BSA Ahmad Bin Hezeem & Associates

Updates on the New Security Regime Over Movable Property in the UAE

Updates on the New Security Regime Over Movable Property in the UAE

August, 2018
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Federal Law No. 20/2016; Cabinet Decision No. 5/2018; Cabinet Decision No. 6/2018; Federal Law No. 5/1985; Federal Law No. 11/1992; Federal Law No. 18/1993

Since the introduction of UAE Federal Law No 20/2016, the legal regime applicable to the mortgage of movable property in the UAE, its creation, perfection, priority and enforcement, has substantially changed. UAE Federal Law No 20/2016 was published in the Federal Gazette no. 609 dated 15 December 2016 and the changes it brought came into effect in March 2017. Further details were set out to this effect in two executive regulations issued by Cabinet Decision No. 5/2018, setting out the relevant procedures, formalities and fees and Cabinet Decision No. 6/2018 regarding the creation of a registry for rights over movables (Cabinet Decision No. 5/2018, Cabinet Decision No. 6/2018 and UAE Federal Law No 20/2016 together as the New Law).

Previously, taking security over movable assets was governed by Federal Law No. 5/1985 on civil transactions (Civil Code) and Federal Law No. 18/1993 on commercial transactions (Commercial Code). A number of conditions had to be satisfied in order to be able to consider the validity of a pledge, including mainly the nature of the asset. The New Law has brought a significant development to these rules as it has expanded the scope of application of pledgeable assets. Under UAE Federal Law No 20/2016 pleadgeable movables can be, amongst other things, tangible or intangible, existing or in the future, accounts payable, bank deposits, bonds and title deeds, equipment and tools, and assets accessory to immovable property. The New Law does not apply however to movables requiring registration in a special register under an existing law (like shares, vehicles, immovable property and intellectual property rights).

Before 2016, in order to create a pledge and for it to be considered valid, it was required to transfer the possession of the movable property. The creation of a pledge required, inter alia, an agreement to be in place (which is still a requirement under the New Law) and its perfection the physical delivery of the asset. The New Law effected a change in this conventional concept, in the sense it facilitated the registration of movable assets in a new registry, without the need to transfer their possession. Among the benefits of this structure is the protection of a creditor’s rights against his debtor and towards third parties, who can even trace the pledged assets in custody of others. The New Law established a special registry managed and supervised by the Emirates Development Bank for the registration of rights over movable property and the perfection of pledge formalities.

A duly registered pledge is considered effective and binding between pledgor and pledgee and towards third parties by its mere publicity in the registry. With Cabinet Decision No. 5/2018 and Cabinet Decision No. 6/2018 coming into force, being both published in the Federal Gazette no. 628 dated 29 March 2018, it has become clearer how the registration process is intended to work as more details of how the process is conducted were set out in these two Decisions, in particular with regards to the amendment, extension, objection, expiration and issuing of the necessary pledge report and rights registration. It is not however possible to create a new pledge on the asset which has already been pledged, unless it has been duly registered. The New Law stipulates further it is permitted even to register the parties’ acceptance of pledging an existing or future movable asset, with the mechanism having the same legal effects as any other charges created.

The New Law departs from the existing position of requiring a court order permitting enforcement against the assets subject to a pledge and expressly provides that for certain categories, out-of-court remedies are available to the pledgee including enforcement against the asset directly without the need for any judicial procedures. In case of violation of the pledgor of the obligations falling on them under the pledge agreement, if the asset is a bank account, bonds or written endorsable instruments, the ownership can be transferred by way of delivery or endorsement. For other categories, it is possible to apply to court to seek a declaration of possession of the pledged assets and an execution order to enforce against the assets. Once the execution order is granted, the assets can be prepared for sale in line with the provisions of Federal Law No. 11/1992 on civil procedure at not less than market price. The sale proceeds will be provisionally stated in a list prepared by the court and distributed accordingly based on an order of priority.

Under the New Law, certain actions of the pledgor or the pledgee, as the case may be, such as the intentional registration of a pledge with false detail or in violation of the law, the intentional disposal of pledged movables in breach of contract or the intentional interference in the execution process, will give rise to criminal liability, including jail terms and fines. The liability will also attach to board members/directors, partners and employees where relevant, unless the individuals can prove their lack of knowledge or their objection to the decision taken in this respect.

In summary, the New Law constitutes a step in the right direction as it seeks to clarify and perfect security interests over a wide class of movable property. It also creates a new legal framework that helps contribute, to a certain extent, to the development of more stable economic relations between the parties. However, the New Law includes certain provisions which do not seem to be fully clear and may be open to interpretation by the courts, in particular since it has not been announced clearly whether any further regulations will be issued to this effect.

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