Encumbrances on a Kenyan Limited Company: What You Need to Know

When dealing with a Kenyan Limited Company (Ltd), one of the most important aspects to consider is whether the company has encumbrances on its assets. An encumbrance is a legal claim, liability, or restriction that affects a company’s ability to freely deal with its assets.

Understanding encumbrances is crucial for investors, lenders, buyers, and business partners because they can directly impact valuation, risk, and the ease of doing business with the company.

Types of Encumbrances on a Kenyan Ltd Company

1. Charges Over Company Assets

• Fixed Charges – These are securities registered against specific assets such as land, machinery, vehicles, or equipment.
• Floating Charges – Securities that cover a class of assets that may change over time, such as inventory, accounts receivables, or bank deposits.

👉 Both fixed and floating charges must be registered with the Registrar of Companies under the Companies Act, 2015.

2. Mortgages and Debentures

• A mortgage may be registered against land or property owned by the company.
• A debenture is a debt instrument often secured by a fixed or floating charge, giving creditors priority rights in case of default.

3. Liens

A lien gives a creditor the legal right to retain possession of a company’s asset until a debt is repaid. For instance, banks may hold onto a company’s title deed until loan obligations are settled.

4. Court Orders and Legal Encumbrances

• Court Injunctions / Caveats – These may restrict the sale, lease, or transfer of company property.
• Receivership or Administration – If a company defaults on debt, a receiver or administrator can be appointed to manage or dispose of assets.
• Winding-Up Proceedings – Pending insolvency or liquidation cases may freeze asset transactions.

5. Tax Liabilities and Government Encumbrances

• The Kenya Revenue Authority (KRA) can place claims on company assets for unpaid taxes.
• Tax-related encumbrances may also include penalties, VAT arrears, or PAYE non-compliance.

6. Other Encumbrances

• Land Caveats: Restrictions recorded at the Ministry of Lands against property owned by the company.
• Intellectual Property Encumbrances: Trademarks, copyrights, or patents pledged as collateral.
• Contractual Restrictions: For example, restrictive covenants in financing, supplier, or lease agreements.

How to Check for Encumbrances on a Kenyan Company

Due diligence is key before investing in or engaging with a company. Here are the main ways to identify encumbrances:

1. Company Registry Search (CR12 / CR24):
   • Reveals directors, shareholders, and registered charges against the company.
2. Land Registry Search:
   • Shows mortgages, caveats, or restrictions on land titles owned by the company.
3. Collateral Registry (Movable Property Security Rights Act):
   • Lists encumbrances on movable assets such as vehicles, stock, or accounts receivables.
4. Court Records Search:
   • Useful for identifying ongoing insolvency, receivership, or litigation cases.
5. KRA Clearance Certificate:
   • Confirms whether the company has outstanding tax liabilities.

Why Encumbrances Matter

• For Investors: They help determine the real value and financial health of a company.
• For Lenders: They establish the priority of claims in case of default.
• For Buyers: They prevent buying property or shares tied up in legal disputes.
• For Entrepreneurs: They ensure compliance and avoid legal hurdles in transactions.

Wrap up

Encumbrances can significantly impact the operations, valuation, and attractiveness of a Kenyan Ltd company. Before engaging in financing, investment, mergers, or acquisitions, always conduct a thorough due diligence check.

By searching through the Company Registry, Land Registry, Collateral Registry, Court Records, and KRA, you can identify any restrictions and make informed business decisions.

💡 Tip: Always consult a licensed company secretary, lawyer, or due diligence expert to conduct searches and interpret encumbrance records correctly.