Overview of the Movable Property (Security Interest) Act
The Movable Property (Security Interest) Act No. 3 of 2016 seeks to promote movable property based lending and thus ultimately increase access to credit by small scale businesses, in particular. Owing to a number of factors including the absence of a unified registry through which to verify whether a movable asset is subject to other third party interests (encumbered) and difficulties associated with enforcement, collateral in form of immovable or fixed assets has been preferred by banks and other creditors.
Unlike immovable or real property (houses and land) whose records have been kept at the Lands and Deeds Registry, no equivalent registry existed in relation to movable property. While a number of security interest registries for movable property existed prior to the enactment of the Movable Property (Security Interest) Act, no unified registry existed. These isolated registries included the register of charges and mortgages under the Companies Act, which was restricted to security interests created by companies and those established under the Trade Charges Act and the Agriculture Credits Act.
The Trade Charges Act provides for the creation of charges to secure loans advanced by financial service providers to persons licensed under the Act. The Act allows for small-scale entrepreneurs, who are usually unincorporated businesses, to access finance using their trading stock and other personal assets. However, the Office of the Registrar of Trades Charges, which falls under the Ministry of Commerce, has been none functional. The Agricultural Charges Act equally provides for charges over agricultural equipment to be registered in the registry. These charges are mostly registered by unincorporated small scale farmers.
With the exception of agricultural charges, priority over registered securities is determined by the date of registration. An agricultural charge takes precedence over a fixed or floating charge granted by a borrower, including charges both granted and registered prior to the agricultural charge. As such, lenders could not be fully secure of their interests in collateral in form of agricultural equipment.
The above secure transaction registries were supplemented by registries that, despite providing for registration of security interests, had not been primarily established to protect security interests. A case in point is the motor vehicle register maintained by the Road Transport and Safety Agency (RATSA). The registration of third party interests in motor vehicles was merely incidental to its role of recording ownership of motor vehicles.
Accordingly, the security interest registration system in Zambia was fragmented across registries, depending on the nature of security interest (agricultural charges) or type of asset (vehicles), or the type of debtor (company). The lack of a unified registry meant that a lender could only be assured that an asset was free of any third party interest (encumbered) after searching all the registries. This was not only cumbersome but expensive.
Further, the multiplicity of registries led to confusion as to priority ranking of security interests. Thus, in case of default, it was difficult to determine which of the several lenders was entitled to a priority claim over the asset pledged as collateral. The net result was reluctance to accept movable property as collateral and preference for immovable or fixed assets which have a relatively lower risk or to companies.
The implication was that none incorporated bodies and small businesses were practically excluded from using their movable assets as collateral. This included motor vehicles which are readily available. This was compounded by the lack of a cost effective enforcement mechanism.
The Movable Property (Security Interest) Act responds to the above challenges by providing for the establishment of a unified registry (the Collateral Registry) in which security interests in all types of movable property will be registered. The Act supersedes other statues on security interests and provides for a simplified enforcement mechanism while elevating the Collateral registry above all existing registries for security interests . Ultimately, the Act provides lenders with guarantees required to accept personal or movable property as collateral.
In Australia, Canada and a few other jurisdictions, laws equivalent to the Movable Property (Security Interest) Act are generally referred to as ‘Personal Property Security Interest’ (PPSI) laws. The substitution of ‘personal property’ with ‘movable property’, in Zambia, was a deliberate attempt to ease understanding of the Act. Such laws are further categorised as Secure Transaction Laws as they secure payment or performance of an obligation. As the name of the Act suggests, the Zambian Act’ like similar statutes elsewhere, is confined to movable property.
The overall objective of the Movable Property (Security Interest) Act it to make it attractive for lenders to accept movable property as collateral and thereby diversify the nature of movable assets used as collateral, leading to increased lending. In essence, the Act seeks to make movable property a reliable form of collateral.
The Act provides a mechanism by which to determine whether a movable property is not subject to other third party interests; ensures certainty as to priority vis-à-vis competing claims over a movable asset pledged as collateral; and provides for a simplified enforcement mechanism in case of default. This is achieved through a unified Collateral Registry in which creditors register their security interests and conduct searches before lending against collateral; and providing for clear and predictable priority and enforcement rules.
