25 May 2014

TAKING SECURITY WITHIN THE VARIOUS UAE FREEZONES - A Q&A SERIES

Authored by: Lori-Ann Campbell and Yasmene Cerfontyne

TAKING SECURITY WITHIN THE VARIOUS UAE FREEZONES - A Q&A SERIES

PART 1 - JAFZA FREE ZONE ESTABLISHMENTS
 
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 first of the series, this article discusses some common issues relating to taking security within Jebel Ali Free Zone Authority (JAFZA).

This note only addresses to JAFZA FZE that are “onshore” as opposed to “offshore” JAFZA Companies.
 
There are numerous free zones within the UAE, each with differing regulations. Where an entity is licensed will determine the procedural requirements and the types of security interests that can be registered. Unlike in other jurisdictions where security over the entire business can be registered, there are limited types of registrable security interests that are currently available in JAFZA.
 
JAFZA has it’s own set of procedures that must be followed and it takes a great deal of understanding and experience of the local market to adequately advise on these matters. These procedural requirements are often overlooked by clients at the outset of a transaction and it is important for clients to understand the cost and time implications that can be associated with this process, in order to avoid delays and complications upon closing.
 
Q1. What types of security can a bank take over Jebel Ali Free Zone Authority (JAFZA) Free Zone Establishments (FZE’s)?

The types of security that a bank can take over JAFZA FZE’s is expressly set out in the JAFZA Regulations. Article 56 of the regulations provides that an FZE can pledge its shares to any creditor, by way of security for any debt or other obligation incurred, or to be incurred by the FZE.  However, Article 58 is much wider in its potential application and provides that an FZE may grant any security interest as permitted by Dubai laws for any debt or other obligation incurred, or to be incurred by the FZE.

Q2. What types of security can be registered by a bank in JAFZA?
 
Only the following types of security interests currently require registration in JAFZA . These are: share pledges, building mortgages, commercial mortgages and assignment of lease rights.
 
Q3. What form should the security documents take?

It can be easy to confuse what documents need to be presented and the form in which they should take when registering one or more of these security interests with JAFZA but the form and procedure is important in order to achieve registration with JAFZA. The share pledge and commercial mortgage are 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. The building mortgage and assignment of lease rights are required to follow the JAFZA prescribed forms and to be signed in front of the JAFZA Registrar and filed.

Q4. Are there any particular filing requirements with JAFZA?
 
Yes, when registering a new security interest. The JAFZA FZE Regulations stipulate that both share pledges and any other security interests permitted under the laws of Dubai must be registered with the FZE Registrar within 7 days of the date of their creation. If this is not complied with, then these documents will be deemed void. It is also important to ensure that the correct JAFZA forms are completed and filed in the presence of the FZE Registrar.
 
Q5. What are the common issues that may arise?
 
Unlike other jurisdictions the concept of a floating charge is not available in the UAE and instead security interests are determined by asset class.  At the outset therefore, initial consideration should be given to the types of assets available within the UAE and whether or not these could form part of a registrable JAFZA security.

Upon identifying a registerable security interest in JAFZA, the following key considerations may arise:
 
-       Is a Security Agent required?

Banks that are licensed by the UAE Central Bank and licensed by the Department of Economic Development (DED) are the only entities that are allowed to act as a mortgagee in JAFZA. In order for foreign banks to be able to register security in JAFZA successfully, a security agency arrangement with a local UAE licensed bank will be required.
 
-       Are there timing issues to be considered?
 
Any corporate authority 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/foreign 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/foreign 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 itself and the final registration additional costs should also be factored into the budget.
 
Q6. Are there any types of security that the banks do not have to register in JAFZA?
 
Although the regulations provide that any security interest is required to be registered by banks in JAFZA, currently in practice, it is only the above mentioned securities that are mandatorily required and accepted as being capable of registration by JAFZA. Examples of the security interests that would not require any form of registration in JAFZA at present are account pledges, liens and guarantees, which would ultimately fall within the category of unregistered security in JAFZA.
 
Registering security in JAFZA is a technical and time consuming process.  However, the process can be eased considerably with local expertise and familiarity with the process. As experienced managers of this process, we can identify obstacles at the outset, resolve issues and streamline 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.