Introduction
The UAE promulgated Federal Law No. 4 of 2020 on Securing Interests in Movable Property ("Movables Security Law") and Cabinet Resolution No. 29 of 2021 on the executive regulations of Federal Law No. 4 of 2020 ("Executive Regulations"). This legislation repealed Federal Law No. 20 of 2016 on Mortgaging Movable Property as Security for a Debt, establishing a comprehensive framework for the creation, perfection, and enforcement of security interests over movable property.
The Movables Security Law applies to any security interest established under its provisions for civil and commercial transactions. The right of the purchaser in a sale of receivables is also considered a security interest and is subject to the provisions of the Movables Security Law, with certain exceptions.
This article provides an overview of the Movables Security Law and the Executive Regulations, covering three broad aspects: (i) creation of a security interest; (ii) registration and perfection of security interests; and (iii) enforcement methods.
Creation of a Security Interest
Properties Which Can Be Collateral
The Movables Security Law provides an inclusive definition of the types of properties that can be provided as collateral. This includes any tangible or intangible movable property or part thereof, or an undivided right in a movable property, whether existing or future.
However, the Movables Security Law does not apply to certain properties:
- Movable property where transactions are required to be registered in a special registry.
- Alimony, salaries, wages, and labor compensations.
- Public property, waqf (endowments) property, and property owned by diplomatic missions and international governmental organizations.
If a secured party is in possession of the collateral, it is under an obligation to preserve such collateral.
Manner of Creation of a Valid Security Interest
The following conditions must be met for the creation of a valid and enforceable security interest:
- The security provider and the secured party must execute a security contract for the creation of a security interest.
- The security provider must have the right or power to create the security interest.
- The security contract must include a description of the collateral in general or specific terms allowing its identification.
- The security contract must include a description of the secured obligation.
- The parties must execute the underlying security agreement and complete the perfection requirements.
A duly created security interest may secure one or more obligations of any type (present or future, determined or determinable, conditional or unconditional, fixed or fluctuating) and shall extend to any proceeds, products, and replacement of the collateral, unless otherwise agreed by the parties. Delivery of the possession of the collateral to the secured party is not compulsory. Registration of the security interest as specified under the Movables Security Law grants a secured party all rights in the collateral as if it were in its possession.
A secured party may transfer the security interest without obtaining approval from the security provider unless contractually restricted. This transfer should be recorded as an amendment to the registration as unregistered assignments may not be effective against third parties or such failure may affect priority of ranking in enforcement.
Control Agreements
Concept and Implementation: The concept of a "control agreement" has indeed been introduced as a method for perfection for credit accounts and deposits maintained with financial institutions under the UAE law. According to the Decree on Security Interest in Movable Property (2021), control can be established through a written agreement between the financial institution maintaining the secured accounts, the security provider, and the secured party. Under this agreement, the financial institution typically agrees to follow the instructions of the secured party regarding the payment of funds credited to the current or deposit account without requiring further consent from the security provider. This mechanism is designed to enhance the security package for secured parties by ensuring they have control over the pledged accounts.
Registration and Perfection of Security
Registration: A duly created security interest can be registered with the Emirates Movable Collateral Registry ("EMCR") managed by the Emirates Integrated Registries Company. The registration of a security interest (referred to as a 'notice') on the EMCR renders the security interest enforceable against third parties. This is in line with the Movables Security Lawand the Executive Regulations. Specifically, Article 10 of the law states that the security interest shall be enforceable towards third parties by registration of a notice in the registry.
Accuracy and Responsibility: The EIRC is not responsible for the correctness or accuracy of the information entered by the applicants when recording the security interests in its database. However, the EIRC retains the right to reject any application if mandatory information is not furnished by the applicants, as stipulated in Article 8 of the Executive Regulations. It is crucial to ensure that correct and accurate information is entered into the EIRC to avoid any issues with enforceability.
Effectiveness: The registration is effective from the date and time when the information in the notice is entered into the EIRC database, making it accessible to searchers. This is confirmed by Article 13 of the Executive Regulations.
Fees and Expenses: The fees and expenses for registration on the EIRC shall be paid by the secured party unless otherwise agreed, as outlined in Article 4 of the Executive Regulations.
