Introduction
The Security Interest in Movable Property Act, 2019 (“SIMPA”) came into force on 31st May 2019 and repealed the Chattels Securities Act 2014. The SIMPA and the regulations made thereunder did (inter-alia) establish a new system for the registration of security over movable assets which was operationalized in October 2019. Below is an overview of the salient features of the SIMPA.
Scope of the Act
The SIMPA applies to:
- security rights in movable property where the movable property is: (i) a tangible asset located in Uganda; (ii) an intangible asset, where the grantor of the asset is located in Uganda; (iii) a tangible or intangible asset which is ordinarily used outside Uganda, where the grantor of the asset is located in Uganda; (iv) a movable property attached to immovable property.
- security interests in movable property where: (i) the collateral is a deposit account maintained in a financial institution that has a place of business in Uganda; (ii) the transaction involves a movable property that secures a payment or the performance of an obligation; (iii) the security interest is a lien in movable property created by a judgement of court; and (iv) where the security interest is for the sale of accounts receivable, commercial consignments and for the lease of goods for more than one year.
It should be noted that the SIMPA does not apply to: (i) the creation, lease or transfer of an interest in immovable property; (ii) a sale of accounts receivable as part of the sale of a business out of which the accounts receivable arose; (iii) the assignment of accounts receivable where the assignment is only for the purpose of collection action; and (iv) the transfer of a claim for compensation of an employee.
Creation of Security Interests
According to the SIMPA, a security interest is created by a transaction that secures payment or performance of an obligation, without regard to the form of the transaction. The SIMPA also prescribes the following requirements that should be met in order for an agreement for a security interest to become enforceable:
- the grantor or the owner must have a right in the collateral or the power to encumber the collateral;
- the agreement must be signed by the grantor, witnessed by a third party and it should identify the secured creditor and the grantor. Furthermore, the agreement should describe the collateral and the secured obligation in a manner that reasonably allows for identification and it should indicate the maximum amount for which the security interest is enforceable; and
- the secured creditor should give the collateral a monetary value.
Where the secured creditor is a money lender, the transaction is, in addition to the above requirements, only enforceable if it complies with the provisions of the Tier 4 Microfinance Institutions and Money Lenders Act, 2016.
It should be noted that under the SIMPA, a security interest is given by a grantor to a creditor for the sole purpose of creating a security interest and this does not operate as a transfer of an interest in property from the grantor to the creditor. Where the grantor signs a transfer as a condition for a grant of a security interest under the SIMPA, such transfer is deemed void.
Perfection of Security Interests
The SIMPA provides for the following methods for perfection of security interests:
- registration that entails a notice of the security interest in the collateral being entered in the register;
- possession of the collateral by the secured creditor or a person acting on behalf of the secured creditor; and
- taking control of the of the deposit account where the collateral is a deposit account by the secured creditor or a person acting on behalf of the secured creditor.
The SIMPA also provides that where a security interest is perfected against a third party under the law of a state other than Uganda and the property is relocated or transferred to Uganda, the SIMPA shall apply to the property and the security interest will remain perfected. However, this is applicable where the country in which the collateral was perfected has entered into a reciprocal arrangement with Uganda to recognize and continue the perfection of security interests created in Uganda.
Where collateral is perfected in Uganda and is relocated or transferred outside the territorial jurisdiction of Uganda, the application of the SIMPA to such collateral remains.
The Registration System
Concerning the method of perfection of security interests by registration, the SIMPA designates the Registrar General who is appointed under the Uganda Registration Services Bureau Act, Cap 210 as the registrar for security interests in movable property. The SIMPA also establishes a register of security interest in movable property which is to be maintained as an electronic records system. The system has been put in place and can be accessed using the following link: simpo.ursb.go.ug/.
The register is available to the public for searches which can be conducted electronically upon the payment of a prescribed fee. Upon the conclusion of a search, the registrar can issue a certified report of the results of the search where the same has been requested at a fee. The report is admissible as evidence in any proceedings without any further proof of its authenticity.
