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What are the necessary elements for a Security Agreement?

Introduction

A Security Agreement is a legal document that provides a lender a security interest in a specified asset or property that is pledged as collateral. In Kenya, the creation and enforcement of security agreements are governed by various statutes, including the Movable Property Security Rights Act, 2017, and the Companies Act, 2015. This document outlines the necessary elements for a valid and enforceable security agreement under Kenyan law.

Table of Contents

1. Legal Framework

   • Movable Property Security Rights Act, 2017

   • Companies Act, 2015

   • Other Relevant Laws

2. Essential Elements of a Security Agreement

   • Identification of Parties

   • Description of Collateral

   • Secured Obligations

   • Granting Clause

   • Representations and Warranties

   • Covenants

   • Default Provisions

   • Governing Law

   • Execution and Delivery

3. Conclusion

1. Legal Framework

Movable Property Security Rights Act, 2017

The Movable Property Security Rights Act, 2017, is the primary legislation governing security interests in movable property in Kenya. It provides a comprehensive framework for the creation, perfection, priority, and enforcement of security interests in movable property.

• Section 4: Defines key terms such as "security agreement," "collateral," and "secured obligation."

• Section 6: Outlines the requirements for creating a security interest.

• Section 10: Specifies the formalities for a security agreement to be enforceable.

Companies Act, 2015

The Companies Act, 2015, also plays a crucial role, especially when the security agreement involves corporate entities.

• Section 878: Requires the registration of charges created by companies.

• Section 879: Details the consequences of failing to register such charges.

Other Relevant Laws

• Law of Contract Act, Cap 23: Governs the general principles of contract law, which are applicable to security agreements.

• Insolvency Act, 2015: Provides guidelines on the treatment of secured creditors in insolvency proceedings.

2. Essential Elements of a Security Agreement

Identification of Parties

A valid security agreement must clearly identify the parties involved:

• Secured Party: The lender or entity that holds the security interest.

• Debtor: The borrower or entity that pledges the collateral.

Source: Movable Property Security Rights Act, 2017, Section 4

Description of Collateral

The collateral must be described with sufficient detail to enable its identification. This can include:

• Serial numbers

• Descriptions of the type and nature of the property

• Location of the collateral

Source: Movable Property Security Rights Act, 2017, Section 10(1)(b)

Secured Obligations

The security agreement must specify the obligations that are secured. This can include:

• Principal amount of the loan

• Interest rates

• Other financial obligations

Source: Movable Property Security Rights Act, 2017, Section 10(1)(c)

Granting Clause

This clause explicitly states that the debtor grants a security interest in the specified collateral to the secured party. It is the operative clause that creates the security interest.

Source: Movable Property Security Rights Act, 2017, Section 10(1)(a)

Representations and Warranties

These are statements of fact made by the debtor to assure the secured party of certain conditions, such as:

• Ownership of the collateral

• Absence of other encumbrances

• Compliance with laws

Source: Law of Contract Act, Cap 23

Covenants

Covenants are promises made by the debtor to do or refrain from doing certain acts. Common covenants include:

• Maintaining the collateral in good condition

• Not selling or transferring the collateral without consent

• Providing financial statements

Source: Law of Contract Act, Cap 23

Default Provisions

The agreement must outline what constitutes an event of default and the remedies available to the secured party. Common events of default include:

• Non-payment of the secured obligations

• Breach of covenants

• Insolvency of the debtor

Source: Movable Property Security Rights Act, 2017, Section 10(1)(d)

Governing Law

The agreement should specify the governing law, which is typically the law of Kenya. This ensures that any disputes will be resolved under Kenyan law.

Source: Law of Contract Act, Cap 23

Execution and Delivery

The security agreement must be signed by the parties involved and delivered to be effective. In the case of corporate entities, the agreement may need to be executed under seal or in accordance with the company's articles of association.

Source: Companies Act, 2015, Section 37

Conclusion

A security agreement is a critical document in secured lending transactions. For it to be valid and enforceable under Kenyan law, it must contain specific elements as outlined above. These elements ensure that the rights and obligations of the parties are clearly defined and that the security interest is properly created and can be enforced in the event of default. By adhering to the requirements set forth in the Movable Property Security Rights Act, 2017, the Companies Act, 2015, and other relevant laws, parties can ensure that their security agreements are legally sound and effective.

Answered by mwakili.com

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