Movable Property Rights Act vs Chattels Transfer Act

• A comparison and contrast of the repealed Chattels Transfer Act, Chapter 28 laws of Kenya, and the Movable Property Rights Act, No. 13 of 2017 follows

Objects and Scope of the Movable Property Rights Act

• Section 3 the Act aims to promote consistency and certainty in secured financing relating to movable assets
• It enhances the ability of individuals and entities to access credit using movable assets
• It establishes a registry to facilitate the registration of security rights in movable assets
• The scope of application of security rights is limited with respect to some of the limitations of an instrument in the Chattels Transfer Act, subject to new provisions

Creation of a Security Right

• Section 6 of the Movable Property Rights Act states a security right is created by a security agreement, if the grantor has rights in the asset to be encumbered and the power to encumber it

A security right should:

• Be in writing and signed by the grantor

• Identify the secured creditor and the grantor

• Describe the secured obligation, except for agreements providing for the outright transfer of a receivable

• Describe the collateral in a way that reasonably allows identification, indicating if it consists of all of the grantor's movable assets, or all of the grantor’s movable assets within a generic category

• Section 8(3) provides that reasonable identification of collateral through description includes specific listing, category, a type of collateral defined in the act, and quantity

• A security agreement entered is enforceable and creates a security right, irrespective of other laws

• The Act extends the meaning of a security right to identifiable proceeds where proceeds in the form of funds credited to a deposit account or money become commingled assets, commingled goods in case of collaterals and tangible assets covered by negotiable instruments

Effect of a Security Right to Third Parties

• Section 15 states a security right is effective against third parties if a notice is registered with the Registrar
• Section 16 further provides that a security right in any proceeds is effective against third parties under certain conditions
• The security right in the original collateral must be effective against third parties already
• The proceeds are in the form of money, receivables, negotiable instruments, or rights to payment of funds credited to a deposit account
• Section 16(2) provides that security rights will be effective against third parties after 10 working days after the proceeds arise
• Section 17 dictates a secured creditor can register an amendment notice after a transfer of a security right, but the security right remains effective regardless of registration

Registration

• The registration process has undergone major developments with new clauses, amendments, and repeals
• Section 5 of the Chattels Transfer Act stated registration was effected by filing an instrument, schedules, and an affidavit in Form 1 at the Registrar's office
• Section 26 of the Act provides that the procedure for registration of a notice shall be prescribed in the regulations, which have now created an electronic Registry
• The Chattels Transfer Act index was arranged alphabetically, while Section 29 of the Act provides that notices are registered in order of submission
• Section 10 of the Chattels Transfer Act stipulated that the instrument be renewed every 5 years by filling an affidavit in Form 3 in the registrar's office and if not renewed the instrument ceased to have effect
• Section 30 of the Act provides the notice is effective for the period indicated, not exceeding 10 years, amendable within six months before expiry, with a new period not exceeding 10 years
• Section 14 of the Chattels Transfer Act provided that an instrument not registered within the time limit should not affect a bona fide purchaser for value without notice.
• Section 36 of the Act provides that the notice remains effective against third parties even if a grantor changes, retaining its original priority

New Provisions Compared to the Chattels Transfer Act

• Section 19 establishes a registry manned by a registrar to receive, store, and provide public access to information on registered notices for security rights and rights of non-consensual creditors
• Section 21 provides that the registrar will remove information after the notice's effectiveness expires which means public records will be archived for 5 years
• Section 22 the registrar will not be liable for actions done in good faith which is not in the Chattels Transfer Act
• Section 24 says to add collateral on an amendment notice, the guarantor must authorize it in writing
• Section 25 allows a grantor to register a single notice for multiple security agreements with the same creditor
• Section 28 states the notice must be in English
• Section 31 requires the registrar to provide the registrant with the date, time of effective registration, and the registration number
• The registrar can be fined for failing to send this information to the grantor
• Section 32 dictates only the secured creditor can amend or cancel the initial notice
• Section 33 outlines the secured creditor amend the notice
• Section 35 states the notice becomes ineffective if the grantor is wrongly identified, unless it seriously mislead the public

Priorities

• Time of registration becomes important for determining the priority of competing security rights created by a single grantor
• If a grantor acquires collateral that had been created by another person, with a security right effected against a third party, the grantor acquiring the collateral has lesser priority
• Whether a secured creditor knows about another security right is immaterial to priority matters
• The act extends priority of security rights to all secured obligations, even those effected against third parties, but this is subject to the rights of consensual creditors if they are on the register
• For proceeds arising from collaterals and effected against any third party, priority is determined by the same date used for the collateral
• Security rights effected against a third party on commingled goods have higher priority
• If multiple security rights have been created the security rights will be considered proportional to the value of the collateral before it became a commingled good
• The act allows a security act to be created on any tangible assets attached to immovable property which means a security right effected against a third party has priority over a competing interest created under any immovable property law

Rights of Buyers and Other Transferees

• The act protects the rights of buyers, transferees, lessees, or licensees of collateral:

• If collateral is sold, transferred, leased, or licensed as security and effective against a third party at the time of sale, the new buyer acquires the rights

• If a secured creditor authorizes the sale of collateral free from the security right, then the buyer acquires the collateral rights free

• The act protects the rights of the lessee and licensee who has possession of an asset with a security right, if the secured creditor authorized the grantor to lease or license the asset

• Rights of non-consensual creditors have priority over those effective against third parties, dependent on whether the non-consensual creditor has registered a notice with the registrar.

