Managing security effectively is a necessary process for banks – multinational or local – as a method of ensuring the availability and ultimately profitable use of assets. This article explains the types of effective security in the UAE and highlights general strategies that can be used by banks to manage security effectively.
In brief:
- In the UAE, banks have to take assurances on face value from the borrower that shares, assets or accounts have not already been secured to other lenders.
- A bank’s security package will depend upon what assets the borrower has to offer and this will vary from case to case.
- A risk profile assessment must be undertaken to ascertain and manage the security and risk exposure.
Effective security, in simple terms, is the process of ensuring that a bank’s risks on its lending are sufficiently covered and that in the event of default or in the worst case in the event of winding up, a bank is assured of getting its funds back. The aim of security is to attain a priority ranking in the list of creditors of the borrower upon dissolution.
There are various types of security documents and not all are equal. Some require registration to perfect them and others do not. Free Zone areas in particular have their own rules and regulations in relation to the registration of security documents and it is beyond the scope of this article to discuss each of those in detail.
The majority of types of UAE security documents are set out in the table below along with a synopsis of the main issues surrounding each.
| Document Type |
Registrable? |
Dual Language Required |
Notarisation Required? |
| Guarantees (Bank/Corporate/Personal) |
No |
Not a prerequisite |
Not a prerequisite |
| Issues: UAE legislation contemplates a guarantee by way of suretyship only. There is a time period for enforcement. |
| |
| Document Type |
Registrable? |
Dual Language Required |
Notarisation Required? |
| Land Mortgages |
Yes. Registration is required to ensure perfection and therefore priority rights upon winding up. |
Yes |
Yes |
| Issues: Land Mortgages must be considered on a case by case basis as there are a myriad of legal issues arising with this form of security particularly in relation to title and location of the property and the power and authority of each party. |
| |
| Document Type |
Registrable? |
Dual Language Required |
Notarisation Required? |
| Commercial Mortgages |
Yes. Registration is required to ensure perfection and therefore priority rights upon winding up. |
Yes |
Yes |
| Issues: This is a cumbersome umbrella mortgage under which various types and classes of assets are mortgaged. Registration fees are in some Emirates uncapped and based on the value of the underlying debt. |
| |
| Document Type |
Registrable? |
Dual Language Required |
Notarisation Required? |
| Security Assignments |
No |
Not a prerequisite |
Not a prerequisite |
| Issues: Perfection is by way of Notice of and Acknowledgment and Consent of Assignment by each counterparty to the agreement. Issues arise on the practicalities of securing perfection. |
| |
| Document Type |
Registrable? |
Dual Language Required |
Notarisation Required? |
| Share Pledge |
Yes. Registration of the Share Pledge in the company's register is required |
Not a prerequisite |
Not a prerequisite |
| Issues: Perfection is by way of execution by the parties, by notarisation, by delivery of the share certificate to the bank annotated with a notice of the pledge of the shares to the bank, and by registration of the pledge in the company’s share register. Possession is the crucial element in this security document. |
| |
| Document Type |
Registrable? |
Dual Language Required |
Notarisation Required? |
| Account Pledge |
No |
Not a prerequisite |
Not a prerequisite |
| Issues: The Account Pledge is considered perfected upon the bank at which this account is held consenting to the transferee’s interest over the account. There is no tested legal practice in the UAE for pledging rights to funds held in bank accounts which can be relied upon. There is no concept of a floating charge under UAE law. |
| |
| Document Type |
Registrable? |
Dual Language Required |
Notarisation Required? |
| Pledge over Moveables |
No |
Not a prerequisite |
Not a prerequisite |
| Issues: For a valid pledge to exist, there must be delivery by the pledgor to the pledgee (or to a third party nominated by the parties) of actual or constructive possession and control of the pledged items. The issues arising pertain to possession. |
| |
| Document Type |
Registrable? |
Dual Language Required |
Notarisation Required? |
| Special Security Power of Attorney |
No |
Yes |
Yes |
| Issues: Special Security Powers of Attorney are normally expressed to be irrevocable by the grantors, but they may nevertheless be revoked by mutual agreement of the parties and by operation of law. |
Strategies for managing security?
Admittedly it is often difficult to assess what type of security to request from a borrower. The UAE does not have a sophisticated system to enable searches against companies to be easily carried out to ascertain if there is prior registered security and where security is not registrable banks have to take assurances on face value from the borrower that shares, assets or accounts have not already been secured to other lenders.
Ultimately the security package will depend upon what assets the borrower has to offer and this will vary from case to case. However, in all cases a risk profile assessment must be undertaken to ascertain and manage the security and risk exposure.
Regardless of the type of security available, it is imperative in order to safeguard the bank’s position that whatever security package is put in place, it is properly implemented and perfected and that due attention is given to the powers and authorities of all parties executing the documents.
Author: Lori-Ann Campbell
l.campbell@hadefpartners.com
EFFECTIVE SECURITY IN THE UAE 17 JUNE 2009
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