12 Jan 2022

New Federal Decree Law No. (16) of 2021 on Assignment of Receivables and Factoring

Authored by: Howrey Kamal

In Brief: This article discusses the recent enactment of Federal Decree Law No. (16) of 2021 on Assignment of Receivables and Factoring (Assignment and Factoring Law) and in particular it discusses:

  1. assignment under the Civil Code;
  2. assignment and factoring under the Assignment and Factoring Law; and
  3. priority and enforcement.

Assignment under the Civil Code

Historically, the law relating to assignment in the UAE has been governed by Federal Law No. 5 of 1985 on the Civil Transactions Law (the Civil Code). The Civil Code deals with assignment in detail through Article 1106 to Article 1132.

Article 1106 of the Civil Code defines assignment to mean “an assignment of debt and claim from the liability of the assignor to the assignee”. An important note to make here is that the assignment provisions under the Civil Code only deal with assignment of ‘debt and claim’; that is, assignment of obligations rather than assignment of rights.

In an assignment of an obligation, A assigns to C its obligation to discharge a contractual claim or its obligation to pay B, whereas in an assignment of rights, A assigns to C its right to receive payment from B. One of the key provisions of assignment is that in order for it to be perfected or valid, notice has to be served to the counterparty and acknowledgment must be obtained. Article 1109 of the Civil Code states that “the validity of an assignment is conditioned upon the acceptance of the assignor, the assignee and the counterparty.” This means an assignment of an obligation (whether debt or claim) is not enforceable against the counterparty unless it agrees to it.

Assignment of rights has been governed by case law. The UAE Courts have been consistent in ruling that ‘consent’ or ‘acknowledgment’ in an assignment of rights from the ‘payor’ is not required and notice to the payor will suffice to perfect the assignment. The rationale for this is that in an assignment of rights no additional burden is imposed on the payor. For example, the Abu Dhabi Court of Cassation in Case No. 597 of 2012 stated that “an assignment of rights shall be established by mutual consent between the assignor and the assignee without the need to obtain the debtor’s consent. If the debtor has not been served with notice of assignment, the debtor can deal with its original creditor as the sole creditor.” The Court further stated that the counterparty will be bound by the assignment once it has become aware of the assignment.

Assignment and Factoring Law

The Assignment and Factoring Law was published on 9 September 2021, the first federal law in relation to assignment of right to payment and it came into force on 7 December 2021. As noted above, previously there was no UAE law on assignment of rights.

Assignment is defined in the Assignment and Factoring Law to mean “an agreement whereby the assignor assigns to the assignee its contractual rights for collecting a monetary amount owed by the Receivable's Debtor. The assignment involves an agreement to create a security interest over the receivable, to assign as a collateral and irrevocably sell the same.”

Article 2(2) of the Assignment and Factoring Law says that it applies to all commercial and civil transactions except for assignment of receivables that arise out of the following situations:

  • a transaction carried for personal, family or household purposes;
  • financial contracts regulated by netting agreements;
  • foreign exchange transactions;
  • systems and agreements of interbank payment, netting systems and adjustment relating to securities, assets or other financial instruments; and
  • buyback of securities, assets or financial instruments deposited with a broker.

Article 2(3) of the Assignment and Factoring Law further says that it shall not apply to the following cases:

  • the right to payments proven under endorsable instruments;
  • the right to payments deposited into the credit accounts with banks; and
  • the right to payments under securities, documentary credits and letters of guarantee.

Key provisions of the Assignment and Factoring Law

  • The receivables must be generally or specifically described so that they can be identified (Article 4(4) of the Assignment and Factoring Law).
  • Assignment of receivables can apply to future receivables (Article 4(5) of the Assignment and Factoring Law).
  • Assignment will be effective regardless of any contractual agreement obliging the assignor not to assign its right to payment under the original agreement (Article 5(2) of the Assignment and Factoring Law).
  • The counterparty will enjoy the same rights it has against the assignor under the original agreement and this includes right of set-off, however this can be contracted out (Articles 16 and 17 of the Assignment and Factoring Law).
  • Once payment is made to the assignee the counterparty cannot claim it back from the assignee even if the assignor is in breach of the original contract (Article 19 of the Assignment and Factoring Law).
  • Existing assignments can be registered in the Moveable Collateral Register within six months from 7 December 2021.