Section 4(3)(1) provides: - 3. (1) Despite any other written law and subject to section four, this Act applies to all interests in movable property created by agreement that secures payment or other performance of an obligation regardless of the form of the transaction, type of movable property, status of the debtor or secured creditor or the nature of the secured obligation, including—
(a) a security interest in intangible or tangible assets, a lien, charge, financial lease, right under a hire-purchase agreement, pledge, security trust deed, trust receipt, consignment, lease, assignment or other interest in movable property that secures payment or performance of an obligation;
(b) the creation, perfection and priority of a security interest in proceeds where this Act is applicable to the creation, perfection and priority of the security interest in the original collateral from which the proceeds arose; and
(c) a security interest created by a consumer or acquired by a secured creditor without affecting the consumers rights as provided in the Competition and Consumer Protection Act, 2010.
(2) This Act also applies to security interests created by judgments of a court in accordance with the Civil Courts (Attachment of Debts) Act or the operation of any other written law.
Accordingly, security interests include a lien, charge, financial lease, right under a hire purchase agreement, pledge, security trust deed, trust receipts, consignment, lease, assignment or other interest in movable property that secures payment or performance of an obligation, as well as judgements. A secured obligation is defined as an obligation secured by a security interest . It is nonetheless noteworthy that enforcement provisions do not apply to security interests created or providing for an outright transfer of an account receivable or operating lease. To this end, section 70(1) provides –
70. (1) This Part applies to security interests created in accordance, with this Act and does not apply to those security interests that are created or provided for by an outright transfer of an account receivable and operating lease.
Further, the Act requires that an operating lease be for a period longer than one year. Under section 2, an operating lease is defined in the following terms: -
“operating lease” means an agreement, that exceeds one year, relating to a transaction in which the leased asset has a useful life at the end of the lease term, the lessee does not have an option to purchase the leased asset at the end of the term of the lease for a nominal price and title to the leased asset is not transferred to the lessee automatically at the end of the lease term’
A financial lease, on the other hand, is defined as;
‘ … a lease of a tangible asset, other than a negotiable instrument or negotiable document, that is the object of a lease agreement, and includes a hire purchase agreement, where— (a) the lessee automatically becomes the owner of the tangible asset; (b) the lessee may acquire ownership of the tangible asset by paying no more than a nominal price; or (c) the tangible asset has no more than a nominal residual value’.
The Act further defines a ‘commercial consignment’ as a consignment where a consignor has reserved an interest in goods that the consignor has delivered to the consignee for the purpose of sale, lease or other disposition and both the consignor and consignee deal in the ordinary course of business in goods of that description, excluding an agreement under which goods are delivered to an auctioneer for sale
However, not all the key terms used in the Act have been defined. For instance, a lien, charge, consignment per se, pledge, security trust deed, lease and assignment, among others, have not been defined. It follows that they have to be given their natural or ordinary meaning. In this regard, section 6 (3) provides that the principles of common law, equity and the law of merchants, except insofar as they are inconsistent with this Act, continue to apply with respect to security interests in movable property.
Further to section 4, the Act covers creation, perfection and priority of security interests. Section 4 provides: - 4. (1) This Act applies to the creation, perfection and priority of a security interest where the— (a) tangible asset is located in Zambia; (b) debtor is located in Zambia where the collateral is an intangible asset; (c) debtor is located in Zambia and the tangible asset is of a type ordinarily used in more than one country; or (d) (bank account is maintained in a bank or corporate/unincorporated body that has a place of business in Zambia.
Subsections 3 to 5 further clarify as follows: -
(3) For the purposes of this Act—
(a) a debtor is located in Zambia if the debtor has a place of business in Zambia;
(b) the habitual residence of the debtor shall apply if the debtor does not have a place of business in Zambia; and
(c) he location of the property or debtor shall be determined at the time of the creation of the security interest and for purposes of perfection and determining of the priority of the security interest, at the time the dispute arose.
(4) If a security interest in collateral is created and perfected before a change in the location of the collateral or debtor, the location of the collateral or debtor is, with respect to perfection and priority, the location prior to the change in location.
(5) If a security interest is perfected under the law of another State and this Act becomes applicable, the security interest remains perfected, in accordance with this Act, for ten working days after the change in location and, thereafter, only if perfection requirements of this Act are satisfied.
