04 Dec 2018

UAE Moveable Assets Security Law

Authored by: Valeria Lysenko

Legislation

Federal Law No. 20 of 2016 published in the Official Federal Gazette on 15 March 2017

Related Legislation

Federal Law No. 8 of 2004, Cabinet Decision No. 5 of 2018, Federal law No. 18 of 1993, Federal Law No. 5 of 1985 and Federal Law No. 37 of 1992

Abstract

Until recently, UAE law has not been particularly clear on the extent to which a valid security interest can be created, perfected and enforced over moveables, whether existing or future. The position has radically changed with Federal Law No. 20 of 2016 regarding the Pledge of Moveables as Security for a Debt that came into effect on 15 March 2017 and the enactment of related secondary legislation. This change in law affects a variety of transactions, categories of moveables, security providers, beneficiaries and third parties, and attempts to cover numerous related creation, perfection and enforcement scenarios. This commentary touches upon some of the changes brought into the UAE legal landscape with this law and of the perceived core benefits, and pitfalls, of the new security regime established by it.

Analysis

Historically, the express recognition and regulation by UAE law of security interests over moveables has been somewhat patchy. There was and remains a body of mandatory federal law which deals with security over specific categories of moveables. There were and remain stand-alone regulations that apply within a limited number of UAE free zones. However, the vast majority of moveables over which UAE security is sought in commercial transactions have not been caught by UAE security law.

The Federal Law No. 20 of 2016 regarding the Pledge of Moveables as Security for a Debt, Executive Regulations issued by the UAE Cabinet in implementation of Federal Law No. 20 of 2016 by the UAE Cabinet Decision No. 5 of 2018 (Executive Regulations) and Instructions on the Registry of Rights over Moveable Property issued by the UAE Minister of Finance by the Ministerial Resolution No. 42 of 2018  are intended to establish an express and clear statutory basis and the mechanism for creating, perfecting and enforcing security over such moveables.

The pledge intended to be created by Federal Law No. 20 of 2016 does not require a physical possession over the assets (article 5 of Federal Law No. 20 of 2016). This allows uninterrupted trading in the secured moveables, without affecting secured parties’ interests. The security interest will generally follow the secured assets into the hands of third parties (Chapter VI of Federal Law No. 20 of 2016). If proved to be effective on enforcement, the Federal Law No. 20 of 2016 regime is bound to enhance the State’s standing as a jurisdiction conducive to foreign investments’ protection. The State will also be able to benefit, among other things, from gaining access to and retaining further business statistical data and to generate additional public income, including from currently nominal registration fees. 

The register in which such security is required to be registered has been established pursuant to the UAE Cabinet Decision No. 5 of 2018 and is operational.

Territorial limits

The regime does not apply to moveables located in the UAE financial free zones (article 3(2) of Federal Law No. 8 of 2004). It does apply to moveables located elsewhere in the UAE (onshore). 

Unlike in other cases of a conflict of its provisions with Federal Law No. 5 of 1985 or another federal law (such as that expressly addressed by article 20(1) of Federal Law No. 20 of 2016), Federal Law No. 20 of 2016 does not affect the application of article 18(1) of Federal Law No. 5 of 1985 to the transactions contemplated by the pledge agreement the subject of Federal Law No. 20 of 2016. Security over offshore moveables and its enforcement remains therefore subject to the offshore movables’ lex situs (article 18(1) of Federal Law No. 5 of 1985).

Security interests and other registrable rights

Federal Law No. 20 of 2016 concerns the creation, perfection and enforcement of pledges (or mortgages), primarily non-possessory pledges (article 2(1) and article 5 of Federal Law No. 20 of 2016) and related transactions.

It does not deal with “security assignments”, “charges”, “hypothecation” or any other security interests and concepts found in, and often attempted to be “imported” into local law security contracts from, the law of and practice in other jurisdictions.

The regime applies to any form or shape of a pledge, except where it

  • arises solely through possession (article 2(1) of Federal Law No. 20 of 2016),
  • is required to be registered in a different register under other mandatory UAE law (article 2(3) of Federal Law No. 20 of 2016),
  • concerns movables which are expressly carved out from the scope of the application of Federal Law No. 20 of 2016.

In addition, Federal Law No. 20 of 2016 permits, but does not require, registration of rights of a lessor of the property under an operating lease of at least one year’s duration, rights of an owner to sale proceeds of its goods and rights of a lessor under a finance lease (article 11 of Federal Law No. 20 of 2016).

No other rights or security interests are currently the subject of this UAE security regime.

Federal Law No. 20 of 2016 regime raises a question of an overlap between, and of parallel enforcement of, the security registrable over moveables under Federal Law No. 5 of 1985, Federal Law No. 18 of 1993 and Federal Law No. 37 of 1992 on the one hand and the security the subject of the of Federal Law No. 20 of 2016 regime on the other.

