CMS Expert Guide for taking security in Kenya

1. Can a guarantee be granted by one entity/person to secure obligations of another entity/person?  

Yes.

2. Is guarantee treated under the law as: 

2.1 a type of security?

Yes.

2.2 a financial service?

The business of providing a guarantee to a lender through absorption of all or a portion of the lender’s risk on a credit facility to a borrower in case of default is defined as a credit guarantee business, which is regulated by the Central Bank of Kenya [Sections 33V, 33W, 33X and 33Y of the Central Bank of Kenya Act].

3. Can a corporate guarantee be granted:

3.1 Upstream?

Yes. See comments in section 4.

3.2 Downstream?

Yes. See comments in section 4.

3.3 Lateral?

Yes. See comments in section 4.

4. Are there any special aspects to be taken into account in relation to granting a guarantee (e.g. financial assistance, transfer pricing, corporate benefit, any other limitations)?

Corporate/Commercial Benefit:    directors of a company are under a statutory duty to act in a way that they, in good faith, consider would promote the success of the company. It is therefore recommended to ensure that the board minutes state the corporate commercial benefit to the guarantor company in relation to the granting of a guarantee by the guarantor company. 

Financial Assistance:

• generally, where a person is acquiring or proposing to acquire shares in a public company, neither the public company or any of its subsidiaries may directly or indirectly give such person financial assistance (including in the form of a guarantee) for the purposes of the acquisition either before or at the same time as the acquisition takes place [Section 442 (1) of the Companies Act (certain exceptions are set out in Section 442(2) of the Companies Act)];
• generally, where a person has acquired shares in a company (and the person or another person has incurred a liability for the purposes of the acquisition) neither the company or any of its subsidiaries may directly or indirectly give financial assistance for the purposes of reducing or discharging the liability if at the time of the assistance is given, the company in which the shares were acquired is a public company [Section 442(3) of the Companies Act (certain exceptions are set out in Section 442(4) of the Companies Act)].
• generally, where a person is acquiring or proposing to acquire shares in a private company, a public company that is a subsidiary of the private company shall not directly or indirectly give financial assistance for the purposes of the acquisition before or at the same time as the acquisition takes place [Section 443(1) of the Companies Act] (certain exceptions are set out in Section 443(2) of the Companies Act)].
• generally, where a person has acquired shares in a private company (and the person or another person has incurred a liability for the purpose of the acquisition) a public company that is a subsidiary of the private company shall not directly or indirectly give financial assistance for the purpose of reducing or discharging the liability [Section 443(3) of the Companies Act (certain exceptions are set out in Section 443(4) of the Companies Act)].
• certain transactions are excepted unconditionally (and others conditionally) from the above general prohibitions against financial assistance [Sections 445 and 446 of the Companies Act].  

It is therefore recommended to assess the transaction motivating the proposed issuance of the guarantee in the context of financial assistance prohibitions.

Offence: Providing prohibited financial assistance in contravention of the Companies Act exposes a company to liability to a fine of up to KSh 1 million (approximately USD 9,000) and officers of the company to a fine not exceeding KSh 500,000 (approximately USD 4,500) or to imprisonment up to two years, or both. 

Member Approvals: a company may not give a guarantee in connection with a loan made by any person to a director unless the transaction has been approved by a resolution of the members of the company [Section 164 of the Companies Act]. A public company (and a company associated with such a company) may not give a guarantee in connection with a quasi-loan by any person to a director (or to any person connected with a director) [Sections 165 and 166 of the Companies Act]. Exceptions to these general rules are set out in Sections 169 to 174 of the Companies Act.            It is therefore recommended to secure member approvals as needed. 

Transfer Pricing: Kenya follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations for determining whether the conditions of financial guarantees between associated enterprises are consistent with the arm’s length principle.  

5. Are there any formal requirements or practical recommendations for the execution, validity and/or enforceability of a guarantee?

• The guarantee should be in writing [Section 3(1) of the Law of Contract Act].
• The guarantee should be executed by the guarantor (or a lawfully authorised person) [Section 3(1) of the Law of Contract Act].
• The guarantee should be stamped by the Collector of Stamp Duty within 30 days of its execution [Section 6(1) of the Stamp Duty Act].   

Yes.

Yes, the validity of a guarantee depends on the validity of a principal obligation. 

Yes, the concept of indemnity is recognised in Kenya.