Priority of Security Interests
The SIMPA provides for rules on priority of security interests and these rules vary depending on the type of movable property in question. However, in the general sense, priority between security interests in the same collateral is determined as follows:
- a perfected security interest takes priority over an unperfected security interest;
- priority between perfected security interests is determined by the order of whichever of the following actions occurs first: (i) the registration of an initial notice; (ii) the secured creditor, or another person on their behalf, taking possession of the collateral; or (iii) the secured creditor, or another person on their behalf, acquiring control of the collateral; and
- priority between unperfected security interests in the same collateral is determined by order of the creation of the security interests.
It should be noted that the order or priority of a security interest is not affected by a change in the method of perfecting the security interest where security interest is not at any time unperfected.
Enforcement of Security Interests
Under the SIMPA, a security interest becomes enforceable where a debtor defaults on the obligation to pay or where another event of default occurs. Upon default, the secured creditor may enforce the security interest by exercising any right provided for under the SIMPA, the security agreement, or any other written law.
The secured creditor is obligated to serve a notification on the grantor in writing or in another form agreed between the parties, to pay the money owing or to perform and observe the agreement as the case may be. Where the debtor does not remedy the default within the time provided in the notification, the secured creditor may register a default and enforcement notice (in the event that the security interest is perfected by registration). In case the security interest is perfected by other means other than registration, the secured creditor may take any action as empowered under the SIMPA.
The acts of enforcement provided for under the SIMPA include taking possession of the collateral with or without a court order and sale of the collateral which must be by auction.
Offences and Penalties
The SIMPA provides for administrative penalties which may be imposed by the Registrar General on persons that do not comply with the provisions of the SIMPA. Where a person fails to pay an administrative penalty, the Registrar General may by way of civil action in a competent court, recover the amount of the penalty from such a person as an amount due and owing to the Uganda Registration Services Bureau.
The SIMPA also provides for specific offences which include: (i) filing of a notice with fraudulent, frivolous or malicious intent; (ii) submission of a false statement or representation for purposes of deceiving the Registrar General; and (iii) making of a false statement or misrepresentation for the purpose or influencing the doing or omitting the doing of anything in relation to the SIMPA. The penalty prescribed for each of these offences upon conviction is imprisonment not exceeding two years or a fine not exceeding two hundred currency points or both.
Savings Provisions and Conclusion
Under the savings provisions, the SIMPA provides that a prior security interest shall remain perfected or effective against a third party and shall be deemed to be perfected under the SIMPA until: (i) the time it would have ceased to be effective against third parties under any other law; or (ii) the expiration of a period of one hundred and fifty calendar days after the effective date of the SIMPA.
However it is worth noting that the SIMPA does not repeal provisions of the Companies Act 2012, which continue to operate and confer validity on security created under the Companies Act 2012. However, out of abundance of caution a number of parties have elected to register old pre-existing security that was created under the Companies Act 2012 onto the registry created by the SIMPA as well. In addition, pending any measures that may in due course streamline processes, for security created by corporate entities over movable property, parties may be advised to consider having such security registered both under the Companies Act 2012 and and SIMPA.
To that end, the SIMPA may have had the effect of adding further steps and an additional registry to the process applied in perfecting security created by companies as opposed to wholly replacing an old process with a new simpler one. The SIMPA may therefore require further streamlining in due course to simplify its interface with provisions of other laws that continue to apply to security and to clarify a number of its provisions whose drafting is open to ambiguity.
All in all, the operationalisation of the SIMPA is expected to enhance access to credit for individuals as well as small and medium sized enterprises by the use of statute to broaden the forms of collateral that lenders may accept and establishing a register for security that is easily accessible online by parties irrespective of their location.
The information contained in this review is for general guidance and not a substitute for the need to get appropriate professional advice. If you require further information, please write to your usual contact person at Mukumbya Musoke Advocates or Julius M. Musoke
