5.1 Security documents

Security documents are the legal documents that create, prove and protect a lender's rights over the collateral and guarantees given for a credit facility. They include the original title documents to the assets, the instruments that create the security (such as a charge or a chattels mortgage), registration evidence, guarantees, insurance policies with the lender's interest noted, and supporting consents and valuations. If any document is lost, damaged or defective, the lender may be unable to sell the security when the borrower defaults, so these documents are among the most valuable records a bank or SACCO holds. Example: the securities officer of a bank branch in Nyahururu receives an original title deed, a registered charge and a valuation report for a dairy farmer's Ksh 2.5 million loan and logs each one into the security register.

Purpose of security documents

• Creating the security: The charge, debenture or mortgage is the legal instrument that gives the lender rights over the asset.
• Proving ownership: Title deeds, certificates of lease, logbooks and share certificates show that the borrower or guarantor owns the asset.
• Establishing priority: Registration shows when the lender's interest was recorded, which decides who is paid first if there are several lenders.
• Enabling realisation: On default, the lender relies on these documents to issue statutory notices and sell the asset.
• Evidence in court: The documents prove the debt and the security if a dispute arises.

Common security documents in Kenya

• Title deed or certificate of lease: Evidence of ownership of land, held by the lender while the charge is in force.
• Charge: The instrument creating security over land under the Land Act 2012 and registered at the land registry under the Land Registration Act 2012.
• Debenture: A document by which a company charges its assets (fixed and floating charges) to secure a loan, registered with the Registrar of Companies under the Companies Act 2015.
• Security agreement over movable property: Under the Movable Property Security Rights Act 2017, security over vehicles, machinery, stock, receivables and other movable assets, perfected by registration at the Collateral Registry.
• Logbook with joint registration: For motor vehicles, the National Transport and Safety Authority registers the lender as joint owner, and the logbook is held by the lender.
• Guarantees and indemnities: Personal or corporate guarantees signed by third parties who promise to pay if the borrower fails.
• Share certificates and transfer forms: Where shares are pledged, with signed blank transfer forms.
• Lien and set-off letters: Over cash deposits held with the lender.
• Assignment of life policy or receivables: Assignment of the cash value of a life policy, or of contract payments, to the lender.
• Insurance policies: For buildings, vehicles and stock, with the lender's interest noted as first loss payee.
• Supporting documents: Valuation reports, spousal consent (required for matrimonial property), land control board consent for agricultural land, rates and rent clearance certificates, official searches and stamp duty receipts.

Characteristics of good security documents

• Original and complete: Originals, not copies, and every page and schedule present.
• Properly executed: Signed, witnessed and attested by an advocate where the law requires.
• Stamped and registered: Stamp duty paid and registration completed within any time limit.
• Current: Insurance, valuations and searches up to date.
• Consistent: Names, parcel numbers and amounts agree across the documents and the facility letter.