1.1. Introduction
The
term ‘Security’ is usually applied to
a collateral, pledge, deposit, lien, charge or mortgage, voluntarily
given by a debtor to a creditor to guarantee the fulfillment of an obligation
especially the assurance that a creditor will be repaid any money or credit
extended to a debtor. Security furnishes the creditor with a resource to be
sold or possessed in case of the debtor’s failure to meet his or her financial
obligation.
A
‘Security Interest’ is a right given
to one party in the asset of another party to secure payment of performance by
that other party or by a third party.
A
fixed, or specific, consensual security interest possesses the following
characteristics:
i)
It
is a right given by a debtor to a creditor in an asset;
ii)
The
right is by way of grant of an interest in the debtor’s asset, not by way of
reservation of title to the creditor;
iii)
The
right is given for securing an obligation;
iv)
The
asset is given in security only, not by way of outright transfer; and
v)
The
agreement restricts the debtor’s right to dispose of the asset free from the
security interest.
Security
gives the creditor a certain measure of influence or control over events. A
financer taking security for an advance is concerned to see that if the
debtor’s assets are insufficient to meet the claims of all his creditors the
financier will at least be able to look to his security to reduce credit risk
and obtain priority over other creditors in the event of the debtor’s
bankruptcy or liquidation. For policy reasons the law allows certain classes of
unsecured creditors claim priority over certain classes of secured claims.
Nevertheless, it remains the general principle that a secured creditor has
priority over an unsecured creditor and where an agreement creates security
interests in law the debtor has a right to redeem and an interest in any
surplus resulting from repossession and sale by the creditor.
It
is recognized that a security interest involves the grant of a right in an
asset which the grantor owns or in which he has an interest which secures the
performance of an obligation.
The
process of perfection of security starts with an application for borrowing by
the Borrower which is then considered by the Lender – credit assessment of the
borrower and valuation of the property to ascertain the mortgage value.
Once
the lender makes a decision to advance money to the borrower on the security of
the borrower’s property, the lender will instruct an advocate to prepare the
appropriate security document which is then registered against the title of the
property offered as security. It is therefore of vital importance that the
borrower should be in possession of a valid title document to the property
which he proposes to mortgage or charge. A due diligence should be carried out
on the title to establish among other things its authenticity, the registered
owner of the property and if there are any encumbrances- the advocate for the
bank should be able to ascertain.
1.2.
Types of Security
Security may be any type of
property. There are two classes of security; real property and personal
property. Real property is the land,
the buildings affixed to it and the rights that go with the land. Personal property often has been defined
as anything capable of ownership, which is not real property for instance stocks and shares,
cash, insurance policies, benefits under contracts, for example supply or
building contracts, book debts and other trade debts or rentals income, ships,
aircraft, negotiable instruments, cars, machinery, future interests (e.g. in a
will) and copyrights and intellectual property.
1.3.
Debenture as a
Security Instrument
The
term debenture refers to a document which creates a debt (security) or
acknowledges a debt due from a company.
Such a document need not be, although it usually is, under seal.[1]
It need not give although it usually does give, a Charge on the assets of the
company (borrower) by way of security.
It may or may not be, one of a series.[2]
Similarly, it may or may not be secured.
In addition, it is always for a specified sum which can only be
transferred in its entirety.
Further, a Debenture may be collaterally secured by a Trust Deed.
The
principal or commonly prepared securities in respect of Micro Credit Customers
(Limited Liability Companies and Business Names) are Debentures and Chattels
Mortgages. Both forms of securities are registered at Companies Registry.
Whereas the creation and perfection of Debenture securities is governed by the
Companies Act, the creation of Chattels Mortgage is governed by the Chattels
Transfer Act (Cap 28) of the Laws of Kenya, and the creation of Chattels
Mortgages in Kenya is largely restricted to securities owned by individuals.
The
Companies Act (Cap 486) of the laws of Kenya provides the legal regime for the
registration of debentures and the issuance of a Certificate of Registration of
Mortgage as evidence of the said registration.
The
issuing of a debenture by a company is done pursuant to powers conferred to the
company by its Memorandum and Articles of Association. In practice, in addition
to the said powers a resolution by the Board of Directors of the company
allowing creation of the debenture will be prepared and executed by the
directors of the company.
1.4. Debenture Covenants
The
Debenture contains covenants by the Company:
(a) not without the prior written consent
of the Bank to part with possession, transfer, sell, lease or otherwise dispose
of the Assets or any part thereof or attempt or agree so to do (except in the
case of stock in trade which may be sold at market value in the usual course of
trading as now conducted and for the purpose of carrying on the Company's
business).
(b) to collect as agent for the Bank all
monies in respect of insurance and all monies so received and until payment to
hold such monies in trust for the Bank.