To all intents and purposes, the Act covers all forms of secure transactions relating to movable property. It applies to all transactions with a security function. These include loans, hire purchase and lease agreements and any other agreements securing payment or performance of an obligation in relating to movable property. To that end, the Act defines a debtor more broadly that commonly understood.
A debtor is defined as a person who creates a security interest to secure that person’s obligation or that of another person and includes a (a) lessee under a financial lease;(b) buyer that acquires goods whose title is to be retained by the seller; (c) grantor of any charge, chattel mortgage, pledge or lien in movable property; (d) consignee who receives goods from another person under a commercial consignment; and (e) seller of accounts receivable and a lessee under an operating lease where the receivables or the object that is subject of the lease does not secure an obligation’.
Similarly, a secured creditor is defined as a person in whose favour a security interest is created, and includes (a) financial lessor; (b) seller who reserved title to the goods sold; (c) chargee under any type of charge, chattel mortgagee or holder of any type of consensual lien; and (d) buyer of accounts receivable, commercial consignor and an operating lessor under an operating lease where the account receivable, goods provided under the commercial consignment or the leased object do not secure an obligation
The intention of the Act is to cover all forms of movable assets. As such, movable property is defined in a non-exhaustive manner. Movable property is defined as including goods, intangibles, securities, money, negotiable instruments and negotiable documents . Similarly, ‘collateral,” is defined under section 2 to mean movable property, whether tangible or intangible that is subject to a security interest. Thus, the Act applies to both tangible and intangible goods.
The broad categories of movable property are: tangible assets, farm produce, inventory, consumer goods and accounts receivables and are defined as follows: -
- Tangible Assets: every form of movable property, including inventory, equipment, consumer goods, accession, negotiable instruments, negotiable documents and money;
- Consumer Goods: goods that a debtor predominantly uses or intends to use for personal, family or household purposes. However, the Act does not define ‘goods’ per se. Goods nonetheless constitute tangible assets and are generally sub-categorized into ‘consumer goods’, ‘inventory’ and ‘equipment’.
- Equipment: tangible asset used by a person in the operation of its business, and includes plant and machinery.
- Negotiable Document: a document such as a warehouse receipt or a bill of lading, that embodies a right to delivery of tangible assets and satisfies the requirement for negotiability under the law governing the document.
- Negotiable Instrument: an instrument, such as a cheque, bill of exchange or promissory note, that embodies a right to payment and satisfies the requirements for negotiability under a law governing negotiable instruments.
- Inventory: tangible assets that are held for sale or lease in the ordinary course of business, raw materials or work-in-process
- Account Receivable: a right to payment of a monetary obligation, excluding a right to payment evidenced by a negotiable instrument and to payment of money credited to a bank account
- Bank Account: an account, maintained by a bank or corporate/unincorporated body, to which monies for a customer are credited, and includes monies received by the bank but not yet credited into the customer’s account.
- Farm products: includes—
- crops grown, growing or to be grown, harvested and their produce and fruit;
- timber, both standing and growing;
- fish stocks, livestock, bees and poultry and the produce and progeny thereof;
- seeds, fertilizers and manure; and
- other supplies and equipment used or produced in a farming operation.
Under section 2(2), parties are required determine the categorization of the collateral, whether consumer goods, equipment, farm products or inventory, at the time they execute the security agreement.
Section 4(3) stipulates as follows in relation to security interests not covered by the Act: -
(3) This Act shall not apply to—
- the creation or transfer of an interest in immovable property;
- a mortgage of a ship regulated by the Merchant Shipping Act and an interest in aircraft and aircraft engines as defined in the Civil Aviation Authority Act, 2012, Civil Aviation Act, 2016; or any other law regulating the aviation sector; and
- pledges of securities under any law regulating a central securities depository system.
Ships and aircrafts are excluded as they are subject to international treaties and thus regulated under specific pieces of legislation. Further, pledges of securities under any law regulating a Central Securities Depository system are excluded as they can be disposed of quite rapidly. Such securities could include Government securities or those of private entities.
However, securities per se fall within the scope of the Act and can therefore be used as collateral. It is noteworthy that the definition of movable property includes securities. Thus, if one issued a certificate such as paper bond, it would qualify as collateral under the Movable Property (Security Interest) Act. If, on the other hand, one is trading electronically in Government Treasuries through a broker and wants to use them as collateral, this pledge will not be covered by the Act. It is also noteworthy that, as regards lending transactions, the Act only applies to secured lending.
