UGANDA: An Introduction to General Business Law
Security interests in movable property in Uganda - three years after SIMPA; opportunities and challenges
A lender’s primary consideration when extending credit is the ability of a borrower to repay the credit provided. The lender will usually assess the business proposition and ability of the borrower to generate enough revenue through its operations to repay the debt as and when it falls due. The lender will also be keen to ensure that if the borrower defaults on its payment obligations, there is adequate and effective security to satisfy the debt.
In Uganda, historically, more reliance has been placed on immovable property as a source of security. Although available as security, movable property was not always a preference and little practical regulation existed in this area. The repealed Chattels Transfer Act (the CTA) and its successor - the Chattels Securities Act (the CSA) (repealed in 2019) mainly covered security in movable assets provided by individuals. Even then, the use of the CSA as a statutory legal structure to streamline the law governing security taken over movable property was nearly nonexistent. The processes under the CSA never really got started, as despite being passed into law in 2014, it only came into force in December 2018; five months prior to its repeal and the commencement of the current Security in Movable Properties Act, 2019 (SIMPA).
Security over movable property has commonly been taken by way of a debenture (usually in the form of a floating charge) created by companies under the Uganda Companies Act, 2012 (the Companies Act). The debenture is popular as a contractual document and industry players including cross border financiers are familiar with it. Rules governing debentures have been developed over time and its robustness is fairly assured. Security over movable property was also created on the basis of other common law charges including liens, deeds of hypothecation, pledges and assignments.
While security over movable property was a recognised form of security, until 2019 when SIMPA was enacted, there was inadequate legislation in Uganda to regulate such security and the scope of movable property was not always certain.
This article seeks to assess the performance of SIMPA three years following its addition to the legal regime governing the creation and enforcement of security in Uganda. We take into account the performance of SIMPA, focusing on changes that have delivered the intended benefit, the challenges and general outlook.
Generally, SIMPA has widened the scope of movable property from traditional tangible assets to include those that were not recognised in the CSA or its predecessor, the CTA. This list now includes shares, account receivables, warehouse receipts and intellectual property. This has had the effect of easing access to capital as the scope of acceptable collateral is now wider and the statutory backing has boosted lender confidence in non-conventional assets presented as security.
SIMPA has also provided a clearer and certain perfection process of security interests in movable property. It provides for registration, and/or taking possession or control of the charged movable property as the acceptable modes of perfection. Registration is the preferred mode as it creates a record on the legal position of a security, and in particular its priority. The registration process is undertaken electronically through the Security Interest in Movable Property Registry System (SIMPRS) and has continuously been improved by the registry, making it fairly easy and quick for one to undertake.
The SIMPRS has simplified verification of security information; details on registered security interests are electronically stored and can be easily accessed by a lender or even third parties as part of due diligence inquiries upon payment of minimal requisite fees. This has created certainty, quickness of closure and visibility of one’s security status from wherever they may be located. This is a marked improvement from the old position where the manual registration and lack of a specific registry created uncertainty for parties involved.
Like any new law, SIMPA has not been subject to wide judicial scrutiny by Courts in Uganda. This notwithstanding, SIMPA’s codification of the law and practice relating to creation, registration and enforcement of security interests in movable property is bound to provide sufficient guidance to Courts when determining claims premised on security interest in such property. The law is certain enabling parties to a financing relationship to have clear expectations from a chosen course of action.
By providing statutory regulation, SIMPA is accepted as an enabler for the provision of finance by increasing reliance on movable assets as security in much the same way as security created in respect of immovable property. This is unlike the CSA and CTA which, despite providing for the creation and registration of charges over movable property, were, among others, not fully operationalised as the legal infrastructure envisaged under the those laws was either non-existent in practice or otherwise inefficient. The old law remained abstract in many respects.
The application of SIMPA alongside other laws is noteworthy. SIMPA has coincided with the initiative by Government to reduce stamp duty payable in respect of certain security instruments. Debentures and separately, pledges and security by way of deposit of title deeds, which previously attracted stamp duty of 0.5% and 1% of the value of secured respectively, now attract nil duty. This has lowered the cost of borrowing and will increase the appeal of movable property as an acceptable and cheap way to access capital.
As a challenge, SIMPA has created a dual registration requirement for charges issued by locally incorporated companies. Such charges are now registered with both the online SIMPRS and the companies’ registry. The companies’ registry is still largely manual while SIMPRS is electronic. The Companies Act provides for a 42 day registration period whereas SIMPA contains no time limit. Importantly, priority under SIMPA is given from the date of registration whereas, traditionally, priority was based on the date of creation of the charge. It is therefore advisable to register a charge covered under SIMPA as soon as it is created (notwithstanding the 42 days allowed under the Companies Act) in order to benefit from the priority created by the Act.
The registration of security interests with SIMPRS imposes an administrative responsibility on a lender (or a security trustee) by requiring it to open and maintain an online account with the registry through which the registration of security interests is undertaken. We note however that the account creation process is fairly quick and there are no reporting or filing obligations arising by virtue of the account creation.
Given its novelty, the SIMPRS has also come up against some operational challenges. The challenges largely relate to the highly prescriptive nature of information required at the time of registration of a security interest and the restrictive manner in which such information must be submitted. These are generally system based and should not take away from the improved regulation; the visibility on registration and the certainty of processes as indicated above. The registry personnel are also receptive to feedback and attempts are continuously made to improve the process.
After three years, it is safe to state that SIMPA has advanced a positive change on the security interest in movable property landscape in Uganda. This has increased lender confidence and uptake of movable property as security.
Andrew Kibaya & Pearl Mirembe
Banking and Finance
Shonubi Musoke & Co. Advocates