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What are the necessary elements for a Security Agreement?
A security agreement is a crucial document in any financial transaction that involves collateral. It outlines the terms and conditions under which a lender acquires a security interest in specific assets or property pledged by the borrower. This agreement serves as a guarantee for the lender, ensuring they have recourse to the collateral in case of default by the borrower.
Table of Contents
Introduction
Elements of a Security Agreement
Agreement
Attachment
Perfection
Case Laws
Conclusion
TLDR
Introduction
In Kenya, the legal framework governing security agreements is primarily found in the Movable Property Security Rights Act, 2017 (MPSRA). This Act aims to facilitate the use of movable property as collateral for credit facilities, establishing the office of the Registrar of Security Rights and providing for the registration of security rights in movable property.
Elements of a Security Agreement
A valid and enforceable security agreement in Kenya must contain the following essential elements:
1. Agreement
The first element is the agreement itself. This signifies a meeting of the minds between the lender and the borrower, where both parties clearly understand and consent to the terms of the security agreement. The agreement must be in writing and signed by both parties.
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2. Attachment
The second element is attachment. This refers to the point where the security interest becomes legally binding on the collateral. For attachment to occur, the following conditions must be met:
Value: The lender must have given value to the borrower. This value can be in the form of money, goods, services, or any other consideration.
Rights in the Collateral: The borrower must have rights in the collateral. This means the borrower must have ownership or possessory rights over the collateral.
Security Agreement: There must be a security agreement that is in writing and signed by both parties. The agreement must describe the collateral and the security interest granted.
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3. Perfection
The final element is perfection. This is the process of making the security interest enforceable against third parties. Perfection ensures that the lender's security interest in the collateral takes priority over other creditors who may have claims against the same collateral.
Perfection can be achieved through various methods, including:
Registration: The most common method of perfection is registration of the security agreement with the Registrar of Security Rights. This creates a public record of the security interest, giving notice to other creditors.
Possession: In some cases, perfection can be achieved by the lender taking possession of the collateral. This is typically used for movable property that is easily identifiable and can be physically controlled.
Control: For certain types of collateral, such as investment property, perfection can be achieved by the lender obtaining control over the collateral. This means the lender has the ability to dispose of the collateral without the borrower's consent.
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Case Laws
**1. ** * **Standard Chartered Bank Kenya Limited v. ** * Kenya Commercial Bank Limited * (2021) eKLR *
This case involved a dispute between two banks over the priority of their security interests in a company's assets. Standard Chartered Bank had a registered security interest in the company's movable property, while Kenya Commercial Bank had a later-registered security interest in the same property. The court held that Standard Chartered Bank's security interest had priority because it was registered first.
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**2. ** * **Equity Bank Limited v. ** * KCB Bank Kenya Limited * (2022) eKLR *
This case involved a dispute between two banks over the validity of a security agreement. Equity Bank had a security interest in a company's assets, but the security agreement did not adequately describe the collateral. The court held that the security agreement was invalid because it did not meet the requirements of the MPSRA.
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Conclusion
In conclusion, a security agreement in Kenya must contain the elements of agreement, attachment, and perfection to be valid and enforceable. The MPSRA provides a comprehensive framework for regulating security agreements, ensuring that lenders have adequate protection and that borrowers understand their obligations.
TLDR
A valid security agreement in Kenya must have an agreement, attachment, and perfection. The Movable Property Security Rights Act, 2017 governs these agreements.
Answered by mwakili.com