Monday, 10 December 2012


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
Offer Letter to the borrower
Certificate of incorporation
Copies of the company’s Memorandum of Association and Articles of Association
A Schedule of assets itemizing the assets that you intend to create the debenture over as well as the Original Title Documents
An Annual returns for the current year together with receipts for payment of the same
Personal Identification Number Certificates of directors
Personal Identification Number Certificates of the company
Certified Copies of National Identity Cards of the Directors
Colored passport photographs of both you as the directors
The Company Seal
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.


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:


Of the consideration or value of the subject matter subject to a minimum of Kshs. 20,000.
Of the consideration or value of the subject matter subject to a minimum of Kshs. 37,500.
Of the consideration or value of the subject matter subject to a minimum of Kshs. 62,500.
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.


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 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.

[1] See Charlesworth and Morse “Company Law” (14th Ed) at Page 64
[2] See Lemon vs. Austin Friors Investment Trust Ltd (1926) ch.1 (CA)


  1. Well done. I didn't find any information about discharge process for debentures though.

  2. Thanks a lot my company intends to apply debenture I will be visiting you soon.

  3. I thank you for information I will be visiting you soon.

  4. Excellent article. I see asset backed debenture instrument's usefulness to transfer asset risk and user right if favour of debenture holder without transferring the assets and thereby deferring IT, VAT, or CGT until debenture matures.