  1. A mortgage over a commercial business (comprising intangible assets and tangible assets allocated for the practice of commercial activities (article 39 of Federal Law No. 18 of 1993) has long been registrable. And so has been a mortgage over trademarks under Federal Law No. 37 of 1992.

    Each requires to be registered in the Commercial Register and the Trademarks Register as relevant. Both may therefore be examples of the situations when Federal Law No. 20 of 2016 should not apply (on the basis of article 2(3) of Federal Law No. 20 of 2016). Yet, Federal Law No. 20 of 2016 expressly permits such moveables to be pledged under the Federal Law No. 20 of 2016 regime (as translated) “without prejudice to the possibility of their pledge” under Federal Law No. 18 of 1993 [and Federal Law No. 5 of 1985] (article 3(5) of Federal Law No. 20 of 2016).

    Unlike in the case of the Federal Law No. 20 of 2016 pledge over the so-called “real property by allocation” (see below), it is not, unfortunately, clear whether or not the legislator’s intention is to permit, require or prevent a parallel registration of a Federal Law No. 20 of 2016 pledge and of a mortgage over the business under Federal Law No. 37 of 1992 over the same moveables. As a result, there may be a question of at least priority as between the two registered security interests over the same existing and identified moveables. A Federal Law No. 20 of 2016 pledge should not be an issue where a registered mortgage over the business is not available, such as over future or unidentified assets or those existing moveables which are not expressly listed out or otherwise identified in the registered contract of mortgage over a commercial business or any addenda to it.
     
  2. Federal Law No. 5 of 1985 recognises a category of “real property by allocation”, that is a movable asset “placed by an owner in real property of his, with the intent of its being used or exploited, even though not [permanently] fixed to the real property” (article 102 of Federal Law No. 5 of 1985 ). Historically, it has been difficult to identify the point in time when such moveables become [permanently] fixed to the real property so that they cannot be removed “without damaging or altering” the property and cease to be a moveable asset (article 101 of Federal Law No. 5 of 1985). In practice, mostly on large UAE financings, parties would have often agreed to have such morphing moveable secured by a mortgage over a commercial business (as amended from time to time) to the extent it was not secured by the registered real property mortgage (and vice versa).

Federal Law No. 20 of 2016 largely follows a similar approach but also goes further:

  • It expressly permits registration of a pledge over such moveables in accordance with the Federal Law No. 20 of 2016 regime (article 3(8) of Federal Law No. 20 of 2016).
  • While a pledge under the Federal Law No. 20 of 2016 can only be created over such assets before they become [permanently] affixed to and form part of the real property, it will have priority over competing rights to such moveables if created and registered in the Federal Law No. 20 of 2016 register and in the relevant real estate register before the date of registration of any such competing rights (article 20(1) of Federal Law No. 20 of 2016). 
  • As an exception from the provisions of Federal Law No. 5 of 1985, if the Federal Law No. 20 of 2016 pledge is created in respect of such moveables and then the assets become a “property through allocation”, the Federal Law No. 20 of 2016 pledge is not extinguished, remains in force as against third parties and, moreover, has priority over any existing security over the real property to which such moveables become affixed. This is the case whether or not such real estate security is created before or after the Federal Law No. 20 of 2016 pledge over the moveables, provided that the Federal Law No. 20 of 2016  pledge is registered both in the Federal Law No. 20 of 2016 register and in the relevant real estate register (article 20(1) of Federal Law No. 20 of 2016).

Beneficiaries of valid possessory pledges crated and perfected prior to the Federal Law No. 20 of 2016 coming into effect had a one year window of opportunity to ensure priority of their interests by registration of their pre-Federal Law No. 20 of 2016 pledge contracts in the Federal Law No. 20 of 2016 register (article 44 of Federal Law No. 20 of 2016). That grace period has expired and has not been extended, with the result of any prior but unregistered pledge purported to have been created by way of a constructive possession at best not having the originally intended priority.

Moveables the subject of the Federal Law No. 20 of 2016 regime

On the face of it, any moveables (whether tangible or intangible) located in the UAE onshore (article 18(1) of Federal Law No. 5 of 1985) may be pledged under Federal Law No. 20 of 2016 (article 3 of Federal Law No. 20 of 2016). However, the wording of article 3(9) of Federal Law No. 20 of 2016 appears to indicate that the relevant pool of the moveables may be limited to that “for which the State laws provide that they can be pledged property under the provisions hereof” (article 3(9) of Federal Law No. 20 of 2016).

