UAE: New security regime over movable assets creates further transparency

The UAE in 2020 issued Federal Law 4 of 2020 (the new law) that repealed and replaced Federal Law 20 of 2016 (the old law) on securing interests over movable assets. Following the enactment of the new law, the UAE Cabinet of Ministers issued Decree No. 29 for 2021 regarding the executive regulations for the new law.

Despite the publication of the new law, the essential elements of the old law has largely been retained in most cases, with a few additions that will facilitate the creation of a better suited legislation.

The new law brings the following notable differences.

The old law applied to contracts and security interests over movable tangible and non-tangible assets.

The new law retains the same principle over taking security interests over movable tangible and non-tangible assets, for the present and in the future. It also adds that transferees’ rights, with respect to the same of account receivables, shall be treated as a security right.

The executive regulations mainly deal with the registration procedures on the Emirates Movable Collateral Registry (the EMCR). Although the new law provides for a new registry to be created, the executive regulations did not introduce a new registry, hence the EMCR continues to be the applicable forum for registering security interests.

It should be noted that the EMCR has altered its name – and has introduced changes to its website – to become the Emirates Integrated Registries Company (EIRC).

The old law lays down the various types of assets that could be subject to a mortgage, including current and future movable properties, such as:

• Account payables;

• Payables and deposits at licensed banks and financial institutions including current accounts and deposits accounts;

• Bonds and other documentation that make ownership transferable through delivery endorsement, commercial papers, certificates of deposits, bills of lading and warehouse bonds;

• Work equipment and tools;

• Material and moral elements of a business falling under the commercial transaction law and the trademark law;

• Raw materials, goods intended or sale or lease and goods used in the manufacturing process; and

• Any other movable asset that may be considered to be valid under the federal law.

The new law has retained most of the assets referred to above, however, the old law did not cover the accounts receivables. The new law covers that point by giving a definition of the account receivables, being a right to receive any such amount that the third party may owe the pledger. Under the new law, accounts receivables are now covered and security interests would be possible.

The new law has clarified the types of assets that may not be pledged or secured under the provisions of the law and has narrowed down these assets under the following three heads:

• Movable required by law to be registered as security rights in relevant registries;

• Wages, salaries, expenditure and compensation for workers and employees; and

• Public funds, endowment funds, foreign diplomatic funds and funds of international governmental organisations.

The executive regulations provide that security rights over accounts (only the accounts, and not other types of assets) can be enforceable against third parties by way of control. This is established:

• Automatically if the right is over an account which is held by a financial institution; or

• If the security provider, secured party and financial institution holding the account, sign an agreement establishing the secured party’s control over the account.

The executive regulations mandate a specific form of a notice that is to be served when a secured creditor exercises his rights against the collateral directly.

The new law provides the public with the right to access the information. The same can be requested in soft or hard copy format, as per the practice existing under the old law.

Article 17 of the old law announced the principle by virtue of which the declaration of a mortgage by the mortgagee entitled them to rights over other creditors in fulfilling their rights over the mortgaged property. This priority was subject to the date and time of the said declaration.

The new law however complements the old law by retaining the existing principles but clarifying certain other aspects, as follows:

• Priority rights shall be granted to all secured liabilities including the ones that rise after they become enforceable;

• Security rights established under the law shall not be affected any other competing rights that may come to the notice of the mortgagee; and

• The implementing regulations shall take precedence over any and all other priority rules that may affect particular types of mortgages.

Taking into account the imposition of the control methods for bank accounts, the executive regulations set out a priority waterfall for credit accounts with the bank holding the account and security ranking first, followed by those with a control agreement and others.

The executive regulations have clarified that security interests granted under the old law regime shall remain in force vis-a-vis third parties, only after the registration of such securities with the emCredit database, and in accordance with the provisions of the new law. It shall remain valid until expiry.

Article 48 of the new law provides that a secured party could register a security interest that was originated prior to the issuance of the executive regulations, provided that the registration is effected within six months from the date of enacting the executive regulations.

The provisions of Article 48 of the new law, combined with the provisions of the executive regulations, would lead to the conclusion that any security interest granted under the old law but not perfected prior to the issuance of the executive regulations needs to be registered in accordance with the new law, however, the priority ranking will still be considered under the old law (the date of the registration of any event).

In conclusion, the new law and the executive regulations have come to introduce a holistic security system over movable assets with wider application related to account receivables and bank accounts, which grant better and more transparent security for creditors against their debtors.

 

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Jirayr Habibian

Managing partner, UAE office

Matouk Bassiouny

T: +971 4289 2159

E: jirayr.habibian@matoukbassiouny.com

Jirayr is the managing partner of Matouk Bassiouny’s UAE Office. He has a wealth of experience of working in the fields of corporate finance, trade finance, M&A transactions and capital markets across multiple jurisdictions including the UAE, Lebanon, Armenia, Egypt, Turkey and Jordan.

Prior to joining the firm, Jirayr worked in a variety of senior roles with leading international banks. This included acting as chief legal officer and board secretary of Investbank, chief general counsel and head of regulatory affairs at Rasmala Investment Bank, head of legal and compliance at Bank of Sharjah, regional head of legal and compliance at Standard Chartered Bank, and non-executive director of the Board of Directors of Lebanese Swiss Bank.

Jirayr is a graduate of St Joseph’s University Law School and Montpellier University.