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Legislative reform for forms of credit support

November 2017

South Africa

Without Prejudice
Common forms of security that are taken by financiers in African jurisdictions include mortgages, debentures, fixed and floating charges, assignments, pledges and liens. A large number of African countries are also former colonies of the United Kingdom and, as a result, the legal regimes in respect of taking security are very similar to English law. However, the legal systems of many African countries are based on civil law. 

During the last year, various African countries have actively taken steps towards legislative reform with the view to creating new forms of security that are specific to the economic climate of borrowers on the African continent. This article shares some insight into the developments in the laws of Zambia, Kenya and Uganda to promote greater access to credit facilities in these countries. 

Zambia

In April 2016 Zambia enacted the Moveable Property (Security Interest) Act 3 of 2016 (the MPA). The MPA aims to promote economic development by enhancing the availability of low-cost secured credit to borrowers and the creation of a single all-inclusive registration authority for secured transactions. It contemplates the use of moveable assets such as consumer goods that are primarily used by a debtor for personal, family or household purposes as a form of collateral. By extending the definition of collateral to include consumer goods, borrowers now have the ability to utilise the full value of their assets as support for obtaining credit facilities.

In addition to this, section 7 of the MPA provides for the establishment of a Collateral Registry Office, which is required to manage and facilitate access to the electronic collateral registry, oversee the operation and maintenance of the registration system and provide practical advice relating to the registration and search processes. Section 11 goes a step further and provides for the establishment of an electronic collateral registry through which documents known as "financial statements" can be registered and recoded in the collateral registry. 

A financial statement is defined as a prescribed form document that must contain the detailed information required in terms of section 13(1)(a)-(j). A prudent secured creditor would ensure that the requirements stipulated in section 13(1) are accurately reflected, as a validly registered financial statement constitutes perfected security under the MPA. Secured creditors should nevertheless be cognisant that any security that is perfected through the registration of a financial statement is only valid for a period of five years. It is possible to renew the term for a further five years. The existing requirements for the perfection of security over movable property have not been repealed by the MPA and secured creditors can perfect the security taken over movable property by taking possession of, or control over, the relevant moveable property without registering a financial statement. 

Kenya 

The laws relating to the creating of security interests in Kenya included the Companies Act 17 of 2015 for security over assets of a company, the Chattels Transfer Act (Cap 28 of the Laws of Kenya) for security over chattels created by natural persons, the Pawnbrokers Act (Cap 529 of the Laws of Kenya) and the Hire Purchase Act (Cap 507 of the Laws of Kenya) for hire purchase transactions. Registries such as the Companies Registry and the Chattels Transfer Registry have been established, but many of these registries are scattered meaning there was no one-stop registry to undertake a limited search on the registered security interests of particular company. Further, the records were not entirely reliable and accurate and because they were performed manually, the search process was challenging. 

On cross-border transactions specifically, an all-inclusive security document known as the all assets debenture is the most common form of security taken by lenders. Unlike a special notarial bond under South African law, there is no need to identify each of the movable assets by means of an inventory list to be appended to the all assets debenture. The description of the secured assets under the all assets debenture is also usually very broadly defined to include all assets of the company granting the security. This has caused difficulties on enforcement as there is much uncertainty over which assets are secured under an all assets debenture. Further, intangible assets such as intellectual property are not recognised as items capable of forming security, which left companies such as small to medium enterprises with no tangible assets at a loss as they could not acquire external financing. 

In order to address these issues and improve access to credit, the Kenyan legislators were prompted to develop new legislation and the Movable Security Rights Bill was published in November 2016. On 10 May 2017, Kenyan President Uhuru Kenyatta signed into law the Movable Security Rights Bill 2017, now called the Movable Property Security Rights Act, 2017 (the Movable Property Act). The Movable Property Act establishes the Office of the Registrar of Security Rights and sets out to establish an online one stop registry known as the Collateral Registry to ease the process of registration of security rights over movable assets and eliminate the requirement to pay stamp duty on security agreements creating security rights. The Movable Property Act repeals the Chattels Transfer Act and the Pawnbrokers Act and institutionalises and formalises security rights over movable assets. 

The Movable Property Act now requires a clearer description of collateral and section 8(1) provides that the assets encumbered or to be encumbered shall be described in the security agreement in a manner that reasonably allows their identification. Section 8(3) further provides that a description reasonably identifies the encumbered assets, if it makes reference to a specific listing, category, type of collateral (as defined by the Moveable Property Act) or quantity. The term "intangible asset" is defined in section 2 and includes receivables, deposit accounts, electronic securities and intellectual property rights, whereas "tangible asset" means all types of goods and includes motor vehicles, crops, machinery and livestock.

Similar to the Zambian "financial statement", part IV of the Movable Property Act deals with registration of notices relating to security rights. Section 19(2) provides that the function of the Registry shall be to receive, store and make accessible to the public information on registered notices with respect to security rights and rights of non-consensual creditors. 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. An initial notice must include the identity and address of the grantor of the security and the secured party or its representative, a description of the collateral in a manner that makes it possible to identify it, the effective dates of the registration and any other information relevant for statistical purposes.

Although the Movable Property Act applies retrospectively to existing security agreements creating security rights over movable assets, companies still need to register a charge (such as an all assets debenture) over its assets at the Companies Registry in addition to the Collateral Registry.

Uganda 

Access to affordable credit is one of the key challenges faced by Ugandan individuals and businesses. The issue stems from the fact that a significant percentage of Ugandans do not own land titles. Banks are reluctant to lend money to borrowers without collateral over tangible assets such as land. Consequently, the majority of the Ugandan population cannot access credit. In order to facilitate access to affordable credit facilities at better interest rates, Uganda is promoting a new law that will allow the use of movable assets as collateral to access credit facilities. 

The outcome of the new Movable Property Security Interest Act of 2017 (the Movable Property Security Act) is that Ugandan businesses and individual borrowers that do not own land, will be able use movable assets like machinery, livestock, inventory, accounts receivable, vehicles, crops, intellectual property rights, electronics, jewellery and many other movables as security for credit facilities. 

The Moveable Property Security Act also establishes a fully electronic movable property security interest registry which provides secured lenders with an online platform where they can register their security interests over a particular movable asset. The direct impact of the electronic registry is the reduction of risk for secured lenders who can protect their security interests against third party claims. According to the Uganda Registration Services Bureau, the "first in time, first in right rule" will apply in respect of the establishment of any competing claims over the secured property. The first secured lender to register a security interest over movable assets in the electronic register, will upon the default of the borrower, be paid before any other claimants.

The legislative developments explored in this article evidence the innovative thinking of African legislators to develop and enact legislation that speaks directly to the needs of African individuals and businesses and facilitates economic growth on the continent. Lenders and borrowers are granted more flexibility in terms of the types of assets that can be encumbered for purposes of credit support. Additionally, the ability to access public electronic registers of securities provides secured lenders with further protection and certainty as to their legal rights over such encumbered movable property. The African continent is home to many budding entrepreneurs and the ability to borrow against a broader range of movable assets will allow them to grow their businesses and develop the continent's economy. 

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