IP as Loan Security: Charging Trademarks, Patents and Copyright to a Kenyan Lender

Using IP as loan security is possible in Kenya, but it works differently from the way most lenders and owners assume. The Movable Property Security Rights Act, 2017 (Cap. 499A) allows trademarks, patents, copyright and related rights to be charged, and the security is perfected by a notice on the collateral registry, not by an entry on the KIPI register. This article sets out what the Act requires, how priority and enforcement work, and where the gaps are, so that a lender or a borrower can structure IP as loan security with the right filings.

IP as loan security: what the Act covers

Section 2 defines “intellectual property” as copyright under the Copyright Act, industrial property rights under the Industrial Property Act, a trade mark under the Trade Marks Act, and any other related right. Section 4(1) applies the Act to every transaction that secures payment or performance of an obligation, without regard to its form, including a floating or fixed charge, a pledge and a chattel mortgage. Three rules matter for IP.

• Tangible assets and IP are separate. Section 14 says a security right in a tangible asset with respect to which IP is used does not extend to the IP, and a security right in the IP does not extend to the tangible asset. A charge over machinery does not catch the patents used in it.
• Other laws still apply. Section 4(5) says nothing in the Act overrides another law that limits the creation or enforcement of a security right in, or the transferability of, specific types of asset.
• A written agreement is needed. Under section 6, the security agreement must be in writing and signed by the grantor, identify the parties, describe the secured obligation and describe the collateral. A generic description of all the grantor’s movable assets is allowed, but a lender should still identify each registration by its number.

Perfection and priority

Section 15 makes a security right effective against third parties if a notice is registered with the Registrar. Under section 38, priority among competing security rights created by the same grantor in the same collateral is determined by the time of registration. Three timing rules deserve a diary entry:

• A registered notice is effective for the period the registrant states, and never more than ten years (section 30). It can be extended only by an amendment notice registered within six months before expiry.
• An error in the grantor identifier makes the registration ineffective (section 35).
• If the grantor’s identifier changes, the secured creditor must register an amendment within sixty days to keep effectiveness and priority (section 36). A rebranding or name change of the borrower is therefore a lender’s deadline; see our article on trademark change of name at KIPI.

Section 81(4) provides that the law applicable to the creation, effectiveness against third parties and priority of a security right in IP is the law of the country in which the IP is protected. For a Kenyan registration that is Kenyan law, and a lender taking security over a portfolio in several countries must satisfy each of them.

KIPI does not record charges

The collateral registry is where the security is recorded. We have found no provision in the Trade Marks Act or the Industrial Property Act for entering a charge on the KIPI registers. Section 62 of the Trade Marks Act bars entry of notices of trust on the register, and section 62 of the Industrial Property Act deals only with changes of ownership. That has two consequences. A lender searching only the KIPI register will not see a charge, so due diligence must include a search of the collateral registry against the grantor; see IP due diligence for cross-border M&A. And if the security is structured as an assignment of title with a reassignment on repayment, the recordal rules apply: under section 28 of the Trade Marks Act and section 62 of the Industrial Property Act, an unrecorded change of ownership cannot be relied on as evidence of title.

Licensees, enforcement and keeping the asset alive

Section 45(1) provides that a licensee of collateral acquires its rights subject to a security right that is effective against third parties, but section 45(6) protects a non-exclusive licensee of intangible collateral licensed in the ordinary course of the licensor’s business, if it does not know the licence violates the creditor’s rights. Exclusive licences and licences outside the ordinary course are therefore a lender’s risk, and the security agreement should restrict them.

After default, section 72 lets the secured creditor sell or otherwise dispose of, lease or license the collateral. The Act has no IP-specific enforcement procedure that we could find, so a buyer of an enforced trademark or patent must still be recorded at KIPI. The security is also only as good as the underlying right. A lender should require the grantor to pay patent annuities and renew registrations on time; see patent annuities at KIPI and trademark renewal at KIPI. It should also require evidence of use, because a mark unused for five years can be removed; see removal for non-use under section 29.

Stamp duty and tax

The Stamp Duty Act’s exemptions list includes an instrument under the Movable Property Security Rights Act, so the security agreement should not attract the mortgage duty in the Schedule. For capital gains, paragraph 6(2)(a) of the Eighth Schedule to the Income Tax Act excludes a transfer of property made only to secure a debt, but a later enforcement sale is a transfer; see IP assignment tax.

A checklist for lenders

• Search the KIPI register for owner, licences and renewal dates, and the collateral registry for existing notices against the grantor.
• Describe each right by registration number and register the notice; diary the ten-year expiry.
• Take covenants to renew, pay annuities, record licences and prove use, and restrict exclusive licensing.
• Calendar the sixty-day amendment deadline on any change in the grantor’s identifier.
• Plan enforcement, including KIPI recordal for a buyer.