While Federal Law No. 20 of 2016 is silent on the application of the law to moveables located offshore, as above, its application would be unlikely (as above, under article 18(1) of Federal Law No. 5 of 1985). It does not, unlike in other cases of a conflict of Federal Law No. 20 of 2016 provisions with Federal Law No. 5 of 1985 (such as is addressed by article(1) of Federal Law No. 20 of 2016), carve out the application of article 18(1) of Federal Law No. 5 of 1985. Security over offshore moveables and its enforcement would therefore remain subject to the offshore movables’ lex situs (article 18(1) of Federal Law No. 5 of 1985).

Perhaps one of the most distinguishing features of this UAE security law is the express inclusion of current and deposit accounts, future moveables and fungibles (such as oil or sugar) within the scope of a registrable pledge which is now capable of the creation, perfection and enforcement under it (articles 3 and 23 of Federal Law No. 20 of 2016). Taking and enforcing UAE security over such moveables have until now been a serious issue for secured creditors due to, among other considerations, fluctuation of the amounts held in bank accounts and inability to ascertain the secured assets when intermingled with unsecured fungibles of the pledgor or fungibles owned by a third party.

There are a limited number of types of assets which are expressly incapable of being secured by the Federal Law No. 20 of 2016 regime. These are:

  • those identified in article 4 of Federal Law No. 20 of 2016, such as those that are the subject of claims mandatorily preferred by law (for example, employees’ claims (article 4(3) of Federal Law No. 20 of 2016) or moveables which cannot be the subject of adverse disposals (such as moveables the subject of diplomatic immunity and public funds (article 4(4) of Federal Law No. 20 of 2016); and
  • moveable property, all transactions over which must be registered in a special register under another mandatory UAE law (article 2(3) of Federal Law No. 20 of 2016).

Determination of the extent to which assets of a particular pledgor may be construed as being “public funds” will remain a challenge (where the position on the point is not expressly made in the establishing law or documentation). Most likely they will be if “…allocated to public benefit ipso facto or ipso jure” (Federal Law No. 15 of 2018 Concerning the Collection of Revenues and Public Funds) or at least “if owned by the State or public juridical persons, allocated in fact or in law for the public benefit” (article 103(1) of Federal Law No. 5 of 1985).

Pledgor

There is no restriction on the party that is capable of creating a Federal Law No. 20 of 2016 pledge, as long as it owns the moveables it purports to grant a Federal Law No. 20 of 2016 pledge over and otherwise has the required capacity and authority to do so (article 8 (2) of Federal Law No. 20 of 2016). The pledgor can be the primary obligor or a third party security provider, whether or not it has any registered presence onshore.

Pledgee

Historically, (subject to limited exceptions) mortgages under UAE onshore security law have only been registrable in the name of duly licensed UAE banks or financial institutions (the former often acting as a security agent for the secured lenders). There is no such restriction applicable to a registrable Federal Law No. 20 of 2016 pledge. To the contrary, the Federal Law No. 20 of 2016 regime expressly contemplates registration in favour of a non-UAE pledgee (Executive Regulations Article 5 paragraph 4 subparagraphs c and e).

Form and language

Most of UAE security contracts registrable under other UAE law have to follow a particular form and are, more often than not, required to be signed in front of local Notary Public. As a result, they have to be at least in the Arabic language.

A contract purporting to create a Federal Law No. 20 of 2016 pledge must be in writing, but it does not necessarily have to be attested by any particular local authority (Executive Regulations Article 3 paragraph 1). A simple exchange of the relevant communication, whether by fax, email or any other means, would, in theory, suffice to meet the Federal Law No. 20 of 2016 requirement as to the form of the contract (Executive Regulations Article 3 paragraph 2). There is no formal requirement for the language of the contract prescribed by the Federal Law No. 20 of 2016 regime. It remains advisable to have it at least in the form of the Arabic translation prepared by certified Arabic translators, to facilitate enforcement through local courts if required. For the purposes of the registration in the Federal Law No. 20 of 2016 register, the required form may be filled in Arabic or in any other language (Executive Regulations Article 6).

Enforcement

Perhaps, one of the most welcomed developments (from the perspective of the Federal Law No. 20 of 2016 pledge beneficiary) is the expressly recognised statutory rights of contractual execution and set off, without having to resort to local courts (articles 27 and 28 of Federal Law No. 20 of 2016 respectively). Notice of enforcement must be given and a number of other conditions are still required to be satisfied (articles 27 and 28 of Federal Law No. 20 of 2016).

Execution through local courts is also available, and the process is regulated in detail (Chapter VII of Federal Law No. 20 of 2016). Stay of execution against the pledged property can be granted for a period of not more than five business days and for justified reasons (article 38 of Federal Law No. 20 of 2016). The provisions of Federal Law No. 20 of 2016 regulating the process of execution against the pledged property will apply in the pledgor’s bankruptcy or similar situation.

 

(Previously published by LexisNexis)

 
 

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 developing jurisdiction of the UAE.