Immovable property is expressly excluded from the Act. Immovable property is defined as land or other property that cannot be moved and includes an object so firmly attached to the land that it is regarded as part of the land ’ It includes fixtures which are defined as tangible asset that is physically attached to immovable property without losing its separate identity, excluding improvements.
Security interests may come into competition with other rights, interests and claims, including other security interests, rights of buyers, lessees and judgement creditor’s. They may also be affected by bankruptcy or insolvency proceedings. Consistent with the need to create a unified and comprehensive registry for security interests in movable property, the Movable Property (Security Interest) Act supersedes any other law with regards to security interests in movable property. These include the Companies Act, the Agricultural Charges Act, the Trade Charges Act and the Hire Purchase Act. Security interests perfected under the Act take precedence over interests protected under any other statute.
Section 6 of the Act provides: -
6. (1) Subject to the Constitution, where there is any inconsistency between the provisions of this Act and the provisions of any other written law relating to security interests in movable property or the creation and maintenance of a registry for security interests in movable property, the provisions of this Act prevail to the extent of the inconsistency.
(2) Despite the generality of subsection (1), this Act shall prevail over any other written law on security interests created by an agreement, including—
- an agreement to sell subject to retention of title;
- a hire-purchase agreement made in accordance with the Hire-Purchase Act;
- an outright transfer of accounts receivable;
- an operating lease;
- consignment that does not secure an obligation; and
- any other interest that secures an obligation
Further, pursuant to section 5, the provisions of section 4, relating to creation, perfection and priority of security interests, prevail over insolvency and bankruptcy proceedings: -
5. (1) Subject to subsection (2), the commencement of bankruptcy or insolvency proceedings under a law relating to bankruptcy or insolvency shall not override the provisions of section four.
(2) Despite subsection (1), the law relating to bankruptcy or insolvency shall apply if the bankruptcy proceedings or insolvency proceedings, as the case may be, commenced under that law in relation to—
- avoidance of security interest;
- treatment of secured creditors;
- ranking of claims; and
- distribution of proceeds.
(3) For the avoidance of doubt, an unperfected security interest created by a debtor shall not be effective against a liquidator or receiver carrying out insolvency proceedings or official receiver in relation to the estate of the debtor.
Not all aspects of secure transactions or secured lending are covered by the Act. Rather, the Act is restricted to factors that have previously undermined the use of movable property as collateral. Similarly, the Act does not impose any obligation on lenders nor compel them to lend. In addition, lenders and borrowers retain the freedom to contract. The Act merely creates the enabling environment for such transactions.
Specifically, the following are not addressed;
- Interests Rates Payable: The rate of interest charged on loans, for example, remains subject to agreement between the parties. However, it is hoped that by reducing the risk associated with asset based lending, the Act will lead to reduction in lending rates.
- Valuation of Assets: The Act leaves it to the parties to decide how collateral is to be valued and secured.
- Insurance of Collateral: Similarly, insurance of assets subject to security interests, including those that are pledged as collateral under loan agreements, are not within the scope of the Act but left to be decided by the parties.
- Enforcement: Except for the simplified enforcement mechanism, the creditor is responsible for recovering the secured funds or performance of the secured obligation. Equally, the lender is responsible for monitoring and recovering payments
Parties retain the right to decide the law applicable to mutual rights and obligations emanating from a security agreement. To this end, section 4(2) stipulates: -
(2) The law applicable to the mutual rights and obligations of a debtor and secured creditor arising from a security agreement shall be the law chosen by the parties and, in the absence of a choice of law, by the law governing the security agreement.
The Collateral Registry is established pursuant to section 11 of the Movable Property (Security Interest) Act No. 3 of 2016. The Registry is operated by the Collateral Registry Office within the Patents and Companies Registration Agency (PACRA).The PACRA Registrar is the Registrar under the Collateral Registry. The Registrar is responsible for managing and facilitating access to the Registry. However, the duties of the Registrar do not include providing legal advice on matters of registration.None legal advice relating to registration and searches can nonetheless be provided
The Collateral Registry is a central database that records security interests in movable assets pledged as collateral. Thus, in essence, it is a registry for security interests. Particulars of security interests as submitted through a financing statement, during registration or upon amendment, shall be kept by the Registry.