Enforceability of assignment and notice requirements

Article 4(2) of the Assignment and Factoring Law says that an assignment will be enforceable, once executed, between the assignor and the assignee even if notice has not been served on the counterparty (payor). This implies that if notice is not served on the counterparty, the assignment is still valid but in order for the assignment to be binding on the counterparty notice must be served, otherwise the counterparty will continue to pay the assignor.

As noted above, the Courts in the UAE have historically been consistent in ruling that an assignment of right does not requires consent of the counterparty and notice will suffice to perfect an assignment. The Assignment and Factoring Law maintains this position and does not require the counterparty to provide consent. However, the counterparty will only be bound by the assignment once notified and when payment instructions are received in accordance with Article 14 of the Assignment and Factoring Law.

Article 11(1) of the Assignment and Factoring Law provides that the assignor and the assignee may each serve notices and payment instructions to the counterparty and once notice is served, the counterparty is obliged to take payment instructions only from the assignee.

Priority and third-party rights

Articles 7 and 8 of the Assignment and Factoring Law provide that in relation to priority, the relevant provisions of the Federal Law No. (4) of 2020 on Securing Interest in Movable Property (Movable Pledge Law) will apply. Article 7(2) of the Assignment and Factoring Law particularly says that an assignment is not enforceable against third-parties (in other words, against competing creditors) unless it is registered in the Movable Collateral Register which is currently managed by Emirates Integrated Registries Company.

Under Article 10(1) of the Movable Pledge Law, a security right is effective against third-parties if:

  1. it is registered in the Movable Collateral Register;
  2. possession has been transferred to the pledgee; and
  3. the pledgee has taken control of the security assets.

The above priority in relation to assignment means that once an assignment of the right to receive payment is perfected by registration in the Movable Collateral Register, it will be binding against any subsequent assignment of the same right. This means a creditor under an assignment by way of security should immediately register the assignment in the Movable Collateral Register, in order to ensure priority over competing claims.

Factoring

Factoring is defined in the Assignment and Factoring Law to mean a “transaction whereby the assignor assigns the current and/or future receivables to the assignee, or an agreement between the parties that the assignor shall retain the entries relating to and collect the receivable transferred and to afford protection to the assignee in case the Receivable's Debtor defaults on payment.”

A significant point to make is that the Assignment and Factoring Law provides that factoring can only be exercised by entities licensed by the UAE Central Bank. Although further guidance is anticipated from the UAE Central Bank in accordance with Article 25 of the Assignment and Factoring Law, no such guidance has been issued as at the date of the publication of this article. For any entities wishing to carry out factoring activities, it is important that they monitor any updates on this point and seek the relevant licence from the UAE Central Bank at the appropriate time.

Enforcement

The Assignment and Factoring Law does not provide a specific mechanism for enforcement should the counterparty refuse to pay the assignee upon receipt of payment instructions. However, Article 21 of the Assignment and Factoring Law says that the assignee can enforce its rights in accordance with provisions of the assignment or alternatively can take enforcement action under Chapters 7 and 8 of the Movable Pledge Law.

Chapter 7 of the Movable Pledge Law provides that the assignee can enjoy self-help (out of court enforcement) subject to notice being served on the counterparty and Chapter 8 of the Movable Pledge Law provides for an expedited court enforcement process. Under Chapter 8 of the of the Movable Pledge Law, the enforcement application is made to the Judge of Urgent Matters and the matter is considered by the Judge within a short timeline as set out in detail therein.

For enquiries in relation to the Assignment and Factoring Law, please contact the Banking & Finance team.

 
 

This article, together with any commentary, does not constitute legal advice. It is provided solely for information purposes on a complimentary basis, without consideration of any specific objectives, circumstances or facts. It reflects then current views of the writer which may modify in time and based on differing objectives, circumstances or facts. A writer's view may differ from views of colleagues and/or the firm. You should seek legal advice on each specific matter. Access to this article does not form an attorney-client relationship.