By Cynthia Mbugua LLB (Hons)
This
is the Taking of Security
Basic
concepts around security
The
type of borrowing determines type of security
Who
can borrow?
1. Individual
So
long as they are of sound mind and not bankrupt.
Can
borrow from individuals, Sacco and financial institutions so long as you have
the capacity.
An
individual has to have title or right over the property entitled to offer it as
security.
You
can’t offer security for what you don’t own or you have no rights.
2. Partnership.
A
registered partnership has the power to borrow but a partnership can only offer
those properties which it as a separate legal entity has title to.
Security
over the assets can be offered by the partners and not the partnership.
An
LLP is a separate legal entity therefore has the power to offer security over
the basis of its assets therefore individual partners don’t need to offer in
their individual capacity.
Any
borrowing that an ordinary partnership can only be secured by security offered
by individual partners as it doesn’t have its own separate legal entity.
3. Cooperative
A
cooperative is a form of business or form of organization that can borrow and
offer assets in its own name.
A
cooperative can’t offer its property in form of shares to secure borrowing as
they belong to its members.
4. Unincorporated
association
An
unincorporated association is permitted to borrow but unless it has title it is
not permitted to offer.
Borrowing
will be done on the strength given by the security of each individual member.
5. Trust
A
body corporate established for a specified purpose registered under Trustees
Act
A
trust which has not been incorporated has no such powers unless specifically
provided for in the trust documents i.e. trust deed, trust rules
A
corporated trust can hold property and can therefore borrow and issue property
Types of properties which
security can be taken
1. Movable
v immovable property
Movable
anything that can be transferred by delivery basically despite the weight.
Immovable property consists of land and fixtures on it.
Test
is can it be delivered and reach the destination in its own original form and
can it be transferred through delivery.
2. Tangible
assets v Intangible assets (e.g. Intellectual property, choses in action,
account receivable)
Tangible
assets have a physical manifestation while intangible don’t. Intangible assets
are manifested in form of a document eg share certificates.
Types of Security.
1. Chattels
mortgage
2. Debenture
issued by a body corporate
3. Chattels
mortgage.
4. Instrument
of Lien
5. Power
of attorney
6. A
letter of hypothecation
7. Charge
on cash deposit
8. Guarantee.
Personal, or corporate guarantees.
Type
of security given depends on certain things:
I.
Underlying relationship between the
borrower and lender.
II.
Nature of the loan i.e. size, purpose and
for how long
III.
The applicable legal regime. Some must be
by way of certain instruments governed by the law. In Kenya for example you
can’t issue security over insurance policies
IV.
Commercial forms agreed by the parties.
V.
Industry practice and norms
Assignment
as a form of security
i.
Could go on account receivables
ii.
Can also be a security over intangible
assets.
CHATTELS TRANSFER SECURITY
A
chattel is any asset that can be transferred by delivery.
A
lot of commercial situations are not amenable to borrowing secured fixed
assets. Eg Mama Mbogas
Chattels
transfer security is a form of security based on immovable assets to cater for
those with no fixed assets, modern commercial realities foes not amend itself
to lending assets.
The
regime for the creation and operation of security is governed by the Movable
Property Security Act supported by the MPS regulations.
Have
repealed the entirety the Chattels Transfer Act.
Covers
security interests over Movable, intangible assets and security interests over
certain choses in action.
Any
Security interest over shares and other instruments covered by the central
repository act.
It
also does not cover any security interest of movable property governed by any
other act
How
different are the acts?
1. The
CA provided for interests over movable assets only. Current one covers movable
and intangibles
2. It
is not mandatory required that an instrument must be registered to come into
effect as per the new Act
3. Previously
registration of an instrument was valid for 5 years. Now it is 10 years
4. Under
the new act, a central registry of security interest is recreated which
consolidates all interest under the previous Act.
5. Previously,
instruments required to be stamped for stamp duty. Right now, instruments are
exempted.
Types of Chattels
A. Chattels
Mortgage
A
mortgage is a security interest issued by a borrower in favor of the lender
under which title of the property is transferred to the lender on condition
that it will revert back to the borrower upon full repayment of the loan.
A
chattels mortgage is a security interest issued over movable property.
When is it suitable to take a
chattels mortgage?
·
Must be for durable assets
·
The asset must have a document of title
·
Must be an asset that isn’t likely to be
destroyed or lost other than naturally.
B. Instrument
of pledge
A
pledge transfers possession but not ownership to the lender.
When is it suitable?
1. Something
not regularly used
2. Asset
must be capable of movement without undue strain/inconvenience
3. Must
be an asset that can be safely used without security risk
C. Security
& Lien
Security
interest under which the borrower creates an encumbrance/restriction in favor
of the lender on conditions that such encumbrance shall be removed on repayment
of loan but borrower does not give title or possession.
