Can I use my phone as security for a loan?
By: Joanne Katende
Yes, a mobile phone is movable property under the Security Interest in Movable Property Act, 2019 (hereinafter, ‘The Act’). The President of Uganda assented to this law on the 31st March, 2019.
This is a law that:
- provides for the use of movable property as collateral for credit,
- provides for the creation and perfection of security interests,
- delineates the rules for determining priority of claims among competing claimants,
- provides for the registration of security interests in movable property by notices,
- provides for a Register of Security Interests in movable property, to provide for the enforcement of security interests and search of the Register.
This is a timely law in Uganda because, previously, it was easy to give notice to third parties that immovable property was encumbered. One merely had to conduct a search at the relevant land (for land) or company registry (for charges and debentures). The same could not be said for certain movable property; there was no universal, reliable way to notify third parties’ that there was a security interest in specific movable property. Meaning, if for instance, you were buying furniture, there was no definitive way to determine if there was a prior security interest in it.
The new Law has remedied this with the ‘Security Interest in Movable Property Registry System – ‘SIMPRS’ at the Uganda Registration Services Bureau (URSB) established under the Act.
This law helps micro, small and medium enterprises or individuals with limited credit to use their movable assets as collateral for loans. The SIMPRS was developed in fulfillment of the Government of Uganda’s objectives in the Second National Development Plan 2015/16 – 2019/20 of reducing interest rates, decreasing default rates and increasing the pool of new borrowers. It provides information on encumbrances on movable property and can be accessed online.
SOME OF THE PROVISIONS OF THE ACT:
The movable property that can be used as collateral
The security interests in movable property envisaged by the Act include but are not limited to: livestock, crops, motor vehicles, electronics, machinery, furniture. Collateral can also be a deposit account maintained in a financial institution that has a place of business in Uganda, where the transaction involves a movable property that secures a payment or the performance of an obligation, without regard to the form or ownership of the movable property including a floating charge, a fixed charge, a pledge, a debenture, a warehouse receipt and any other transaction that secures payment or performance of an obligation with movable property. It can also be where the security interest is a lien in movable property created by judgment of court and the security interest is for the sale of accounts receivable, commercial consignments and for the lease of goods for more than one year.
How a security interest is created in the property
For a security interest to be created, there has to be:
- an agreement,
- signed by the grantor, which identifies the secured creditor and the grantor,
- is witnessed by a third party,
- describes the collateral and secured obligation in a manner that reasonably allows for its identification, whether pre-existing, present or future,
- indicates the maximum amount for which the security interest is enforceable, and
- the secured creditor gives the collateral a monetary value.
Creating a security interest in the property does not transfer it to the creditor
The Act underscores the point that the security interest given by a grantor to a creditor does not operate as a transfer of an interest in the property, it merely creates a security interest. Where a grantor signs a transfer as a condition for grant of a security interest, the transfer shall be deemed void.
Security interest in assets persists even if the owner or grantor sells the asset
The Act provides for continuation of a security interest after transfer of collateral and in commingled goods. This is helpful because a grantor cannot sell the collateral and be released from their obligations, the security interest continues, since it is presumed that potential purchasers will have taken the time to peruse the Register to confirm that there are no encumbrances beforehand.
How does a creditor notify others of his or her interest in the movable property?
The security interest in the collateral is perfected:
- where a notice of the interest is entered in the register,
- the secured creditor has possession of the collateral,
- the collateral is a deposit account and the secured creditor or their representative has control of the deposit account for instance, a financial institution.
Notice of a lien
A notice of a lien may be registered by the lien holder without the consent of the subject of the lien. This means that, if for instance, your car mechanic serviced your car but you have not yet paid him, he is entitled to register a lien on that car, without your consent.
Priority of security interests in the same collateral
These are determined:
- a perfected security interest shall have priority over an unperfected security interest;
- priority between perfected security interests shall be determined by the order of whichever of the following actions first occurs-
- the registration of an initial notice;
- the secured creditor, or another person on the secured creditor’s behalf, taking possession of the collateral; or
- the secured creditor, or another person on the secured creditor’s behalf acquiring control of the collateral; and
- priority between unperfected security interests in the same collateral shall be determined by the order of creation of the security interests.
