE OF THE ACT
The Act applies to security rights in movable assets including every transaction that secures payment or performance of an obligation, a chattel mortgage, credit purchase transaction, credit sale agreement, floating and fixed charge, pledge, trust indenture, trust receipt and financial lease (a lease under which at the end the lessee automatically becomes the owner of the asset that is the object of the lease or, may acquire ownership of the asset by paying no more than a nominal price or, the asset has no more than a nominal residual value). However, the Act does not apply to security rights in proceeds of collateral if the proceeds constitute a type of asset that is governed by another law. The Act also does not apply to transactions specified under section 4(2) which include, among others, a security right in book entry securities under the Central Depositories Act, the creation, lease or transfer of an interest in land excluding a right to payment that arises in connection with an interest in or a lease of land and security right in a vessel or aircraft.
Movable assets mean any tangible asset (i.e. all types of goods including motor vehicles, crops, machineries, livestock) or intangible asset. Examples of intangible assets are, receivables (amounts which are owed to a business and regarded as assets), choses in action (for example right to sue for damages for an injury, rights of a beneficiary to an estate of a deceased and rights of an employee to unpaid wages), deposit accounts, electronic securities (securities not represented by a certificate) and intellectual property rights.
Security rights mean a property right in a movable asset that is created by an agreement to secure payment or other performance of an obligation, regardless of whether the parties have denominated it as a security right, and regardless of the type of asset, the status of the grantor or secured creditor, or the nature of the secured obligation. Security rights also mean the right of the transferee in an outright transfer of a receivable.
It is also prudent to note that the Act does not override provisions of any other law that limits the creation or enforcement of a security right in, or the transferability of, specific types of assets. However, if that other law limits the creation or enforcement of a security right in, or the transferability of an asset on the sole ground that it is a future asset, or a part of, or undivided interest in an asset, then the Act shall override that other law (see section 4(5)).
- MANDATORY EFFECT
One of the interesting aspects of the Act is that it provides for party autonomy under section 5(1) which means that parties can opt not to follow the provisions of the Act save for sections 5(2) (requiring a person to exercise the rights and perform the obligations under the Act diligently and in good faith), 6 (creation of a security right by execution of a security agreement) 8 (description of an encumbered asset), 56 (grantor or secured creditor of collateral to exercise reasonable care as regards the collateral), 57 (registration of amendment or cancellation notice on termination of security right) and 80 to 87 (deals with the lawapplicable to security right in tangible and intangible assets), which are mandatory. Parties are permitted to derogate from other provisions of the Act.
- CREATION OF A SECURITY RIGH
A security right is created by a security agreement which must be in writing and signed by the grantor, must identify the secured creditor and grantor, describe the secured obligation (except in the case of an agreement that provides for the outright transfer of a receivable) and describe the collateral as provided in section 8 of the Act. Section 6 and 8 of Part II of the Act which provide for creation of security rights and description of collaterals are mandatory and parties cannot derogate from the requirements of those sections.
Section 6(4) of the Act provides that a security agreement entered into in accordance with section 6 of the Act is enforceable and creates a security right, irrespective of the satisfaction of the requirements that may be imposed by any other written law. It is interesting to note that this section does not provide for registration of a security agreement as a qualifying factor for the creation and enforceability of a security right.
- REGISTRATION OF NOTICES
Section 19(1) establishes the Office of Registrar who shall be in charge of the Registry of security rights. The Registry’s function is to receive, store and make accessible to the public information on registered notices with respect to security rights and rights of non-consequential creditors. The Attorney General’s Office is at an advanced stage of setting up an electronic collateral Registry which would be accessible online by everyone. However, only secured creditors will be able to register collateral on the online platform. It is therefore the responsibility of the creditor to register the notices.
A notice is defined in the Act as communication in the prescribed manner to the Registrar of information in an initial notice, an amendment notice or a cancellation notice. An initial notice would be the first document to be lodged with the Registrar in respect of a security right. Section 27(1) of the Act provides that an initial notice shall contain the identifier and address of the grantor, the identifier and address of the secured creditor or its representative, a description of the collateral in accordance with Section 8 or by a serial number for the serial-numbered collateral only that is not held as inventory, the period of effectiveness of the registration and any other information for statistical purposes. The registration of an initial notice, amendment notice and cancellation notice is effective from the date and time when the information in the notice is entered into the records in the Registry.
With regard to the procedure for registration of notice, the Act provides that the procedure for registration of notice, access to information by the public, conduct of search and assigning of unique identifiers to grantors and secured creditors shall be as prescribed in the regulations made by the Cabinet Secretary. We note from The Kenya Gazette of 2nd June 2017 that a Legal Notice Number 86 in respect of The Movable Property Security Rights (General) Regulations, 2017 was published indicating that the regulations in respect of the Act have been published. However, the regulations have not been printed yet and accordingly we are not in a position to ascertain the provisions of these regulations without having sight of the final printed version.
By way of an amendment to section 117 of the Stamp Duty Act (Cap. 480), a notice need not be stamped with duty as all instruments under the Act are exempt from duty. Upon registration of an initial notice, the Registrar will assign a unique number to the registered notice and will associate all registered amendment or cancellation notices that contain that unique number with the initial notice. The registration of an initial notice is effective for the period of time indicated in the notice, but shall not in any event, exceed ten (10) years.An amendment notice must be registered within six (6) months before expiry of the effective period of the initial notice in order to extend the period of effectiveness and in such case, the extended period of the initial notice shall not exceed ten (10) years.