Yes.

Yes.

Security trustees and security agents are recognised under Kenyan law, and a security trustee or agent may be appointed to hold security for the benefit of lenders and other secured parties. 

Provided that the security granted in its favour has been properly perfected, the trustee’s or agent’s rights regarding the security interest should be enforceable.

Generally, a guarantee may be enforced by the assignee unless there is a prohibition against such assignment contained in the guarantee.

Generally, a debenture may be transferred to a new creditor who may enforce it, unless there is a prohibition against such transfer contained in the debenture. [Related Processes: a company may register a transfer of debenture if a document of transfer is delivered to it. Such registration is to be concluded no later than two months after the date on which a transfer of debenture is lodged (unless it is refusing such registration, for which it will need to specify reasons) – Sections 497 and 498 of the Companies Act].   

Generally, a charge over immoveable property may be transferred to a new creditor, who may enforce it, unless there is a prohibition against such transfer contained in the charge document. Related Processes: a proprietor of a charge may transfer the charge to any person by an instrument in prescribed form, which shall be completed by filing the relevant instrument and registration of the transferee as the proprietor of the charge – Section 37 of the Land Act.

The recommended course of action is to secure the consent of the guarantor where an underlying obligation is being varied. 

A charge over land in Kenya may only be created by an instrument governed by Kenyan law [Section 36(1) of the Land Registration Act]. 

A charge over assets situated in Kenya shall be governed by Kenyan law. 

A guarantee issued by a company incorporated or registered under the Companies Act, which is expressed to be governed by a foreign law, shall be valid and effective against the Kenyan company provided that the foreign law does not violate Kenyan public policy or any Kenyan statute reflecting such policy.

Foreign Courts: The consent by a company incorporated or registered in Kenya to the jurisdiction of a foreign court with respect to dispute resolution relating to a private contract is valid and binding and the resulting judgment will be enforceable in Kenya subject to, and in accordance with, the provisions of the Foreign Judgement (Reciprocal Enforcement) Act.   

Arbitration: The consent by a company incorporated or registered in Kenya to dispute resolution relating to a private contract by way of arbitration is valid and binding. The Arbitration Act provides for the recognition and enforcement by the High Court of Kenya of arbitral awards irrespective of the state in which the award was made.    

Enforcement of any obligations arising under contracts may be limited or affected by applicable bankruptcy, insolvency, liquidation, arrangement, moratorium or other laws relating to or affecting generally the enforcement of creditors’ rights.

No.

Yes. The concept of a hardening period exists. 

Voidable Preference:

1. if a company enters into a transaction at an undervalue during two years immediately preceding the onset of its insolvency. 
2. if a company gives a preference to a person connected with the company other than as an employee within a period of two years immediately preceding the onset of insolvency.
3. if a company gives a preference (though not at an undervalue) within six months immediately preceding the onset of insolvency. 

Invalidity: 

Potentially Invalid Floating Charge – a floating charge created within 12 months ending with the onset of insolvency.

Yes.

Yes. See comments in 4.  

No.

Company Charge: Yes. A registrable charge created by a company incorporated or registered in Kenya should be lodged for registration at the Companies Registry within 30  days of its creation to prevent it becoming void as against a liquidator, administrator or creditor of the company. [Section 885 of the Companies Act].   

Charge over land: Yes. A charge over land should be registered at the relevant Land Titles Registry. (The general rule is that the order of priority for charges over land is determined by the order of their registration at the applicable Land Titles Registry). [Section 81 of the Land Act].

Charge over Movable Property: Yes. 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. [Section 15 of the Movable Property Security Rights Act].  

No. 

Yes. 

Priority with respect to charges over land: charges over land will have priority according to the order in which they were presented to the relevant land titles registry for registration (irrespective of the dates of the charges). [Section 36(5) of the Land Registration Act]. 

Priority with respect to charges registrable under the Companies Act: generally, priority will be determined by the date of creation of the charges.

Priority with respect to charges over movable property: generally, priority is determined according to the time of registration of the charges. [Section 38 of the Moveable Property Security Rights Act].

Security is easily established and encumbrances are easily checked 

Charges over land: Yes. Where practicable, a charge processed and executed electronically by persons consenting to it by way of an advanced electronic signature shall be deemed a validly executed document. [Section 44(3A) of the Land Registration Act].

