Perfecting Security on a Defaulted Facility
Mwangaza Hardware Ltd defaulted on a KES 12 million overdraft and the bank has issued a demand letter. The bank holds a debenture created eighteen months ago, but the company secretary who executed it has since resigned and the bank cannot locate the board resolution authorising the charge. The bank also holds a chattel mortgage over a delivery truck, but the registration was never completed at the relevant registry. A third party, a supplier, has obtained judgment against the company and is now seeking to attach the truck. The company's directors are disputing the validity of the debenture, arguing it was not properly authorised. The bank's recovery officer wants to take possession of the truck immediately and sell it.
1. Identify the defects in the bank's security position and explain their practical consequences.
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There are two distinct security defects, each with different consequences:
1. The debenture - authorisation gap. A charge executed by a company officer must be authorised by the board; without a board resolution the company can argue the officer lacked authority. The practical consequences:
- The charge may be challengeable by the company and by a liquidator or administrator.
- If the bank cannot prove authority, its status as a secured creditor over the company's assets is at risk, and it may be treated as unsecured in an insolvency.
- The missing resolution is a documentary gap the bank must cure: obtain a certified copy or a confirmatory resolution, and check the company's register of charges and the public register for registration of the debenture.
2. The chattel mortgage - unperfected registration. A chattel mortgage that is not registered is generally ineffective against third parties and may be void against a subsequent creditor or a liquidator. The consequences:
- The supplier's judgment creditor can attach the truck ahead of the bank because the bank's interest was not perfected.
- The bank cannot assert priority over the truck.
Overall: The bank's apparent security is weaker than its files suggest. Before any enforcement, it must establish whether the debenture is validly authorised and registered, and whether the chattel mortgage can still be perfected. Acting on defective security exposes the bank to a wrongful enforcement claim.
2. The recovery officer proposes immediate repossession and sale of the truck. Advise on the legal and practical risks and the steps the bank should take first.
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Immediate repossession is risky because the bank's title to the truck is unperfected and contested.
Risks of acting now:
- Wrongful enforcement. If the chattel mortgage is void against third parties, seizing and selling the truck could expose the bank to a claim by the company or the supplier for conversion and damages.
- Priority loss. The supplier's attachment may rank ahead of the bank; selling the asset could be treated as an interference with the supplier's execution.
- Reputational and regulatory exposure. Enforcing on defective security invites complaint and possible regulatory scrutiny.
Steps before enforcement:
- Cure the debenture - obtain the board resolution or a confirmatory resolution, verify registration, and confirm the charge is on the company's register.
- Investigate the chattel mortgage - establish whether registration can still be completed and whether the delay is fatal; take legal advice on perfection and priority.
- Verify the supplier's position - check the judgment, the execution order, and whether the supplier has a prior registered interest.
- Demand and notice - serve proper demand and, where required, notice of intention to enforce, giving the company an opportunity to remedy.
- Preserve the asset - if repossession is justified, secure the truck to prevent dissipation but do not sell until title and priority are clear.
- Consider alternatives - negotiated settlement, restructuring, or appointing a receiver under a valid debenture if the debenture is confirmed.
Conclusion: The bank should not sell until it has confirmed valid, perfected security and cleared priority. Speed here destroys value; a short delay to cure defects protects the bank's claim.