Are there any requirements foreign lenders are required to comply with when advancing a loan to a domestic borrower in Kenya?
There are no mandatory requirements foreign lenders are required to comply with when advancing loans to domestic borrowers.
Under the Central Bank of Kenya Act, certain kinds of payments, which would include principal and repayment of a loan, must be made through an authorised bank, ie one that has been licensed to carry on banking business by the Central Bank of Kenya.
There is no exchange control in force in Kenya. The law governing contracts in Kenya is provided for under the Law of Contract Act (Cap 21 – the “Contract Act”). The Contract Act is a receiving statute which provides for the application of English contract law, including statutes of general application, the substance of common law, and the doctrines of equity. The Kenyan courts have regularly asserted that English Law decisions are not binding on them, but are only of persuasive authority on cases with similar facts.
The degree of ‘persuasiveness’ of an English decision on a Kenyan case with similar facts is largely dependent on the level of the English court making the decision. Therefore, judgments of the superior courts of England, such as the Supreme Court of the United Kingdom (formerly House of Lords), the PrivyCouncil and the Court of Appeal (in that order), would be of greater persuasive value than decisions of the English High Court.
Are there any obligations domestic corporate borrowers are required to comply with when entering into a foreign loan?
Corporate borrowers are required to comply with all obligations and obtain all corporate authorisations in accordance with their Memorandum and Articles of Association. Other contracts may restrict their ability to borrow or to provide security. Borrowings must be made for a proper corporate purpose and must be approved by the board of directors.
Regulated corporate borrowers such as public listed companies, banks, insurance companies, investment banks, telecommunication companies, power companies and state corporations may also require authorisations from their shareholders, regulatory authorities or relevant government ministries. Withholding tax is deductible at a rate of 15% on all payments of interest on loans, whether the interest is paid to a local or foreign lender.
Are there any requirements and/or considerations which may impact a foreign lender’s ability to enforce rights and obligations under a loan agreement and/or security documents?
There are no restrictions to foreign lenders accessing domestic courts on domestic claims. Foreign lenders are, however, likely to be required to provide security for costs.
Courts recognise and will generally give effect to provisions in an agreement conferring exclusive jurisdiction to a foreign court. Under the Foreign Judgments (Reciprocal Enforcement) Act, Cap 43, judgments for a definite sum given by courts of reciprocating jurisdictions, or awards in arbitration proceedings held in reciprocating jurisdictions where such award has become enforceable in the same manner as a judgment (an ‘applicable decision’) will be recognised and enforced by the High Court of Kenya without re-trial or examination of the merits of the case provided that:
(i) the applicable decision has been registered at the Court within six years of the date of the applicable decision or, where there have been proceedings by way of appeal against the applicable decision, within six years of the date of last judgment or award in the proceedings
(ii) the Court is satisfied that papers relating to such proceedings have been properly served
(iii) the Court is satisfied that the defendant received notice of such proceedings in sufficient time to enable the defendant to defend the proceedings
(iv) the applicable decision is not contrary to the public policy of Kenya
(v) the applicable decision does not relate to the recovery of any penalty or penalty interest (albeit that amounts may be recoverable to the extent that they do not relate to any penalty or penalty interest)
(vi) the applicable decision was not obtained by fraud. The Act does not apply to judgments of courts or arbitral awards obtained in any states which have not entered into reciprocal enforceable agreements with Kenya.
In such cases, a final and conclusive judgment or arbitral award may be sued upon in the Kenyan courts but could be impeached if the Kenyan courts did not recognise the jurisdiction of the foreign court or foreign arbitral panel, in the case of fraud and on other grounds. Further provisions relating to arbitral awards (including interim arbitral awards) are contained in the Arbitration Act 1995 which provides for the recognition and enforcement by the High Court of Kenya of arbitral awards irrespective of the state in which the award is made. Enforcement is subject to compliance with the procedure for registration of the arbitral award with the High Court and may be refused only in limited circumstances.