- EFFECT OF REGISTRATION
We have mentioned in paragraph 4 above that a security agreement entered into in accordance with section 6 of the Act is enforceable and creates a security right. Section 15 of the Act provides that for a security right to be effective against third parties, a notice with respect to the security right must be registered with the Registrar of security rights. However, under section 16(1) a security right in any proceeds is effective against third parties without any further action of the grantor and secured creditor if the security right in the original collateral is effective against third parties and if the proceeds are in the form of money, receivables, negotiable instruments or rights to payment of funds credited to a deposit account.
- RIGHT TO INDEMNITY
A key issue to note is that the Act does not expressly provide for the right to indemnity to a person who suffers damage due to any rectification of the Register under the Act or any error in the records kept at the Registry. In this regard, the Act states under section 34(3) that a search of the Registry records issued by the Registrar shall be proof of its contents. The Act also provides under section 22 that the Registrar or an officer acting under the authority of the Registrar cannot be held liable for anything done under the authority of this Act if that action or matter is done in good faith.
- ORDER OF PRIORITY IN RESPECT OF COMPETING SECURITY RIGHTS
Section 38 of the Act provides that priority among competing security rights created by the same grantor in the same collateral shall be determined according to the time of registration of the initial notice.
A security right may be created in tangible assets that are attachments to immovable property. It is however important to note that a security right made effective against third parties in an attachment to immovable property has priority over a competing interest created and made effective against third parties under immovable property law.
- TRANSFER OF A SECURITY RIGHT
Section 17 of the Act permits a secured creditor to transfer a security right or part of it. The secured creditor may register an amendment notice to reflect the transfer. However, section 17(2) provides that a transfer of a security right shall be effective whether or not an amendment notice has been registered.
- AMENDMENT AND CANCELLATION NOTICES
Section 57 of the Act is one of the mandatory provisions. It obliges a secured creditor to register an amendment or cancellation notice as provided in section 33 of the Act, on termination of a security right in a collateral or in respect of any amendments.
- ENFORCEMENT OF A SECURITY RIGHT
Part VII of the Act sets out the regulations in respect of enforcement of security rights by a secured creditor upon default by a grantor. Section 66 provides that a secured creditor may exercise its post-default rights by application to a court or in accordance with the provisions of Part VII, without applying to a court.
Should the grantor default on any of the grantor’s obligations, the secured creditor shall serve a notice to the grantor in writing or in any form agreed between the parties, to pay the money owing or perform the security agreement. The notice should contain the information set out under section 67(2) of the Act which includes among others, the nature and extent of default, actual amount where money is owing, act to be done etc .
Section 67(3) sets out the methods of enforcement of the secured creditor’s rights should the grantor not comply with the notice. Under this Section, the secured creditor may sue the grantor, appoint a receiver of, lease, take possession or sell the immovable asset. Section 68 (1) provides that a secured creditor may sue the grantor for performance of the obligations secured by the security agreement only if the grantor is personally bound to satisfy the secured obligation, the collateral is rendered insufficient to fully satisfy the secured obligation or the secured creditor is deprived of the whole or part of the security right through a wrongful act or default of the grantor or debtor. In the event that the secured creditor intends to dispose of the collateral, the secured creditor must send a notice to the grantor of its intention to dispose of the collateral as required under section 73(1) of the Act. This notification must be sent to (1) the grantor and the debtor and (2) any other secured creditor that has registered a notice with respect to the collateral a least five (5) working days before the notification is sent to the grantor.
Section 74 of the Act sets out the order in which the secured creditor should apply the proceeds of disposition, which is as follows:-
a) cost of processing and preparing for disposition;
b) satisfaction of obligation secured by the security right under which the disposition is made;
c) satisfaction of obligation secured by any subordinate security right or other subordinate lien.
The debtor remains liable for any shortfall owing after application of the net proceeds under this Section.
- CONSEQUENTIAL AMENDMENTS
The Act repeals the Chattels Transfer Act (Cap. 28) and The Pawnbrokers Act (Cap. 529). It also amends several sections of The Agricultural Finance Corporation Act (Cap. 323), The Stamp Duty Act (Cap. 480), The Hire Purchase Act (Cap. 507), The Business Registration Services Act (Act No. 15 of 2015), The Companies Act, 2015 and The Insolvency Act, 2015.
A key amendment we wish to highlight is with regard to section 832(3)(c) of the Companies Act, 2015 which is now amended to provide that the Register of Companies shall comprise certificates of registration of company security rights. Our understanding of this amendment is that it would require double registration and therefore duplication. This is because a secured creditor shall first have to register the security right at the Registry of security interests and then after register the same at the Registry of Companies. The Act also amends Section 535(2) of the Insolvency Act, 2015 to provide that the priority of a floating charge shall be determined in accordance with the Act
Section 89(2) of the Act provides that, except as provided in the Act, the Act shall apply to all security rights within its scope, including prior security rights. A prior security right means a right covered by a security agreement entered into before the coming into force of the Act, that is a security right within the meaning of the Act and to which the Act would have applied if it had been in force at the time when the security right was created.
However, under section 91(2), a prior security right remains effective between the parties despite the fact that its creation did not comply with the creation requirements of the Act. A prior security right shall also remain effective against third parties if it was effective against third parties under the law that was previously in force until the earlier of the time it would have ceased to be effective under the prior law and the expiration of nine months after the coming into force of the Act. It is advisable that secured creditors take note of the nine month’s transition period and register initial notices in respect of existing security rights that go beyond nine months.
We shall continue monitoring the gradual progress in implementing the Act and we shall send further alerts once we obtain and review the final print out of the Regulations from Government Printers. We shall also update you on the proceedings at the collateral registry once it is fully set up and operational.