Guarantees: Yes. Signing for the purposes of the Law of Contract Act (which sets out the essentials of an enforceable guarantee) includes making one’s mark by means of an advanced electronic signature. [Sections 3(1) and (6) of the Law of Contract Act].

Security Documents: Yes. A document is validly executed by a company if it is signed either by two authorised signatories or by a company director in the presence of a witness who attests the signature. Signing for the purposes of the Companies Act includes signing by means of an electronic signature. [Sections 2 and 37 of the Companies Act].

The above notwithstanding, prevalent market practice is to execute documents in wet ink. 

Guarantees: No. There is no centralised system of public disclosure of guarantees issued by companies. 

Land: Yes. The Lands Registrar maintains a register for all documentation under the Land Registration Act. These records are accessible by the public [Sections 9 and 10 of the Land Registration Act].  Certain records are accessible online (the State Department of Lands is in the midst of digitising these registers, an exercise that is being implemented in phases). 

Moveable Assets: Yes. The register is publicly available and accessible online. 

Company Charges: Yes. The register is accessible online.

Charge over land: Either party to the transaction (the lender taking the security or the borrower creating the charge over the land) may make the relevant application for a charge to be registered at the relevant Land Titles Registry (or an authorised agent of either, being a person registered by a professional body).  Prevalent market practice is for the lender’s counsel to submit this application. 

Company Charges: Any person who claims to have an interest in the charge may make the relevant application for its registration [Section 878(2) of the Companies Act]. Prevalent market practice is for the lender’s counsel to submit this application. 

Moveable Assets:  The Secured Creditor.  

Charge over land: The relevant application form (LRA 9) will need to be filled out and executed and submitted together with the charge over the land; the original document of title to the land; and a cadastral plan (where applicable) approved by the office for land survey. (Land Titles Registry). 

Company Charges: The relevant filing form (CR25) will need to be filled out and executed and presented alongside the security document. (Companies Registry).   

Moveable Assets: The relevant application form (Form 3) will need to be filled out with certain information and presented to the registrar. [Regulation 8(2) of the Moveable Property Security Rights (General) Regulations]. (Moveable Property Security Rights Registry). 

Lands Titles Registry Search: Online Search – reasonably swift, provided the systems are up. Official Search – up to five working days, assuming ready availability of the property file. Cost – EUR 5. 

Companies Registry Search: Online Search – reasonably immediate, provided the systems are up. Cost – EUR 7. Personal Search – up to five working days, assuming ready availability of the company file.  Cost – EUR 5. 

Movable Assets Collateral Registry Search:  Online Search – reasonably instant, provided the systems are up. Cost – EUR 7.

Land Titles Registry:

• In order for a charge over land to be presented for registration at the land titles registry, it must first be stamped by the Collector of Stamp Duty.
•  The charge must be stamped within 30 days of its execution.
• Time: Stamping is usually achieved within seven days from lodgement of the charge for assessment of the stamp duty payable (provided, of course, the stamp duty payment is available for payment following assessment).
• Stamp Duty Cost: The rate of stamp duty payable for a principal instrument of a charge is 0.1% of the amount secured by the charge (0.05% of the amount secured for a principal instrument of discharge).
• Registration Time: generally, up to, on average, 14 days from lodgement for registration.   

Companies Registry:

• In order for a company charge to be presented for registration at the land titles registry, it must first be stamped by the Collector of Stamp Duty.
• The charge must be stamped within 30 days of its execution.
• Time: Stamping is usually achieved within seven days from lodgement of the charge for assessment of the stamp duty payable (provided, of course, the stamp duty payment is available for payment following assessment).
• Stamp Duty Cost: The rate of stamp duty payable for a principal instrument of a charge is 0.1% of the amount secured by the charge (0.05% of the amount secured for a principal instrument of discharge).
• Registration Cost: Between EUR 20 and EUR 120 depending on the amount secured by the charge (EUR 20 for a discharge).  
• Registration Time: generally, up to, on average, seven days from lodgement for registration.  

Moveable Assets Collateral Registry:

• In order for a charge over moveable assets to be presented for registration at the land titles registry, it must first be stamped by the Collector of Stamp Duty.
• The charge must be stamped within 30 days of its execution.
• Time: Stamping is usually achieved within seven days as from lodgement of the charge for assessment of the stamp duty payable (provided, of course, the stamp duty payment monies are timeously available for payment following assessment).
• Stamp Duty Cost: The rate of stamp duty payable for a principal instrument of a charge is 0.1% of the amount secured by the charge.
• Registration Cost: Nil
• Registration Time: one day.   