Cancellation of Registration
Conditions for Cancellation: The charge holder is required to cancel the registration in the following cases:
- Mutual agreement to strike off.
- Fulfilment of the full secured liability under a security contract.
- Incomplete establishment of the security contract as per the provisions of the law.
- Court order to strike off registration.
The charge holder must cancel the registration within five working days of the occurrence of any of the above conditions. Failure to do so will result in the charge holder being required to compensate the security provider for any damages incurred, as per Article 16 of the Executive Regulations.
Effect of Cancellation: The effect of cancellation does not extend to the rights of other charge holders who have rights under the same security contract unless agreed in writing.
Other Methods of Perfection
Alternative Methods: Apart from registration on the EIRC, a security interest may be made enforceable by:
- Delivery of possession of the collateral to the secured party.
- The secured party acquiring control over the collateral.
These methods are outlined in Article 10 of the Movables Security Law.
Priority
Determination of Priority: Priority is determined by the date and time when a security interest became enforceable towards third parties. The enforceability of the security interest towards third parties results in the secured party's interest having priority over unsecured and preferential debts. This is detailed in Article 17 of the Movables Security Law.
Scope of Priority: The priority of a security interest extends to all secured obligations, including those incurred after its perfection. It covers all movable property described in a notice registered in the EIRC, regardless of whether they come into existence before or after the time of registration, as per Article 17 of the law.
Specifics for Credit Accounts:
- The financial institution where the credit account is maintained will have priority over a competing security interest.
- If there is a control agreement in place, it will have priority over a competing security interest, except for the security interest of the financial institution maintaining the account. The date and time of the control agreement will be considered to determine priority, as outlined in Article 21 of the Executive Regulations.
Enforcement
We address two key enforcement mechanisms: (i) secured party's self-help remedy; and (ii) enforcement through the courts.
A security right remains enforceable against third parties on returns, proceeds, amounts, and replacements. The secured party should register the security interest within fifteen working days from the date of receipt by the security provider of the returns, proceeds, amounts, and replacements unless the security returns are cash and recognisable or described in the registration.
Self-help Remedies
As per Article 27 of the Movables Security Law, a secured party can now seek out-of-court enforcement provided it has sent a legal notice to the security provider(s) and the debtor. 3 Such legal notice must satisfy the following requirements before out-of-court enforcement is exercised:
- Intention to take possession of the pledged property and to enforce against it;
- Identification of the pledgor and the pledged property against which enforcement will be made;
- The method of enforcement against the pledged property; and
- The time and place of enforcing against the pledged property.
Enforcement through Court
A secured party has the option to seek enforcement of their security interest by filing a petition before the Judge of Urgent Matters to issue an order to repossess the secured collateral and to enforce its rights thereon. 7
The petition may include a request to place the collateral under the custody of a third party at the cost of the debtor in preparation for its sale immediately in accordance with the provisions of this Law. Such a petition should be accompanied by the following:
- A copy of the security contract and an extract of the notice as publicised in the EIRC;
- The name of the applicant and its address;
- The names and addresses of the security provider and the debtor;
- The details of the possessor of the collateral, if it is in the possession of a third party;
- The names and addresses of the owners and possessors of the movable/immovable property where collateral may be located.
The Judge of Urgent Matters shall decide on the petition and any objection thereto within five (5) working days and may issue an order ex parte. The decision of the Judge of Urgent Matters may be appealed before the Court of Appeal within five (5) working days from the date of its issuance. The Court of Appeal shall decide on the appeal within ten (10) working days from the date of its filing, and its decision in this respect shall be deemed final and not subject to appeal by any means.
The enforcement process through the court is undertaken under the supervision of the courts.
Conclusion
The Movables Security Law and the Executive Regulations are a step in the right direction toward creating a more robust mechanism for creating and enforcing security interests. Certain new concepts, such as the self-help remedies contained in Article 27 of the Movables Security Law, provide secured parties with an effective mechanism to enforce the security rights they hold without the involvement of the courts. However, it remains to be seen how these self-help remedies will be considered by the courts and what impediments a secured party faces in enforcing its security interest under Article 27. Additionally, in the context of credit accounts, most secured parties will now insist on control agreements as part of the security package.
Since the Movables Security Law is fairly recent, the legal jurisprudence with respect to it is still under development.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
