The Moveable Property (Security Interest) Act, No. 3 of 2016 (the Act) establishes a new electronic Collateral Registry within The Patents and Companies Registration Agency (PACRA) for the registration of 'financing statements' relating to security taken over tangible or intangible movable property. Registration of a financing statement relating to security taken over movable property will serve to perfect that security and will constitute conclusive proof of the security interest. While the Act has been in force since April 2016, it cannot be implemented until the Collateral Registry is operational. The Collateral Registry has very recently started to operate and the regulations to govern the operation of the Collateral Registry are expected to come into force in the near future.
The Act applies to the creation, perfection and priority of security interests in tangible or intangible movable property where:
(a) the tangible asset is located in Zambia or, if the tangible asset is ordinarily used in more than one country, the debtor is located in Zambia;
(b) in the case of intangible assets, the debtor is located in Zambia; or
(c) the bank account is maintained at bank or financial institution that has a place of business in Zambia.
The definition of 'movable property' in the Act is very broad and includes "goods, intangibles, securities, money, negotiable instruments and negotiable documents."
Creation and perfection of security interests
In terms of the Act, a security interest in moveable property may be created by means of a security agreement (including any type of charge, chattel, mortgage or consensual lien over movable property, an agreement to sell subject to retention of title, a hire-purchase agreement and an outright transfer of accounts receivable), an order of court or the operation of any other written law. A security agreement must describe the assets over which security is granted (the collateral) in sufficient detail.
The Act does not replace the existing legal regime for taking security over movable property and as a result, it is important to note that:
- the requirements prescribed under existing legislation must still be met when creating or enforcing security; and
- security over movable property can still be perfected by taking possession of, or control over, the relevant property without registering a financing statement.
Having been validly created, a security interest is perfected once, either a financing statement has been registered, or the secured creditor has acquired possession of the property (or control where the movable property is a bank account). Where two creditors have validly created and perfected security over the same property, the priority of claims against the property will be determined according to which of the creditors perfected their security first in time by either registering a financing statement or taking possession of, or control over, the property. Given that a financing statement can be registered immediately after the security interest is created, this would in most instances be a more effective method of perfecting security.
Since unregistered security must be perfected by the creditor taking possession or control over the property, a creditor should be able to mitigate the risk that prior security exists that has not be registered by establishing that the party giving the security is in possession of, or has control over, the property at the time when the security is taken. In such circumstances, it stands to reason that, any prior security that may exist has not been perfected.
The Act further stipulates that security perfected by registration of a financing statement will be effective for five years only. This term can be renewed or extended for a further five year period, provided that this is done before the initial 5 year period expires.
Other specific issues
Unique provisions have been included regarding the perfection of security over specific types of movable property, including bank accounts. The Act provides that a security interest in a bank account that has been perfected by taking control over the bank account will have priority as against a competing security interest perfected by registration of a financing statement, irrespective of the time when control was acquired.
If a security interest was perfected under the law of another country and the Act subsequently becomes applicable (for example due to a change in location of the property), a creditor will have 10 working days to perfect its security interest in accordance with Zambian law after which the security will be regarded as unperfected security.
There is some ambiguity in the transitional provisions of the Act which determine the status of security taken prior to the Act coming into force. The Act provides that an existing security interest that has been perfected "shall be deemed to be perfected under the Act until (a) the time it would have ceased to be perfected or effective against third parties under any other law; or (b) the expiration of a period of six months after the effective date of the Act." It is not clear whether the longer or the shorter of the two periods described in this section will apply.