29 Sep 2022
Introduction to the Law
The Federal Law Number (20) of 2016 is reappealed, by the Federal Law Number (4) of 2020 Concerning Security Rights over Movable Property (The Movable Property Law). Additionally, the Movable Property Law's implementation processes were outlined in Cabinet Resolution 29 of 2021 Concerning the Implementing Regulations of Federal Law 4 of 2020. It is imperative to point out, that vital elements of the old law have been retained in most cases with a few new amendments that shall facilitate the implementation of the new law which is suited to meet the domestic needs of the persons concerned in the transactions set forth.
Banks have the option to seize all assets as security against corporate debtors under the Moveable Assets Security Law. This signifies that all of the borrower's current and prospective moveable assets are secured by a security interest granted by the borrower (or its credit support provider). This would be comparable to general security agreements or corporate debentures, which are frequent in other jurisdictions. Additionally, the steps for registering security interests, enforcing pledge rights, and using the movables pledge register (the Register) are outlined in the Implementing Regulations. A security interest over a movable asset can be made binding against third parties in accordance with the Movables Pledge Law through one of three channels: registration, possession, or control. With effect from the date of issuance and effectiveness of the implementing regulations, parties may register security interests granted in connection with transactions concluded prior to that date without first obtaining the pledgor's consent; however, these security interests must be registered within six months of that date (Articles 48(1) and (2) of the New Law). According to Article 48(3) of the New Law, the primacy of rights registered within this six-month window shall be established by the date on which they become enforceable against third parties or, in the alternative, from the date of registration.
Emirates Moveable Collateral Registry (EMCR)
Prior to the implementation of new rules, Law Number (20) for 2016's old regulations continued to be in force under the New Law. In light of this, the Executive Regulations replace the 2018 regulations (Cabinet Decree Number (5) of 2018) and are primarily concerned with the registration procedures on the EMCR. The consequences for and legal status of security interests that are now recorded on the EMCR are not addressed under the New Law. Instead, the New Law stipulates that up until the new implementing regulations are established, any old Law-related rules, judgments, and circulars will continue to be valid to the degree that they do not contradict its provisions (Article 49 of the New Law). Since the old law has been completely repealed, there is uncertainty for persons who have registered security interests on the EMCR. But the EMCR will not be held liable, in case the information under the database was wrongfully uploaded by the applicant. The responsibility shall fall on the person submitting information to the EMCR. In particular, it is now certain that registration is not valid if the EMCR contains the incorrect prescribed identification information, making it impossible to recover it through a search. This is significant because searches are now only conducted using the debtor's registration number or identification number.
What Separates the Old Law from the New Law?
The New Law confirms that such rights shall not include payments established in endorsable bonds, rights attaching to deposits in accounts held with banks, or the right to collect payments under securities instruments. It also broadly preserves the range of movable assets that may be subject to a security interest and adds a new definition of accounts receivable as the right to receive amounts owed to the pledgor by a third party (Article 3). Regarding other movable property, Article 27 of the New Law limits the application of self-help measures to situations in which the pledgor or principal debtor has violated the terms of the security agreement. As per the New Law, banks and other financial organizations with deposit-keeping licenses have the authority to; prioritize the pledgor's right to receive the cash deposits made into his account with the bank and the pledgor's right to conduct set-off for obligations owing to them by the pledgor (Article 21).
The Benefit of Registering the Security Contract
The effects of enforceability on the security agent's priority over other creditors in seeking fulfillment of its claims against the secured property under Article 17(1), the New Law's priority is often determined based on the date and time of registering the security agreement. According to Article 11(1), the priority over the secured property includes the returns on the secured property. However, the New Law (before Article 19 to returns) (1), has precedence above interest earned on the pledged assets of the old Law. As Cabinet Resolution 6 was issued pursuant to Federal Law 20, is still valid. According to Cabinet Resolution 6, Emirates Development Bank (EDB), should establish and maintain the Register. Currently, the Register is being managed by Emirates Integrated Registries Company LLC, an EDB subsidiary. The acting body of the Register is Emirates Integrated Registries Company LLC. In order to register the security right over movable assets, the prior requirement of a security agreement between the pledgor and the pledgee is written consent regarding the registration of the security right obtained from the pledgor. The mentioned security agreement must be formally attested by the Notary Public or any other government official.