(c) when so required by the Bank to
execute such further legal or other mortgages charges or assignments over all
or any of the Assets.
(d) not without the prior consent in
writing of the Bank to create attempt to create or permit to subsist any
mortgage debenture charge pledge or lien or other security interest over any of
the Assets or any parts thereof.
1.5.
Effects of Creation
of a Debenture
The
Debenture creates security by way of a first fixed and floating charge over all
the Company's present and future undertaking, goodwill, property, assets,
rights and revenues (including, without limitation, all book and other debts
and monetary claims (including, without limitation, deposits and credit balances
held with the Bank or third parties from time to time and things in action
which give rise to any such debt or claim) now or at any time hereafter due or
owing to the Company, together with the full benefit of all guarantees and
securities therefor and indemnities in respect thereof and all negotiable
instruments, liens, reservations of title, rights of tracing and other rights
enabling the Company to enforce any such debts or claims), whatsoever and
wheresoever situate (the “Assets”).
If
the Company creates or attempts to create any encumbrance over any of the
Assets charged by way of floating charge without the prior consent in writing
of the Bank or if any person levies or attempts to levy any distress,
execution, sequestration or other process against any of the Assets charged by
way of floating charge, the said floating charge shall automatically without
notice crystallize and operate as a fixed charge instantly such event occurs.
The
security created by the Debenture is a continuing security.
1.6.
Documents Needed
For Perfection of Debenture Security
To
enable us successfully perfect the security, we shall need the following
documents at the earliest:
Letter of Instruction to prepare a debenture
in favour of the Bank
|
Bank
|
Offer Letter to the borrower
|
Bank
|
Certificate of
incorporation
|
Bank/Borrower
|
Copies of the
company’s Memorandum of Association and Articles of
Association
|
Bank/Borrower
|
A Schedule of
assets itemizing the assets that you intend to create the debenture over as
well as the Original Title Documents
|
Bank/Borrower
|
An Annual returns
for the current year together with receipts for payment of the same
|
Bank/Borrower
|
Personal
Identification Number Certificates of directors
|
Bank/Borrower
|
Personal
Identification Number Certificates of the company
|
Bank/Borrower
|
Certified Copies of National Identity Cards of the Directors
|
Bank/Borrower
|
Colored passport
photographs of both you as the directors
|
Bank/Borrower
|
The Company Seal
|
Bank/Borrower
|
Official Search
on the Company
|
We shall obtain
this
|
The Debenture
Instrument – which we shall prepared
|
We shall prepare
this
|
Company board
resolution authorizing the borrowing, which minutes will contain the specific
clause of the Memorandum of Association and
Articles of Association
empowering directors to authorize a borrowing – we can prepare these for
execution by the company
|
We shall prepare
this
|
The director’s
personal guarantee for the loan
|
We shall prepare
this
|
1.7.
Procedure for
Registration of Debenture Securities
The
procedure for registering a debenture is as follows:
a) Conducting of a search on the company file at the
Companies Registry
to ascertain the existence of the company together with information that is
pertinent to the creation of a debenture such as establishing that the
provisions of the Memorandum and Articles of Association of the company empower
it to create a debenture, and whether these exists any debenture against the
assets of the company.
b) Drawing up of the Instrument of Debenture: The Debenture
instrument is prepared by an Advocate. It is important that the instrument be
prepared by a licensed practicing advocate. Non-compliance with this
requirement may be a ground for challenging a realization exercise in the event
of default by a borrower.
c) Execution of the Debenture: The Companies Act
provides for execution of the debenture by appending of the Company Seal which
is to be witnessed by the signatures of two directors of the company or one
director of the company and its company secretary. Execution of the debenture
by the financier is not a mandatory requirement, although for business comfort
we often encourage execution by the Bank as well.
d)
Drawing Resolution
to borrow: A
clear and unambiguous resolution of the shareholders/directors authorizing the
borrowing and certified by the Company Secretary is prepared upon review of the Memorandum and Articles of
Association. The meeting must have quorum if the resolutions are to be
legitimate. The advocate will verify that the Memorandum and Articles contain
clear and unambiguous powers to borrow. The Advocate will establish whether the
company may borrower money and whether directors have borrowing powers. These
are often contained in the Memorandum and Articles of Association as:
Objects
of the Company
1) To borrow or raise money whether
or not for the purposes of the Company (including by way of hire purchase,
conditional sale, credit sale or any other such methods of financing) from
banking and financial institutions or other money lending institutions or by
other lawful means including by the issue of debentures, debenture stock
(perpetual or terminable) or bonds and to secure or discharge any debt,
liability or obligation of or binding on the Company whether by way of
guarantee or indemnity or otherwise (including, without limitation, pursuant to
the borrowing or raising of money) by the giving of mortgages, charges or other
security founded, or based upon all or any of the property and rights of the
Company, including its uncalled capital or without any such security and upon
such terms as to priority or otherwise as the Company shall think fit.