What are the assets available as collateral in Kenya and what are the most common forms of security granted over it?
Assets available as collateral in Kenya include real estate, tangible movable assets such as motor vehicles, plant and equipment, cash collateral and personal guarantees from directors of companies.
The terms ‘real estate’ and ‘immovable property’ are not specifically defined in Kenyan law. In practice, the term encompasses land (other than minerals and petroleum forming part of the land), as well as buildings and other structures permanently affixed to the land.
Under the new Constitution of Kenya non-citizens may not own freehold titles and any leasehold held by a non-citizen will be converted into leases of up to 99 years. Any company which is not wholly owned, directly and indirectly, by Kenyan citizens will not be compliant.
Security over real estate is evidenced by a mortgage or charge (depending upon the land registration system). Registration and documentary requirements are dependent upon the registration system applicable to the land in question. There are three principal land registration systems in force: The Government Lands Act, the Registered Land Act, and the Registration of Titles Act. Titles may be freehold or leasehold. Mortgages apply to the old form of unregistered (or partially registered) conveyancing. Charges apply to registered land.
Security over land can also be achieved through an equitable charge which must be recorded in a memorandum of deposit and which will need to comply with the requirements with regard to the form of execution and attestation for contracts for the disposition of interests in land.
Tangible Movable Property
Tangible movable assets comprise property that can be handled physically and completely transferred by delivery including machinery, trading stock, aircraft and ships. There are a wide range of possessory liens recognised by the English common law.Possessory liens arise by operation of law. There is no applicable registration system. Examples include warehousemen’s liens, liens for other bailees (eg repairs of motor vehicles) and banker’s liens.
Shares and Financial Instruments
There is no adequate system for the registration of security over shares in companies other than those listed on the securities exchange. Security is usually constituted by a deposit of share certificates with a blank share transfer form and a memorandum setting out the terms of the deposit and rights of enforcement. Publicly listed securities may be pledged. Pledging requires the lodging of a duly completed Securities Pledge Form (CDS 5) with the Central Depository and Settlement Corporation (CDSC). The Securities Pledge Form is a form prescribed by the CDSC. It is lodged through a CDSC Central Depository Agent (CDA). The CDSC facilitates freezing of securities pledged as collateral.
Taking security over Government bonds requires submission of duly completed sale and purchase confirmation forms (by the borrower and bank respectively) to the Central Bank of Kenya (CBK) which then marks a lien against the relevant securities. The sale and purchase confirmation forms are prescribed forms provided by the CBK.
Security over all assets of a company is evidenced by debentures creating fixed and floating charges. These require registration at the Companies Registry. In large financing transactions these may be supplemented by formal mortgages of large value items (eg plant equipment and aircraft).
Security over motor vehicles is usually supplemented by a deposit of the vehicle logbook and a blank transfer. Lenders will usually require the vehicle to be transferred into the joint names of the financier and the hirer. No separate registration is required for security over aircraft. As a matter of practice, copies of mortgages or charges of Kenya-registered aircraft are usually sent to the Director of Civil Aviation with the request that they be placed on the register.
Security over ships and shares in ships requires registration under the Merchant Shipping Act. Priority is governed by the date of registration. The Act confers a statutory power of sale which may only be exercised under a certificate of sale issued by the Registrar. Pledges are permissible under general English common law principles. Pledges also apply to negotiable instruments. No registration is required. The pledge is constituted by the delivery of the goods or instrument. It is usual to take a short letter of pledge, setting out the rights of the holder of the pledge to sell the underlying security upon default. This security is used in relation to deposits.
Claims and Receivables
Security over actionable claims (eg debts) is governed by Chapter VIII of the Transfer of Property Act, 1882 of India (which is applicable in Kenya). An actionable claim can be transferred (whether by way of security or otherwise) by an instrument in writing which is effective immediately on execution. No special form is required. The transfer is only binding on the debtor if notice is given to the debtor by the transferor or, if he fails to do so, by the transferee. Priority is governed by the date of the giving of the notice.
