TTHE MOVEABLE PROPERTY SECURITIES ACT 2017

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 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 2 nd 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.

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 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.

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 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