Movable securities in the UAE

November 2021 | SPOTLIGHT | BANKING & FINANCE

Financier Worldwide Magazine

November 2021 Issue

United Arab Emirates (UAE) Federal Law 4 of 2020 has been introduced to bring in various changes to the movable security regime in the UAE and has repealed and replaced UAE Federal Law 20 of 2016.

As per the provisions of the new law, the old law remained in effect until new regulations were commenced. In March 2021, the Federal Cabinet issued Cabinet Decision No. 29/2021 regarding the Executive Regulations. The Executive Regulations are a replacement of the 2018 regulations which related to the old law.

There are some significant changes which have been introduced by the new law, while some features of the old law (which was only recently introduced and which had significantly overhauled the previous regime for taking, perfecting and enforcing security interests over movable assets in the UAE) have been retained.

What assets constitute collateral?

The old law listed the types of assets that could be the subject of a collateral (defined in the new law as the corporeal or incorporeal movable asset, current or future, over which a security interest is created). The types of assets, listed at Article 3 of the new law, are listed below.

First, accounts receivable, unless they are part of a property ownership transfer transaction. Second, accounts payable at banks, including the current account and the deposit account. Third, written deeds and documents that can transfer ownership by delivery or endorsement and that establish the maturity of an amount or the ownership of goods, including commercial papers, certificates of deposit, bills of lading and warehouse bonds. Fourth, equipment and work tools. Fifth, material and moral elements of a business concern. Sixth, goods intended for sale or lease, raw materials and goods in the process of manufacturing or transformation. Seventh, agricultural crops, animals and their products, including fish and bees. Eighth, fixtures. Finally, any other movable assets deemed by the laws in force in the UAE to be suitable as a subject of a collateral in accordance with provisions of the new law.

The new law has retained the above list with one new addition: accounts receivable. Accounts receivable are defined by the new law as the right to collect amounts of money owed to the guarantor (the person holding the right or the power to dispose of the collateral that creates the security interest for securing interest for securing their obligations). However, as defined in the new law, accounts receivable does not include the right to collect payments established in endorsable deeds, the right to collect payments deposited in accounts payable in banks or the right to collect payments under securities.

Assets exempt from the new law

The class of assets that were exempt under the old law from registration has been slightly revised under the new law with some classes being removed. The new law does not apply to the following assets: (i) movable assets over which security interests should be entered in special registers under the legislation in force; (ii) expenses, wages, salaries and workers’ compensation; and (iii) public funds, endowment funds and funds of foreign diplomatic and consular entities and intergovernmental organisations.

Creation of security interests

The new law, at Article 8, sets out the following conditions that must be met for the creation of a security interest: (i) a contract of guarantee (defined by the new law as a contract concluded between a guarantor and an obligee to create the security interest) shall be concluded; (ii) the guarantor shall have the capacity to dispose of the collateral or shall be authorised to create the security interest therefor; (iii) the contract of guarantee shall include a description of the collateral; (iv) the contract of guarantee shall include a description of the obligation secured under the security interest; and (v) the obligee shall settle the consideration agreed upon in the contract of guarantee or shall undertake to settle the same.

It is important to note that the security interest is to guarantee one or more obligations, current or future, determined or determinable, fulfilled or conditional, fixed or variable. The security interest also extends to any returns on the collateral. This means any cash or in-kind consideration resulting from the disposal of the collateral or from its substitution, as well as any compensation received by the guarantor as a result of the impairment or loss of the collateral would be encompassed within the security interest.

Online registration of movable securities – Emirates Integrated Registries Company (EIRC)

The old law introduced a register to manage the registration of movable securities. This was known as the Emirates Moveable Collateral Registry (EMCR).

As part of the changes introduced by the new law and the Executive Regulations, the EMCR has been renamed the EIRC. All existing security interests that had been recorded in the EMCR prior to the implementation of the Executive Regulations continue to remain registered and no details related to registrations made prior to the implementation of the Executive Regulations need to be amended to satisfy the new law.

It is important to note that the EIRC will not be liable in instances where incorrect information is provided. The EIRC does not conduct due diligence on information provided for its database. As with most regulatory filings, the responsibility to provide accurate particulars is borne by the applicant.

An interesting provision of the new law is found in Articles 48(1) and 48(2) which provide that security interests arising from any transaction that was made prior to the Executive Regulations may be registered in the EIRC so long as the registration is completed within six months from the date of the Executive Regulations. Article 48(3) states that the priority of the rights registered during the period of six months shall be determined by the date upon which they become enforceable against third parties. Otherwise, they shall become enforceable against third parties from the date of registration with the EIRC.

Similar to the provisions contained in the old law, the new law provides the public access to information provided in the register as well as an entitlement to request reports of the information contained in the register.

Enforcing security interest against third parties

The old law recommended registration through the EMCR, now the EIRC, in order to enforce security rights. Registration on the EMCR was not necessary to create a valid security interest. However, it was required to perfect the security and to ensure that it was effective against third parties.

Article 10 of the new law provides three methods in which the security right may be enforced against third parties. They are: (i) registering the security with the EIRC; (ii) delivering possession of the collateral (the movable asset over which the security interest is created) to the obligee (the creditor benefitting from the security interest) and the obligee gaining control of the collateral; and (iii) creating a security right over existing or future property even where a contract had not yet been formed.

Judicial enforcement

An obligee may submit a request to the Magistrate of Summary Justice to order the seizure and enforcement of the collateral in accordance with the new law. All interested parties to the proceedings may object to the request for seizure for enforcement purposes with the Magistrate of Summary Justice within five working days from the date of being notified of the request.

Conclusion

The introduction of the new law was not expected as the old law had only been recently introduced. Concerns that had previously been raised regarding the status of existing securities registered with the EMCR have now been allayed by the Executive Regulations. Those examining the provisions of the new law are advised to seek expert legal advice as this is a constantly evolving area of law.

Robert Carroll is an associate at Horizons & Co. He can be contacted on +971 (4) 354 4444 or by email: robert.carroll@horizlaw.ae.

Robert Carroll

Horizons & Co.