Security in agricultural crops
A security interest in growing crops or in crops to be grown, which is perfected and the grantor is in legal possession of the land where the crops are, has priority over the interest of the owner of the land or the mortgagee of the land.
This means that if a farmer owes you money, you can create a security interest in his or her growing crops if they are in legal possession of the land the crops are on, and your secured interest trumps the interests of the owner of the land and anyone the land may be mortgaged to for instance a financial institution.
Security in a negotiable instrument
A security interest in a negotiable instrument that is perfected by possession of the negotiable instrument has priority over a security interest in the negotiable instrument that is perfected by registration of a notice in the register.
It is interesting that a negotiable instrument in possession for instance a check, promissory note, bill of exchange outweighs a perfected registration of a notice, yet this is not the case for other securities.
Can a secured creditor just take your ‘stuff’ if you don’t pay up?
Expedited possession by a secured party, (with or without a court order), can only be done for secured transactions with a contractual value of at least UGX 10,000,000 (approx. USD 2,630) and possession or control must be taken without breach of the peace. The Act defines breach of the peace to mean entering the premises of the grantor without permission or being physically violent or intimidating the grantor.
Sale of collateral by secured creditor
This has to be by auction and the creditor must give notice of disposition of the collateral to:
- the grantor,
- any other secured creditor,
- owner of the collateral,
- or any other person deemed fit, and
- file the notice with the Registrar at the Uganda Registration Services Bureau (URSB). It must indicate the amount required to satisfy the secured obligation including the interest due and the expenses incurred, and stating the time and place for the public sale.
The grantor has 5 days after receipt of the notice to object. Upon receipt of the objection, the Registrar has to notify the secured creditor and suspend the disposition of the collateral until the object is withdrawn or lapses. The objection lapses after 45 days from the date of objection unless the person who objects commences proceedings in a court of competent jurisdiction and has obtained and served on the registrar an injunction or court order restraining the registrar from removing the objection from the register.
This does not apply to perishable collateral, or where the secured creditor believes the collateral shall decline substantially in value if not disposed of immediately. The Minister shall by statutory instrument prescribe the procedure for disposing of perishable collateral. (At the time of writing, this has not yet been fulfilled).
The secured creditor has to give notice to the owner, other secured creditors at least 10 working days before the distribution of the proceeds or sale or disposal, informing them of the date to present claims on the proceeds of the sale, the address and the type of proof of the claim to be provided. The recipients of the claim have 5 working days to provide the secured creditor with an authenticated claim of interest or a notice of a claim of interest in the collateral from a lien holder. Please note that here, the Law specifies working days, not just days.
The secured creditor has to, within 10 working days after the disposal of the collateral provide a written statement of account to the grantor, owner or other secured creditor indicating the amount of the gross proceeds of the disposal, amount of costs and expenses of enforcement and disposition and the balance owing by the secured creditor to the debtor, or vice versa.
Offences under the Act
It is an offence to file a fraudulent, frivolous notice or one with malicious intent, and such a person is liable on conviction to imprisonment not exceeding 2 years or a fine not exceeding UGX 4,000,000 (approx.. USD 1000) or both. The same penalties apply for deceiving the Registrar General or a URSB officer by making a false statement or representation, whether orally or in writing, knowing the same to be false, or, for the purpose of procuring or influencing the doing or omitting the doing of anything in relation to the Act, and on becoming aware of the falsity fails to inform the Registrar General.
Suffice it to say, the Act is a welcome reprieve for business people or even individuals who wish to take out loans but lack immovable property assets, read land, as it will give them access to credit.
With the SIMPRS feature at the URSB, one can register a security interest notice (and amend that notice), an objection notice, an enforcement notice, a discharge notice, a collateral disposal notice among others. Since the SIMPRS is relatively new (it took effect in early October, 2019), it remains to be seen whether it will be embraced by the general public, and if financial institutions will willingly offer credit for large sums of money for movable property.
If you have questions on security interests in movable property please contact Joanne.
This Company law alert provides general information only. It is not intended to provide advice with respect to any specific set of facts, nor is it intended to advise on all developments in the law.