2) To guarantee or otherwise support
or secure, either with or without the Company receiving any consideration or
advantage and whether by personal covenant or by mortgaging or charging all or part
of the undertaking, property, assets, rights and revenues present and future
and uncalled capital of the Company or by both such methods or by such other
means whatsoever, the liabilities and obligations of and the payment of any
moneys whatsoever (including but not limited to principal, interest and other
liabilities of any borrowings or acceptance credits and capital, premiums,
dividends, costs and expenses or any stocks, shares or securities) by any
person, firm or company including but not limited to any company which is for
the time being a holding company or a subsidiary (both as defined in the
Companies Act (Chapter 486)) of the Company or of the Company's holding company
and that the giving and creation of any such guarantee support or security is
hereby constituted one of the main objects of the Company.
Directors Borrowing Powers
1) The Directors may exercise all
the powers of the Company to borrow, lend and guarantee the repayment of money
and to mortgage or charge or otherwise secure its undertaking, assets, property
and uncalled capital or any part thereof and to issue debentures, debenture
stock and other securities whether outright or as security for any debt,
liability or obligation of the Company or of any third party. Regulation 79 of Table "A" Part I
shall not apply to the Company.
2) The Directors may exercise all
the powers of the Company to guarantee and become surety for the liabilities,
the performance of contracts and the repayment of monies by any person, firm or
company and to issue charges, mortgages, debentures or lien to secure
performance by the Company of any such guarantee or surety.
Without powers to
borrow included in the companies Memorandum and Articles of Association, there
is no power to borrow and any attempt to issue security will be outside the
objects of the company and the securities would be difficult to realize in the
event of default by the borrower.
e) Drawing Form 214 on Particulars Of A Mortgage Or Charge
Created By A Company: Section 96 (1) of
the Companies Act provides that:
“Subject to the provisions of this Part, every
charge created after the fixed date by a company registered in Kenya and being
a charge to which this section applies shall, so far as any security on the
company's property or undertaking is conferred thereby, be void against the
liquidator and any creditor of the company, unless the prescribed
particulars of the charge, together with the instrument, if any, by
which the charge is created or evidenced are delivered to or received by
the registrar for registration within forty-two days after the date of its
creation, but without prejudice to any contract or obligation for
repayment of the money thereby secured, and when a charge becomes void under
this section the money secured thereby shall immediately become payable.”
Accordingly, Form
214 which contains Particulars Of A Mortgage Or Charge Created By A Company is
a mandatory document to be attached to the Debenture during the perfection
process.
f)
Assessment of
Debenture to stamp duty and payment of assessed stamp duty:
Stamp Duty is form of revenue for the Government and
it’s chargeable under the Stamp Duty Act (Cap 480) Laws of Kenya and the
schedule to the Act lists the documents chargeable with stamp duty and this
includes transfers, leases, mortgages and charges. Under section 20 of the Act
failure to pay stamp duty is an offence. The law also provides that no document required by law to be
stamped shall be accepted for registration unless it is duly stamped.
The amount of stamp duty payable depends on the
transaction in question and it’s based on a percentage of the consideration
stated in the instrument. Presently stamp duty payable has been lowered from 0.2%
to 0.1% of the sum secured. This change came into effect following the budget
speech read in June 2010.
Assessment of a
Debenture to determine the stamp duty payable to the Kenya Revenue Authority is
done at the Companies Registry.
In order to assess
a document to stamp duty there is need to have the Personal Identification Numbers
(PINs) of the parties to the transaction (in the case of a debenture the PIN of
the lender and the borrower). A PIN is issued by the Kenya Revenue Authority.
g) Payment of Stamp Duty: After assessment
of payable duty payment of the tax is made at specified banks which remit
details of the payment to the Companies Registry to facilitate the stamping of
the debenture instrument. Currently, stamp duty payments for registration of
Debentures are made to National Bank of Kenya.
h) Presentation for Registration and Lodging of the
Debenture with the Registrar of Companies for stamping: The Instrument of
Debenture together with Form 214 is then presented at the Companies registry
for registration where an endorsement is made on its first page signifying the
payment of duty. A standard Registration fee of Kshs. 600.00 is payable at the
registry.
i)
Issuance of a
certificate of Registration as evidence of the creation of a debenture. The evidence of
successful perfection process is through the stamped Debenture together with
the Certificate of Registration.
1.8.
