Accessing IP backed financing in Kenya: The Movable Security Rights Act, 2017
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Over the last few years, Kenya has taken steps towards legislative reform by creating new forms of security to assist people who do not own immovable property to secure credit. These new forms of security entail the recognition of various types of movable assets under the law relating to security interests. Before this legislative development, immovable property was the dominant form of accessing credit in financial institutions due to the security it provided to lenders in case of any default. Therefore, this meant that movable property such as intellectual property was not given recognition as assets capable of holding security. For this reason, individuals and SMEs with no tangible assets were locked out from accessing credit. This lack of financial inclusivity necessitated the process of repealing and amending the laws addressing security interests that failed to identify various deficiencies under the previous regime. The repealed laws include the Chattels Transfer Act and the Pawnbrokers Act. While the amended laws include: The Stamp Duty Act, the Hire Purchase Act, the Business Registration Services Act 2015, the Companies Act, 2015 and the Insolvency Act, 2015.
The move to repeal and amend the laws governing movable asset collateral prior to 2017, led to various challenges under the previous regime being addressed. The previous framework was characterized by a multiplicity of laws, the demand of multiple requirements, a dispersed, multiple registry system with high costs of borrowing and expensive enforcement procedures. Therefore, there was no one-stop registry to undertake a limited search and the cost kept increasing due to the numerous stamp duty and the registry charge fee on each document submitted under the various registries. Furthermore, there were no clear provisions for conflict of laws and lack of consideration for emerging forms of movable property such as Intellectual Property Rights. To address this situation, on 10th May 2017 the Movable Property Security Rights Act, 2017 assented into law. The law was intended to facilitate the use of movable property in credit facilities ensuring there is financial inclusion by widening the scope of assets that can be used as collateral, establishing the Office of the Registrar of Security Rights, and registration of security rights in movable property. Under this new regime, Intellectual Property is now recognized as a registrable form of security. A harmonized registry is now in place offering easy registration, and the removal of the requirement to pay stamp duty on security agreements creating security rights, has reduced the burden of costs.
The scope of assets that this post focuses on the meaningful realization of access to IP securitization in Kenya. It examines whether IP backed financing has been operationalized under the various IP laws and the Movable Property Act. The lack of harmony between the two laws calls for an Act that streamlines the system of securities in the IP sector.
Kenya’s legislative development on IP Securitization & Enforcement Procedures
The Movable Property Act institutionalizes and formalizes intellectual property rights as security rights that can be registered as collateral. Under this new law, Intellectual Property means copyright as defined in the Copyright Act, 2001, industrial property rights as defined in the Industrial Property Act, 2001, trademark as defined in the Trademarks Act, and any other related right. Most of these IP laws do not provide for provisions on the securitization of IP. However in 2015, KIPI sought to address this situation by submitting to the Attorney General’s Office some proposals and draft instructions to repeal the Trademark Act, Cap 506. The most significant proposal under this draft Bill is the hypothecation of trademarks by a deed of security or charge. If adopted, this would mean that a registered trademark can be pledged as security by a borrower to access credit without transferring property or possession to the borrower. Unfortunately, the Bill is yet to be enacted into law.
Currently, the option is to assign trademarks, copyright, patents, and utility models using a deed of assignment. The disadvantage of using this instrument to take security, is that there is transfer of ownership. To avoid this situation, this must carefully be done through an assignment by way of security which places mutual obligations on the borrower and the lender. Obtaining security would mean a statutory assignment to allow transfer of rights by the assignor to the assignee and an obligation on the assignee to reassign those rights back to the assignor once the debt is discharged. However, the risk of loss of ownership creates a pressing need of an IP law that expressly addresses securitization of IP using secure means such as a deed of hypothecation which only secures debt and is discharged upon payment.
To address this gap, there has been proposals for an Intellectual Property Bill, 2020 that looks into the constitutional recognition of intellectual property rights and best practices in the management of intellectual property rights. The IP Bill, 2020 timely acknowledges the growing trend of the recognition of IP as an asset that can be used as collateral. The Bill proposes that a registered trademark may be hypothecated by a deed of security or a charge. Once the trademark is registered, it may be attached and sold based on a court order or may be charged by a deed of security to obtain financing. Therefore, this makes it easier for a lender to leverage on the clients of the borrower in case of any default. However, this Bill is yet to be considered making the issue of IP securitization under Kenyan IP law inconclusive.
Despite the gap under the local IP laws in addressing IP securitization, the Movable Property Act categorizes IP as a form of collateral. Under section 2 of the Act, an acquisition security right means a security right in a tangible asset or intellectual property, which secures the obligation to pay any unpaid portion of the purchase price of the asset or other credit extended to enable the grantor to acquire it. The Act further widens the scope of an intangible asset to include receivables, choses in action, deposit accounts, electronic securities, and intellectual property rights. Having established intellectual property as an acquisition security right, priority is given under section 47 against a competing non- acquisition security right provided that a notice of the security right is registered with the Registrar. In addition, the Act gives direction that in case of any dispute, the law applicable to the creation, effectiveness against third parties, and priority of a security right in intellectual property, is the law of the country in which the intellectual property is protected. This law now explicitly recognizes intellectual property as a security right but there is no specific law or regulation addressing the enforcement of IP securitization.
Since IP under the Movable Property Act is now a registrable form of security, the Act has established the Business Registration Service (BRS). BRS is State corporation under the Office of the Attorney General that oversees the process of registration of collateral under the respective registries. The Security Right Registry is a fully electronic registry hosted on the e-citizen platform. The operation of the e-collateral registry allows members of the public to access the search function of the registry. While lenders can easily conduct searches, register initial notices, and amend or cancel security rights notices. This eases access to registries to facilitate the process of registration. This has also resulted in more security to lenders when lending credit as the collateral registry now acts as a public notice to any other entity interested in the collateral. In addition, lodging notices with the BRS is of importance as it is proof of perfection of security interests by providing a public notice of the existence of these interests. Therefore, perfection of IPRs through a public notice gives the secured party greater rights than those with unperfected security interests in case of bankruptcy.
As a result, the practical outlook on the sensitization, training efforts, and publication of Movable Property Act by the BRS on the use of the electronic registry is the steady increase in the registration of security interests. According to the BRS statistics, the Registry has over 20,000 Initial Notices lodged by various lenders with secured credit amounts running into billions of shillings. The BRS has gone further to ensure that the process of sensitization is not just a one-off training but a continuous process that remains open to individualized training upon request. This has been complemented by a user manual prepared for the Movement Property Registry System which is accessible to various Stakeholders and available online on the BRS website. Therefore, there is now more awareness on how to register movable asset such as IPRs but without further thought on enforcement considerations on some of the emerging rights.
After four years of the Movable Property Security Rights (MPSR) law being in place, we have witnessed a diversification in the type of collateral a person can give as security. Hence, accessing credit using movable property has now been made possible. This development is a result of the MPSR law that extensively provides for the creation of a security right, third-party effectiveness of a security right, registration of notices relating to security rights, priorities, rights and obligations of the parties, and third-party obligations and enforcement of a security right. However, the deficiency in IP laws in addressing IP securitization creates the pressing need of an Act that streamlines the system of securities in the IP sector. A unified law regulating Intellectual Property in Kenya. This Act will ensure that the inherent concerns that make it difficult to integrate intellectual property rights with the financial system are addressed. This would span from the valuation of intellectual property rights to clear provisions on securitization of IP. In conclusion, there is need to streamline the possibility of accessing credit using intellectual property rights through the legal system.