17 Jul 2014

FREE ZONE SERIES, PART II DAFZA

Authored by: Lori-Ann Campbell and Yasmene Cerfontyne

FREE ZONE SERIES PART II DAFZA

A SERIES OF Q & A’S ON COMMON ISSUES WHEN REGISTERING SECURITY WITHIN VARIOUS FREEZONES IN THE UAE
 
PART 2 - DAFZA
 
In this series Lori-Ann Campbell, Senior Legal Consultant and Yasmene Cerfontyne in the Banking & Finance team at Hadef & Partners will discuss the regulations, practicalities and common issues that arise in various free zones across the UAE. In the second of the series, this article discusses some common issues relating to registering security within Dubai Airport Free Zone Authority (DAFZA).
 
There are a number of free zones within the UAE, each with differing implementing laws, regulations and practical procedures. The procedural requirements and the types of security interests that can be registered will vary depending on where the entity that is granting security is licensed.
 
In Part 1 of the series the various types of security that could be registered against a JAFZA FZE were considered.
 
Part 2 of the series considers DAFZA FZEs and what registrable security is available.
 
It has been our experience that while the regulatory provisions relating to registering security at DAFZA bear some similarity to JAFZA there are also key differences between the two jurisdictions in terms of the practical procedure and requirements.
 
Q1. What types of security can a bank register against DAFZA Free Zone Establishments (FZE’s)?
 
The type of security that a bank can register against DAFZA FZE’s is expressly set out in the DAFZA Regulations (the “Regulations”). Article 56 of the Regulations provides that all of the shares of an FZE (but not part of the shareholding) can be pledged to any creditor in security for any debt or other obligation incurred, or to be incurred by the FZE.
 
The Regulations also provide at Article 58 that that an FZE may grant any security interest permitted under the laws of Dubai from time to time for any debt or other obligation incurred, or to be incurred by the FZE.  Whilst this wording is similar to the JAFZA FZE regulations and there is potential flexibility for future types of security to be registered, currently in practice its scope is limited to share pledges only.
 
Q2. What form should the documents take?
 
Currently it is only possible to register share pledges in DAFZA.
 
DAFZA have no prescribed form of share pledge agreement and parties are free to negotiate the commercial terms between themselves. The share pledge agreement is however required to be notarised before the Dubai Courts Notary Public which requires that these documents are in Arabic and stamped by certified UAE Court translators.
 
Q3. Are there any particular filing requirements with DAFZA?
 
Yes, at DAFZA there is a two stage approval process to register a share pledge.
 
As a preliminary requirement the FZE must submit a request letter in respect of the share pledge to the licensing department for initial approval. The initial approval is valid for a period of six months from the date of issuance by DAFZA.
 
The second stage requires the submission of shareholder resolutions (legalised if necessary), the notarised share pledge agreement and a confirmation letter from the bank on its letterhead for final approval and registration thereafter.
 
The Regulations provide that details of the share pledge must be delivered to the licensing department within seven (7) days of the date of its creation, otherwise the share pledge will be deemed void.
 
However, from our experience and depending upon the circumstances, DAFZA may extend the filing period to accommodate parties depending upon the commercial requirements of the transaction, pursuant to its discretionary powers under Article 73 of the Regulations.
 
Q4. What are the common issues that may arise?
 
-       Who can register security at DAFZA?
 
Only banks that are licensed by the UAE Central Bank and licensed by the Department of Economic Development (DED) will be accepted as a pledge holder in DAFZA.
 
-       Are there timing issues to be considered?
 
Any corporate authority executed outside of the UAE that is to be presented to the Notary Public to achieve notarisation of the underlying security documents is required to be legalised. This process can dramatically impact upon the timing of registration and also the initial anticipated costs.
 
Legalisation is a two-tiered process. The first stage is to ensure that the corporate authority is stamped or attested in the home jurisdiction up to the level required by the UAE embassy in that country. Upon completion of this, the attested documents must be translated into Arabic by certified UAE Court translators and stamped by the Ministry of Foreign Affairs in the UAE. Following this, these stamps must be translated into Arabic and passed to the Ministry of Justice for final stamping.
 
The timing of the legalisation process will largely depend upon the efficiency in the home jurisdiction and the entire process can often take up to several weeks to complete.
 
-       Are there cost issues to be considered?
 
Many businesses have to deal with unanticipated costs that arise as a result of the numerous stages of the registration process so it is important to be aware and note what may be incurred. There will be separate costs charged for stamping at each level of the legalisation process and also for any translation services that are required. On notarisation of the share pledge agreement, additional costs should also be factored into the budget.
 
Unlike other jurisdictions, DAFZA currently do not impose any fees on registering the share pledge.
 
Q5. What is evidence of registration at DAFZA?
 
Upon approval by DAFZA of the documents submitted for registration, DAFZA will stamp the original notarised share pledge agreement and retain an original for their records. If required by the bank DAFZA will issue a letter confirming receipt of the notarised share pledge.
 
It is currently not possible to obtain an extract of a security register, however, we understand that DAFZA are currently developing this and may provide copies of such evidence in the future.
 
Registering security in the various free zones can be quite technical and sometimes confusing, however this need not be the case. Our local expertise and familiarity with the process allows us to identify potential issues at the outset to ensure a streamlined and effective registration.

 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the develop jurisdiction of the UAE