Delivery of
Completion Documents to Bank
Upon completion of
perfection process, we delivers all the original documents to the bank,
including:
1. Certificate of
Registration of Mortgage;
2. Stamped Debenture
Instruments with the endorsements of Companies Registry;
3. Copy of Offer
Letter to the borrower;
4. Certificate of
incorporation of the Company;
5. Certified Copy of
the Official Search on the Company;
6. Copies of the
company’s Memorandum of Association and Articles of Association;
7. Original Signed and
Sealed Board Resolution authorizing the borrowing;
8. A Schedule of
assets itemizing the assets against which create the debenture is created;
9. Each director’s
personal guarantee for the loan;
10. Personal
Identification Number Certificates of directors;
11. Personal
Identification Number Certificates of the company; and
12. Copies of National Identity Cards of the Directors.
1.9.
Turn-Around Times
On
straight forward cases, we undertake to complete registration of debentures
securities in not more than two weeks. However, some of the common causes of
delay in completion of perfection of debenture securities include, among
others:
1. Missing files at
the Companies Registry or returns have not been filed properly.
2. Customer’s delay in
executing the documents
3. Delay by the
customer in providing stamp duty funds.
We
undertake to do all in our power to assuage and or mitigate such eventualities.
2.
QUATATION FOR PERFECTION OF DEBENTURE INSTRUMENTS
Below is our
quotation for perfection of debenture instruments:
2.1. Legal Costs Payable
by Borrower
The
perfection of debenture security entails drafting and reviewing the legal
documents, engrossing documents; conducting searches at the Companies Registry,
verifying and processing consents, arranging for valuation, stamping and
registration.
Legal costs for
Perfection of Debenture instruments is governed by the Third Scale of the First
Schedule of the Advocates (Remuneration) Order of 2009 (Legal Notice Number 59
of 2009). Charging
a lower fee (undercutting) is
prohibited. Rule 3 of Advocates
(Remuneration) Order expressly
states:
“No
advocate may agree or accept his remuneration at less than that provided by
this Order”.
It
has been argued that violation of this Rule 3 would lead to invalidation of the
documents, and therefore an exposure of the Bank to risks of inability to
realize securities in the event of default.
Accordingly, and
pursuant to Rule 1 (b) of the Third Scale of the First Schedule of the ARO, the
fees applicable to Debentures would be calculated as follows:
FROM
|
TO
|
FEES
|
||
1
|
0
|
2,500,000
|
1.50%
|
Of the consideration or value of
the subject matter subject to a minimum of Kshs. 20,000.
|
2
|
2,500,001
|
5,000,000
|
1.25%
|
Of the consideration or value of
the subject matter subject to a minimum of Kshs. 37,500.
|
3
|
5,000,001
|
250,000,000
|
1%
|
Of the consideration or value of
the subject matter subject to a minimum of Kshs. 62,500.
|
4
|
250,000,001
|
500,000,000
|
0.60%
|
Of the consideration or value of
the subject matter subject to a minimum of Kshs. 2,500,000.
|
Note the figures
quoted above do not include stamp duty, registration fees, bank charges and
other costs incurred in the registration process.
Examples 1
Facility of Kshs.
5,000,000.00 falls under category 2
Legal fees is
calculated as (1.25 ÷100×5,000,000) =62,500
(higher than 37,500.00)
The higher figure
and the Legal fees is Kshs 62,500.00
Add 16% VAT (16÷100×30,000) = 10,000.00
TOTAL =
Kshs 72,500.00
2.2. Legal Costs Payable
by Bank
Where an Advocate is
acting for both the Bank and the Borrower, and in pursuance of Note 1 (b) of
the Notes to the Third Scale of the First Schedule of the Remuneration
[Amendment] Order [2009], the Bank as the Grantee is required to pay legal fees
at 40 % of the Legal Fees payable by the borrower. However, Note 5 of the Notes to the Third Scale of the First Schedule states that this
amount should be paid by the borrower unless the Bank and the Borrower agree
otherwise in writing.
2.3.
Stamp Duty,
Registration Fees, Bank Charges
Effective June 2010
when the 2010/2011 Budget was read, Stamp Duty payable on Debentures stand at
0.1 % of the amount being secured.
Registration Cost
for each debenture instrument is Kshs. 600.00.
Bank charges for
each debenture Kshs.140.00
In the event that
we undertake Official Search, the costs is usually in the range of Kshs.
1,600.00 per official search.
2.4. Office Expenses
These vary
depending on complexity of the matter but may not exceed Kshs. 20,000.00 in
most straight forward transactions.
CONCLUSION
We trust that the
above will be useful in your decision making processes. However, should you
have any further queries regarding preparation and perfection of debenture
security in Kenya, please do not hesitate to contact us at info@stralexgroup.co.ke
or on + 254 715 310 677 for clarification.
Yours
faithfully,
For: Strategic
Legal Solutions Group Limited
Patrick, Teddy & Partners Advocates – a participating Law Firm in the SLS Group
of consultancies.