The
encumbrance prevents things like further charging.
When
is it necessary:
i.
Transfer will cost undue strain
ii.
Goods are being used
Documents that have to be prepared
- Letter
of offer
The
form and outline should be a letter in the appropriate letterhead addressed to
the borrower
Should
have a reference.
Reference
should be specific and to the point. Refer to the offer, previous negotiations,
loan facilities and amount.
Do
not have a long heading
Must:
i.
Have an intro…on what the letter is about.
Give content to what you are going to provide.
ii.
Be clear who is the purchaser and borrower
is.
iii.
State what the purpose of the loan is.
iv.
The terms of the loan should also be
stated. Should be expressed in months as interest is calculated monthly.
v.
The interest. Interest in percentage
should be provided fro whether it is compound or simple, whether annually or
monthly
vi.
Security clause. What are the securities
you are going to provide for this loan. Identify general power of atto…..
vii.
State how the loan will be repaid.
Identify a figure and the date to which it must be paid on or before,
installments and after how long
viii.
Obligations of the borrower.
a. Not
to transfer assign lease or part possession with the chattels
b. To
inform lender when the chattel is stolen
ix.
Obligations of the purchaser.
a. To
be paid
x.
Rights of the lender. Right to exercise
security rights over the chattels etc
xi.
Disbursed
xii.
The document must be signed by someone
duly appointed by the bank
xiii.
Acknowledgment that the buyer has accepted
the conditions and is bound by the letter. As wells as signature
xiv.
Must have a witness
- Loan
of the facility agreement.
For
small borrowing the lender may not do a separate loan agreement
They
are not mandatory as they may decide to use the terms of the letter of offer as
the agreement
In
certain circumstances, e.g. large sums are being borrowed, the loan agreement
may have many names.
Purpose
is to capture terms under which the lender may offer certain rights to the
borrower.
The
introduction is the purpose of the loan and the amount. The main clause should
be able to identify the purpose of the loan, term, interest, securities,
conditions precedent before the loan can be disbursed, payment obligations,
what happens in case of default and consequences, rights of the lender, general
clauses e.g amendments, arbitration clauses, good faith. In the case of a
chattels mortgage, it is illegal to state the governing law is…..
Consequences
of default
Borrower
will be charged a default penalty interest which is higher than ordinary
interest
Lender
can exercise any of their rights under the security document.
The
execution page must always be stand alone. Execution must be done in accordance
with the prevailing law. Not all documents need to be under seal. Documents
that should be under seal are those that deal with an interest in land or
intellectual property. State signed on
behalf of…Company in the presence of…. In banks, documents are signed by
officers under PoA. State the registration of the PoA and the year registered.
After
the execution, the document should contain schedules. The first schedule may
contain the rights of the assets of which security should be taken. Another
schedule
- Security
agreements
- Chattels
Mortgage
When
drafting an instrument under the Act, the cover page should have a title e.g.
chattels mortgage. As an instrument, prepare it in accordance to the prescribed
forms.
………………………………
If
the borrowers undertake it, you will create a first ranking mortgage
…………………………………
An
affidavit should also be included and executed by the witness who saw the
borrower sign.
QUESTION…Tom John and Peter have
incorporated a company known as the Next Big Thing Ltd. Offices at Santau Plaza
on the junction of Ghalana and Lenana.Borrowing 2 Mill for branding, website,
working capital. Bank CBA at Junction…Draft A Letter of Hypothecation
- Registration
and perfection of the securities.
Under
the Act there is established a registrar of movable and tangible assets.
Maintains a central registry. Instruments created under the Act requires to be
registered. The process of registration of securities starts with execution.
The advocates of the lenders should facilitate and ensure that. Borrower should
always execute first. If consent is needed, should be attached as well. The
document is then bound and endorsed. If the document should be assessed, it
should be assessed. It should then be lodged for registration by filling the
standard forms as regards the instrument. Registration fees should as well be
paid and submitted to the Registrar. Once Registrar is satisfied that all
particulars have been filled and requisite fee paid, the instrument is
registered by stamping on it and giving it a serial number. The serial number
is entered into the master register of all instruments. One is at liberty to
apply for a certificate of registration but not mandatory as the serial number
is what is important. One copy is kept by the register and two given to the
lender who will then give one to the borrower.
When
there is any change in the particulars of the assets, a notification must be
made to the Registrar within 30 days in the prescribed form. The intention is
that this register will be accessed online. Every instrument registered must be
renewed after 10 years. Unlike the previous act an instrument doesn’t become
invalid just because it has not been registered. Registration in the central
registry is just conclusive proof that the security interest was created unless
fraud can be proved.
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