• If the right is effective against the third party before the non-consensual creditor registers their notice, the third party's rights are limited to the credit extended by the secured creditor

• Possession of goods held in lien for payment or duty in the ordinary course of business has higher priority as long as the possessory lien remains

Additional Priority Rules

• An acquisition security right has priority over a competing non-acquisition security right created by a grantor, if a notice is registered before the grantor obtains possession

• An acquisition security right of a seller or lessor has priority over a competing acquisition security right of a secured creditor other than a seller or lessor

• An acquisition security right in a tangible asset extending to commingled goods and effective against third parties has priority over a non-acquisition security right granted by the same grantor in the commingled goods

• A person may subordinate their right under this act in favor of any competing claimant, the beneficiary need not be a party to the subordination

• A consensual transferee of an encumbered negotiable instrument acquires its rights free of a security right by registration of notice in both cases detailed

• If the person qualifies as a holder in due course under the bills of exchange act

• Takes possession of the negotiable instrument and gives value without knowledge that the sale or transfer is in violation of a secured creditor under the security agreement

• A transferee of funds from a deposit account acquires its rights free of a security right in the right to payment of funds credited to the deposit account, unless the transferee knows the transfer violates the secured creditor's rights

• A transferee obtaining possession of money subject to a security right acquires its rights free of it, unless they know the transfer violates the secured creditor's rights

• A transferee of securities taking possession of certificated securities or acquiring rights in an electronic security gives value without knowledge that the sale is in violation of the secured creditor's rights acquires its rights free of the security right

Rights and Obligations of Parties

• The Act protects and provides for the rights of the debtor
• The Act provides for the rights and obligations of the parties and third-parties in Part VI
• The repealed Chattels Transfer Act had a section in the third schedule implied covenants duties obligations as well as efforts to protect as much as possible on security rights granted over crops
• Section 57 provides for the creditor to cancel, return, release, or register the cancellation of secured property
• The Chattels Transfer Act allowed filing a memorandum of satisfaction, signed by the Registrar
• The Act allows the intended creditor to inspect the collateral before transferring property under section 58
• Section 59 protects the debtor's rights in the receivable, including payment terms
• The Act provides for notification of security right and payment of the receivable under section 60

Debtor Rights and Defenses

• Definition of "notification of a security right in a receivable" under section 2 of the act means a communication by the grantor or the secured creditor, informing the debtor of the receivable that a security right has been created in the receivable
• This notification right was missing from the Chattels Transfer Act
• Under section 61 during a claim by the secured creditor against the debtor, the debtor may raise defenses, rights of set-off arising from the contract giving rise to the receivable, or any other contract that was part of the same transaction
• The debtor of the receivable could avail itself as if the security right had not been created and the claim were made by the grantor
• Any other right of set-off available to the debtor of the receivable at the time it received notification of the security right
• The debtor of the receivable may not raise breach of an agreement limiting the grantor's right to create the security right
• The debtor of the receivable may agree in writing not to raise defenses and rights of set-off, but may not waive defenses arising from fraudulent acts or the debtor's incapacity
• Section 62 states an agreement made prior to notification of a security right affecting the secured creditor's rights is effective against the secured creditor

Additional Provisions

• Section 63: The grantor's failure to perform obligations does not entitle the debtor to recover from the secured creditor sums paid to the grantor
• Under section 64(1), creating a security right in a payment of funds to a deposit account does not affect the institution's rights and obligations, deposit account without providing information to third parties
• Subsection (2) states any rights of set-off the institution has are not affected by any security right in a right to payment of funds credited to a deposit account

Enforcement of a Security Right

• The Act introduces enforcement mechanisms parties may exercise upon the grantor's default, which is an upgrade from the Chattels Transfer Act
• The Act allows suing or using the security agreement/law to recover from default for recovery purposes
• He grantor has the right to redemption before final disposition of the collateral and the secured creditor rights as to acquisition of collaterals
• The secured creditor must provide a written notification to pay the money owing or perform the agreement
• The agreement the grantor consented to possession or if it wasn't in the agreement but at the time the secured creditor attempts to obtain possession there is no objection
• The creditor may dispose collateral in commercially reasonable preparation or processing and select the manner, time, place of such sale, disposition, lease, or license
• The secured creditor must notify the grantor, debtor and other secured creditors prior to disposition which shall identify the secured creditor, grantor, description of the collateral, amount required, manner, and date, time, place of disposition
• The secured creditor can distribute proceeds and pay the surplus to the court for distribution

Applicable Law

• Introduces provisions on the law that applies where there is a tangible or intangible asset, funds credited in a deposit account, electronic security, intellectual property, and the enforcement of security rights in countries where more than one country is involved
• It focuses on the law governing the relationship
• The law applicable to enforcement of a security in a tangible asset is the country where enforcement happens
• If it is an intangible asset, the applicable law is the right that creates priority
• The Act also provides for the law on security rights in proceeds and a security right is effective against third parties

Repealed and Amended Law

• The Act schedule repeals and amends several laws:
• The Chattel Transfer Act and the Pawnbrokers Act are repealed
• The definition of a mortgage in the Agricultural Finance Corporation Act to include a security right.
• The words "chattels transfer" in The Business Registration Service Act and replaced with "security rights".
• For both the Companies Act and the Insolvency Act, it amended the definition of _retention of title’ to mean the agreement for the sale of goods to a company being an agreement that doesn't constitute a charge on the goods means seller will have priority over all other creditors of the company

Regulations

• The Movable Security Rights adopted the (General) Regulations, 2017 has now been adopted as under section 88 of the Act
• The rules provide for an electronic registry for submissions of notices and search requests
• One must have a user account to access the Registry
• The rules also provide requirements for an initial notice, identifiers of grantors and secured creditors, and fees (Kshs. 500/=)

Conclusion

• The act observes rights of the debtor to inspect the receivables to ease doing business