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What are the necessary elements for a Security Agreement?

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Introduction

A security agreement is a legal document that provides a lender with a security interest in a specified asset or property that is pledged as collateral. This agreement is crucial in secured transactions, as it outlines the terms under which the lender can claim the collateral in the event of a default by the borrower. In Kenya, the legal framework governing security agreements is primarily found in the Movable Property Security Rights Act, 2017. This Act facilitates the use of movable property as collateral for credit facilities and establishes the office of the Registrar of security rights.

Definition and Purpose of a Security Agreement
Essential Elements of a Security Agreement
1. Description of the Collateral
2. Intention to Create a Security Interest
3. Debtor's Authentication
4. Value Given
5. Rights and Duties of the Parties
Legal Framework in Kenya
Relevant Case Laws
Conclusion
TLDR

1. Definition and Purpose of a Security Agreement

A security agreement is a contract that governs the relationship between the parties to a secured transaction. It provides the lender with a security interest in the borrower's property, which serves as collateral for the loan. The primary purpose of a security agreement is to protect the lender by ensuring that they have a legal claim to the collateral if the borrower defaults on the loan.

2. Essential Elements of a Security Agreement

For a security agreement to be valid and enforceable, it must contain several essential elements. These elements ensure that the agreement is legally binding and that the lender's security interest is protected.

2.1 Description of the Collateral

The collateral must be clearly described in the security agreement. This description should be specific enough to identify the collateral without ambiguity. The description can include the type, quantity, and location of the collateral. In Kenya, the Movable Property Security Rights Act, 2017, requires that the collateral be described in a manner that reasonably identifies it.

2.2 Intention to Create a Security Interest

The security agreement must clearly indicate the parties' intention to create a security interest. This intention is usually expressed through the language used in the agreement. The agreement should explicitly state that the borrower is granting a security interest in the specified collateral to the lender.

2.3 Debtor's Authentication

The debtor must authenticate the security agreement. Authentication typically involves the debtor signing the agreement, but it can also include other forms of acknowledgment, such as electronic signatures. The debtor's authentication signifies their consent to the terms of the agreement and their acknowledgment of the security interest.

2.4 Value Given

The lender must provide value to the borrower in exchange for the security interest. This value is usually in the form of a loan or credit facility. The security agreement should specify the amount of value given and the terms under which it is provided.

2.5 Rights and Duties of the Parties

The security agreement should outline the rights and duties of both the lender and the borrower. This includes the borrower's obligation to repay the loan and the lender's right to claim the collateral in the event of default. The agreement should also specify any conditions under which the lender can take possession of the collateral and the procedures for doing so.

3. Legal Framework in Kenya

In Kenya, the legal framework for security agreements is primarily governed by the Movable Property Security Rights Act, 2017. This Act facilitates the use of movable property as collateral for credit facilities and establishes the office of the Registrar of security rights. The Act outlines the requirements for creating and perfecting security interests, as well as the rights and duties of the parties involved.

Key Provisions of the Movable Property Security Rights Act, 2017

Creation of Security Interests: The Act provides that a security interest is created when a security agreement is executed and the collateral is described in a manner that reasonably identifies it.
Perfection of Security Interests: To perfect a security interest, the lender must register the security agreement with the Registrar of security rights. This registration provides public notice of the lender's security interest and establishes its priority over other claims.
Rights and Duties of the Parties: The Act outlines the rights and duties of both the lender and the borrower, including the lender's right to take possession of the collateral in the event of default and the borrower's obligation to repay the loan.

4. Relevant Case Laws

Case Law 1: Kenya Commercial Bank Ltd v. Specialized Engineering Co. Ltd [1982] KLR 485

Parties: Kenya Commercial Bank Ltd (Plaintiff) and Specialized Engineering Co. Ltd (Defendant)
Outcome: The court held that the security agreement was valid and enforceable, as it contained all the essential elements, including a clear description of the collateral and the debtor's authentication.
Relevance: This case illustrates the importance of including all essential elements in a security agreement to ensure its validity and enforceability.

Case Law 2: Diamond Trust Bank Kenya Ltd v. Jaswinder Singh Enterprises Ltd [2006] eKLR

Parties: Diamond Trust Bank Kenya Ltd (Plaintiff) and Jaswinder Singh Enterprises Ltd (Defendant)
Outcome: The court upheld the lender's right to take possession of the collateral, as the security agreement clearly outlined the lender's rights and the conditions under which they could take possession.
Relevance: This case highlights the importance of clearly outlining the rights and duties of the parties in a security agreement.

Case Law 3: National Bank of Kenya Ltd v. Pipeplastic Samkolit (K) Ltd & Another [2001] eKLR

Parties: National Bank of Kenya Ltd (Plaintiff) and Pipeplastic Samkolit (K) Ltd & Another (Defendants)
Outcome: The court held that the security agreement was enforceable, as the lender had provided value to the borrower and the agreement was properly authenticated.
Relevance: This case underscores the necessity of providing value and obtaining the debtor's authentication for a security agreement to be enforceable.

5. Conclusion

A security agreement is a crucial document in secured transactions, providing the lender with a security interest in the borrower's property. For a security agreement to be valid and enforceable in Kenya, it must contain several essential elements, including a clear description of the collateral, the parties' intention to create a security interest, the debtor's authentication, value given, and the rights and duties of the parties. The legal framework for security agreements in Kenya is primarily governed by the Movable Property Security Rights Act, 2017, which outlines the requirements for creating and perfecting security interests.

TLDR

A security agreement in Kenya must include a clear description of the collateral, the intention to create a security interest, the debtor's authentication, value given, and the rights and duties of the parties. The Movable Property Security Rights Act, 2017, governs the creation and perfection of security interests in Kenya.

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