There are no special rules regarding security over intellectual property. Securities may require registration under the Companies Act or the Chattels Transfer Act. An assignment of a trade mark by way of security may also require registration at the Trade Marks Registry but this does not govern the priority of securities.
Are there any types or class of assets over which security cannot be granted or if granted, is difficult to enforce?
Under Kenyan law, security can be granted over all types of assets. Typically, security over land can be difficult to enforce. Under the proposed new Constitution of Kenya, non-citizens may not own freehold titles and any leasehold held will be converted into leases of up to 99 years. It is not clear how this will impact land ownership and its classification as security, or what will happen if a non-Kenyan lender forecloses on a land title or exercises a power of sale.
Rights to future assets can be granted as security in the form of a floating charge.
Security over fungible assets can be granted by way of a floating charge.
What type of commercial or quasi-security structures (ie legal structures used instead of taking security) are common in Kenya?
The following forms of commercial security or quasi-security are common:
(i) Guarantees and credit enhancement
(iii) Finance leases
(iv) Hire purchase
(v) Instalment sales
Do company law rules or conventions affect taking security in Kenya?
Section 56 of the Companies Act prohibits companies from providing financial assistance directly or indirectly for the purpose of or in connection with purchasing or subscription of their own shares, or the shares of their holding company. Financial assistance includes the granting of loans, guarantees or security and the company and any officer that grants unlawful financial assistance is liable to a fine. The only exception to this rule arises where the assistance is given in connection with a scheme for the purchase of shares by employees of the company.
The power of the directors of a company to borrow and/or grant security on behalf of the company may be limited by its Memorandum and Articles of Association. Any borrowing or security granted in contravention of this restriction may be void in certain circumstances. The directors of a company will breach their fiduciary duties towards a company if they permit the company to enter into a transaction which is not in the best interests of the company. This includes the granting of security or a guarantee.
Under which circumstances can a secured lender enforce its collateral?
A secured lender can generally enforce its security following the occurrence of default or an event of default under the financing documents. Events of default include default of payment, breach of any financial or any other obligations under the facility, misrepresentation by the borrower and/or pledgor of the security, insolvency and occurrence of material adverse changes. Other events of default may be specified in the relevant security document.
A secured lender is ordinarily required to notify the borrower and in the case of collateral issued by a third party, such third party of the occurrence and intention of the lender to enforce its collateral. Statutory notices are required in the case of immovable property.
Are company rescue or re-organisation procedures (outside of insolvency or receivership proceedings) available and practiced in Kenya?
There are no formal rescue or reorganisation procedures outside of insolvency or receivership proceedings in Kenya. Schemes of arrangement between the company and its creditors are provided for under the Companies Act, but these provisions are not invoked, possibly owing to the need for court approval. Informal rescue and reorganisation are uncommon except in the financial sector where such arrangements have been brokered by statutory managers and regulators to rescue banks, insurance and stock-broking companies. Generally such restructurings, many of which have involved the inclusion of third party investors, have been vulnerable to frustration from the original owners of the firms.
In what order are creditors paid on a company’s insolvency?
Certain creditors of a Kenyan company enjoy preference or priority arising by reason of law in the event that the company is being wound up, a receiver is appointed on behalf of the holders of any debentures of the company secured by a floating charge or, possession is taken by or on behalf of those holders of any property comprised in or subject to a floating charge. The following debts must be paid out in priority to all unsecured debts and, in certain cases (mentioned below), must be paid out in priority to secured debts:
(i) all Government taxes and local rates due at the relevant date and having become due and payable within twelve months next before that date not exceeding in the whole one year’s assessment
(ii) all Government rents not more than one year in arrears
(iii) employees’ (other than directors) wages or salary for four months prior to the relevant date and all workmen’s or labourers’ wages for services rendered, not ineither case exceeding KShs. 4,000 per individual claimant (iv) amounts due by way of Workmen’s Compensation
(v) amounts due in respect of contributions payable during the period of twelve months immediately preceding the relevant date under the National Social Security Fund Act.