N/a

Charge over land:

• If the land being charged is leasehold property, securing consent from the head lessor will usually be a prerequisite to the creation and perfection of the charge. Time: dependant on the head lessor. Cost: dependant on the head lessor.  
• If the land being charged is classified as agricultural land, securing the consent from the relevant land control board will be a prerequisite to the creation and perfection of the charge. Time: dependant on the relevant land control board. Generally, between 14 days to 30 days as from application. Cost: standard land control board consent USD 30; special land control board consent USD 100.
• If the land being charged is classified as controlled land and involves ineligible persons*, securing approval from the Cabinet Secretary responsible for land matters may be a prerequisite to the creation and perfection of the charge. Time: At least 30 days. Cost: Application for approval USD 2,500. [*Note: Ineligible persons refer to individuals who are not Kenyan citizens; the government of a country other than Kenya or political subdivision of a country other than Kenya or a body corporate, which has non-citizens as shareholders].  

Yes.

Yes, on events of default agreed by the parties.  

Yes, as agreed by the parties.

Yes.

Yes, on all events of default agreed by the parties.  

Charge over land:

Cure Period – Yes. There is a mandatory period for curing a default. Where the default concerns the non-payment of money, the cure period is not less than 3 months from the date of notification to the defaulting charger. Where the default concerns failure to perform or observe a covenant, the cure period is not less than 2 months from the date of notification to the defaulting charger.  

Formalities – Yes.

1. Where the holder of charge (the Chargee) elects to sell the charged land, (a) the Chargee is required to serve a notice of sale to the chargor. The Chargee shall not conclude any sale of the land during the 40-day period following service of such notice; and (b) The Chargee is required to ensure that a forced sale valuation is undertaken by a valuer before exercising its right to sell the land. (c) Where the land is to be sold by way of public auction, the Chargee is required to ensure that the sale is publicly advertised in such a manner and form as to bring it to the attention of persons likely to be interested in bidding for the charged land (and that rules applicable to auctions of land are followed).
2. Where the Chargee wishes to appoint a receiver of income of the charged land, the Chargee shall first serve a notice to the chargor in this regard and shall not proceed with the appointment until 30 days have lapsed.  
3. Where the Chargee wishes to lease the charged land, the Chargee shall first serve a notice to this effect to the chargor and shall not proceed with such leasing until 30 days have lapsed.
4. Where the Chargee intends to enter possession of the charged land, the Chargee shall first serve a notice to the charger to this intention and shall not proceed with such entry before 1 month has lapsed and a court order has been obtained with respect to such entry.  

Yes, out of court security enforcement is available.

Any additional instrument will depend on the out-of-court enforcement option exercised.   

With respect to a charge over land: Yes, the holder of the charge (the Chargee) is by statute entitled to certain remedies in relation to a defaulting chargor, including entering into possession of the charged land. [Section 90(3)(d) of the Land Act].

With respect to a charge over moveable property:

Yes, a secured creditor, in relation to a defaulting grantor of a security right (the Grantor), is entitled to take possession of the movable asset. [Section 67(e) of the Moveable Property Security Rights Act].

With respect to a charge over land: Yes, a Chargee is by statute entitled to certain remedies in relation to a defaulting chargor, including selling the charged land. [Section 90(3)(e) of the Land Act].

With respect to a charge over moveable property:

Yes, a secured creditor, in relation to a defaulting grantor of a security right (the Grantor), is entitled to sell the movable asset. [Section 67(e) of the Moveable Property Security Rights Act].

N/A. 

With respect to a charge over movable property:

After default by a Grantor, a secured creditor with a security right in a receivable; negotiable instrument; right to payment of funds credited to a deposit account or security is entitled to collect payment from: the debtor of the receivable; obligor under the negotiable instrument; depository bank; or issuer of the security. [Section 77(1) of the Moveable Property Security Rights Act].

No.

Charge over land: Fairly easy, debtor friendly, long.

Company Charge: Fairly easy, debtor friendly, average.

Movable Assets: Fairly easy, balanced, average.  

“No. Applicable statutory and subsidiary legislation, having in the last decade been the subject of significant reform, are not expected to undergo fundamental change in the immediate future as the reformed framework is tested for regulatory appropriateness.”