Any person has the access to conduct the search of the Register which could be done through either the pledge registration number or pledgor identification number (example ID number of the individual, registration number for corporate entities). Hence, if any of the mandatory information needed for conducting the search is not provided, or if the information entered is not readable, the Registrar may deny an application for the search of the Register. In any other case, the Registrar cannot deny a request to search the Register.
Emirates International Registry Company (EIRC)
The EMCR was succeeded by the (EIRC), a subsidiary of Emirates Development Bank, which offers a platform for disseminating information about any security interest in movable property. The company's objectives include maintaining and managing the registry, gathering and entering data, archiving papers. Cabinet Resolution 6 of 2018, Concerning the Establishment of a Register for Registering Rights over Movable Property, issued under the repealed movables pledge law (Federal Law 20 of 2016 Concerning the Pledge of Movable Property as Security), established the Register.
Taking the Secured Property Without the Assistance of the Court
The right to self-help, this allows the pledgee immediate recourse against the items that were pledged under Articles 27 and 28 outlines the specific conditions that permit such enforcement. In order to undertake implementation against the pledged assets, the concerned party must be notified by the pledger.
Different Types of Assets
The old law includes various types of assets subject to a mortgage, including the current and future movable properties, for example:
- Accounts payables;
- Deposits and payables at licensed banks and financial institutions, including current accounts;
- Other documents (such as, bonds, commercial papers, certificates of deposit, bills of lading), that make ownership transferable through delivery endorsement;
- Work equipments;
- A business’s material and moral elements that are governed by commercial transaction and trademark law;
- Raw material (goods that have the intention for sale or lease).
The majority of the aforementioned assets are still protected by the current law, however the accounts receivables were not included by the previous legislation. In order to address this issue, the new law defines account receivables as the right to receive money that the third party may owe the pledger. Receivables are now covered by the new law, and accordingly, the security interest is now feasible.
The following three categories have been created by the new law to more clearly define the types of assets that may not be pledged or secured in accordance with its provisions; movable objects must be registered as security interests in the appropriate registers by law, wagers, salaries, expenses and benefits for employees and workers, and funding from international governmental organizations, public funds, endowment funds, and foreign diplomatic missions.
Enforceability of Secured Rights Vis-à-Vis Third Parties
The security rights over accounts are provided by the executive regulations, and can be enforceable under third parties by way of control. This is established if the claims relate to an account held by a financial institution or if an agreement establishing the secured party’s ownership over the account is signed by the security provider, secured party, and financial institution holding the account. As a result of the foregoing, control over a bank account gives security the top priority. Additionally, the rules specify the kind of notice that must be given when a secured creditor immediately exercises their rights against collateral.
Three ways are described under Article 10 of the new law, for enforcing the security right against third parties. They are filing the security with the EIRC and granting the creditor who will benefit from the security interest, possession of the collateral and allowing the creditor to take ownership of the collateral and also establish a security interest over current or future property even in the absence of a signed contract.
Applicable Law on Intangible Movable Security
The new law states, that establishment and enforcement of a security interest over intangible moveable property shall be governed by the laws of the security provider's country of residence. This effectively indicates that under the New Law, security over the intangible personal property of UAE citizens and corporations must be perfected. Intangible assets include a specific customer contact, goodwill, a trade name, the right to rent property, industrial, literary, and creative patents and licenses, among other things, as stated in the Commercial Code Number (18) for 1993. They include all intangible property, to put it more broadly.
To conclude, while the new development was certainly an unexpected development, given the fact that the old law was moderately recently introduced, the parties to the transaction would be well to (a) check all current security interests they have registered on EMCR, and (b) closely watch any additional developments in this regard, notably the release of the implementing regulations for the New Law. Subsequently, there are a number of ambiguities and questions of interpretation in relation to the New Law, while these should be clarified further in the implementing regulations. If you have any queries reach out to the banking and finance lawyers in Dubai