Kenya: Movable Property Security Rights Act Enacted

(May 18, 2017) On May 10, 2017, Kenyan President Uhuru Kenyatta signed into law the
Movable Security Rights Bill 2017, legislation aimed at facilitating the use of movable
property as collateral for securing a credit line. (President Kenyatta Signs Movable Property
Security Rights Bill into Law, OFFICIAL WEBSITE OF THE PRESIDENT (May 10, 2017).) It
does this mainly by establishing the Office of Registrar of security rights and by providing
for the registration of security rights in movable property. (Id.) The Act will be
implemented once the Cabinet secretary responsible for the registration of security rights
issues a notice in the Kenyan Gazette to that effect. (Movable Property Security Rights Act,
2017, 1 (May 10, 2017), IKM Advocates website.)
Security Rights and Borrowing
Under the Act, a security right is:

(a) 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; and

(b) the right of the transferee in an outright transfer of a receivable; (Id. 2.)
The Act makes it easier for persons who do not own real property to secure a credit line by
facilitating borrowing against their various types of movable assets. It states that

(2) A security right may encumber

(a) any type of movable asset, whether tangible or intangible [including future assets];

(b) parts of assets and undivided rights in movable assets;

(c) generic categories of movable assets; and

(d) all of a grantors movable assets. (Movable Property Security Rights Act, 7.)

The term intangible asset includes receivables, choses in action (a right to sue), deposit
accounts, electronic securities and intellectual property rights, whereas tangible asset
means all types of goods and includes motor vehicles, crops, machineries, livestock. (Id.
2.)

Notification of Security Rights and Creditor Rights

The function of the Office of Registrar is to receive, store and make accessible to the public
information on registered notices with respect to security rights and rights of non-
consensual creditors (creditors that obtained the right in the collateral by operation of
law). (Id. 2 & 19.) An initial notice must include the following content:
information about the guarantor and the creditor;
a description of the collateral in a manner that makes it possible to identify it;
effective dates of the registration; and
any other information relevant for statistical purposes. (Id. 8 & 27.)
Rules on the process for registering a notice and accessing the information collected by the
Registrar will be enacted through regulations. (Id. 26.)
Application of a security right to a third party requires the registration of the right.
According to the Act, a security right in any movable asset is effective against third parties
if a notice with respect to the security right is registered with the Registrar. (Id. 15
 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 Acts 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.

1. 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.

1. 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)).

1. 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 law applicable to security right in tangible and intangible assets), which are mandatory.
Parties are permitted to derogate from other provisions of the Act.

1. CREATION OF A SECURITY RIGHT

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.

1. REGISTRATION OF NOTICES

Section 19(1) establishes the Office of Registrar who shall be in charge of the Registry of
security rights. The Registrys 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 Generals 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 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.

1. 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.

1. 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.

1. 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.

1. 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.

1. 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.

1. 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 grantors 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 creditors 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.

1. 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

1. RETROSPECTIVITY

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
months 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.

The Movable Property Security Rights Act, 2017 (the Act) was assented into law on
10th May, 2017.This new law will facilitate the use of movable property as collateral for
credit facilities, establish the office of the Registrar of Security Rights and provide for the
registration of security rights in movable property.
This Act will also benefit small and medium-sized enterprises which experience difficulty in
accessing finance from the formal sector.

Overview

The Act has repealed the Chattels Transfer Act (Cap. 28) and the Pawnbrokers Act (Cap.
529.It has amended 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.

The Objects of the Act

The Act is significant as it seeks; to enhance the ability of individuals and entities to access
credit using movable assets and to promote consistency and certainty in secured financing
relating to movable assets.

Significant Provisions of the Act

It is important to note that the Act, has brought with it significant provisions. These
provisions are:

a) Creation of a Security Right

A security right under the Act is created by a security agreement and provides that the
grantor has rights in the asset to be encumbered or the power to encumber it. The security
agreement must be in writing and signed by the grantor; it must also identify the secured
creditor and the grantor, except in the case of an agreement that allows for the outright
transfer of a receivable, it should also describe the secured obligation and the collateral.

b) Types of Securities Created

The Act assists persons who do not own real (immovable) property to secure credit by
facilitating borrowing against their various types of movable assets. The Act provides that a
security right can encumber the following:-

i. any type of movable asset, whether tangible or intangible, including future assets (a
moveable asset which does not exist or which the grantor does not have rights in or power
to encumber at the time the security agreement is made;

ii. parts of assets and undivided rights in movable assets;

iii. generic categories of movable assets;

iv. all of a grantors movable assets; and

v. choses in action.

The Act further defines a tangible asset to mean all types of goods which include: motor
vehicles, crops, machineries and livestock whereas intangible assets include: Receivables,
deposit accounts, electronic securities and intellectual property rights.
The assets encumbered or to be encumbered ought to be described in the security
agreement in a manner that reasonably allows their identification.

c) Registration of Notices Relating to Security Rights

The Act establishes the Office of the Registrar for purposes of receiving, storing and making
accessible to the public information on registered notices with respect to security rights and
the general running of the registry. The Registrar will be appointed by the Cabinet
Secretary for National Treasury.

Section 20 of the Act has further adopted a regime of notice filing, under which a single
initial notice can be registered, and under which many individual transactions will fall. The
initial notice should contain; the identifier and address of the grantor, the identifier and
notice of secured creditor, a description of the collateral and the period of effectiveness of
the registration.

Section 30 provides that a public registry will be established, permitting searches both by
the identifier of the grantor of security, and by the serial number of the collateral. Priority
will be determined by the time of lodging the security for registration.

d) Enforcement of a Security Right

In the event that there is failure to pay or perform the secured obligation, the grantor or
secured creditor will exercise any right under the security agreement or that which is
provided under any other law.

If there is default with respect to an obligation, the secured creditor should notify the
grantor in writing to pay money owing or perform and observe the agreement. If the grantor
does not comply within the period indicated in the notification after date of service of the
said notification, the secured creditor will have the right to:-

1. Sue for any money due or owing under the agreement;

2. Appoint a receiver of the income of the moveable asset;
3. Lease the moveable asset; or
4. Take possession of the moveable asset

Conclusion

From the foregoing, the Act has introduced numerous advantages by enhancing access to
credit facilities using moveable property as collateral which will benefit small and medium-
sized enterprises. The Act, however, does not provide any mechanism to verify that a person
who registers a notice on movable property in their name is the owner of the property. This
could eventually lead to disputes around ownership pursuant to registration.

Further, the Act does not compel any banking institution or other lender to accept movable
assets as collateral. The decision on whether to accept movable assets as collateral will
remain within the bank or lenders discretion pursuant to a full risk assessment and
depending on the availability of funds for this purpose.