These preferential debts and the conditions applicable to them are specified in section 311 of the
Companies Act, which also defines the ‘relevant date’. Essentially this is the date on which winding-up is commenced, a receiver is appointed or possession is taken (as the case may be).
Section 311 of the Companies Act sets out the position in a winding-up and section 95 of that Act applies the provisions of section 311 to the receiverships and taking of possession described above. The costs and expenses of the liquidator, receiver or person taking possession also rank as a prior claim over the general creditors.
Assets comprised in floating charges must be used to satisfy preferential debts in priority to the creditors secured by the floating charge if other funds are not available. Assets comprised in fixed charges (including the charge over immovable property of the company) are not available to pay preferential debts until the creditors secured by those charges have been paid in full.
If the company is subject to a winding up, all the charges, costs and expenses of the winding up rank as preferential payments to the payment of the holders of a floating charge.
It should also be noted that where a buyer has reserved title to goods, such goods do not form part of the goods that are subject to floating charges.
This is as long as the goods remain capable of being separately identified.
Priority of secured creditors are subject to any inter-creditor arrangements. Priority is based on the date of registration of the security interest. The only creditors who may have priority to secured creditors are:
(i) preferential creditors as described above
(ii) sellers of goods who have reserved title of goods until payment
(iii) execution creditors who havecompleted their attachment
(iv) a landlord who has distrained upon goods
Are there any restrictions in granting security to a foreign lender?
There are no legal restrictions in granting security over any form of property to foreign lenders. However, there are some requirements for consent with respect to agricultural land. This applies to all lenders. There may be risks for lenders where the borrower is not 100% owned by Kenyan citizens or upon exercise of foreclosure rights over real estate pursuant to the provisions of the proposed new Constitution of Kenya.
How is the priority between creditors, holding a security interest, determined?
Subject to any inter-creditor arrangements, priority is based on the date of registration of the security interest. Securities created by Kenyan companies or foreign companies with property in Kenya must be registered at the Companies Registry within 42 days of their creation. Registration is effected by delivering particulars of the securities in the prescribed form to the Registrar with a copy of the stamped instrument. A filing fee is payable for each filing.
Are taxes or fees paid on the granting and enforcement of security or the granting of a loan?
Taking security can be a time consuming business due to inefficiencies at the Government Registries. Depending upon the nature of the security, a minimum of three to four weeks should be allowed for stamping and registration.
There are no other notarial or similar fees payable although there are statutory requirements in relation to the form of execution and attestation of charges over land. In particular, it is necessary for execution to take place in the presence of a Kenyan advocate who must explain certain statutory provisions and append a certificate to that effect. It may be necessary to make special arrangements to ensure that any non-resident signatories are present in Kenya for signing.
There are no ongoing maintenance requirements in relation to the registration of securities. There are no taxes or fees that are payable on the granting of a loan. On granting of security by the borrower, registration fees and stamp duty may be payable depending on the nature of the security as follows:
(i) On principal security: 0.1 per cent of the sum secured
(ii) On collateral security: 0.1 per cent of the sum secured
(iii) On supplemental security: KES 5.00
KES 600.00 at the Companies Registry
KES 500.00 at the Lands Registry
In the case of assignment/transfers by way of security of debts and charges, these constitute charges and the above provisions apply. In the case of an outright transfer/assignment of debts and charges, no registration is necessary but the rate of stamp duty is 2%. For pledges no registration is required and there is no stamp duty on a simple pledge.
There are no taxes or fees payable on enforcement save where court orders are required such as in the case of foreclosure.
Coulson Harney Advocates
Unit A, Nairobi Business Park
Tel: +254 (0)20 386 1686