We are delighted to provide a comprehensive overview of Federal Law No. 4/2020, a vital piece of legislation in the United Arab Emirates governing the assurance of rights associated with movable assets. This law introduces significant provisions related to security interests, collateral, and enforcement procedures, all of which are of utmost importance in both commercial and civil transactions within the UAE. Notably, the law encompasses rights related to movables, including assignee’s rights to sell Accounts Receivable, thus reinforcing its impact.
Key Definitions and Concepts:
- Security Interest: A real right over a movable asset, established under a Contract of Guarantee to secure an obligation. It encompasses rights under various agreements like mortgage deeds, finance leases, and sale contracts, applicable irrespective of the asset type, the Guarantor or Obligee’s situation, or the obligation’s nature.
- Collateral: Refers to the movable asset, whether tangible or intangible, present or future, that the Security Interest is created over.
- Returns on Collateral: Encompasses all forms of in-kind or cash consideration obtained from disposing of or substituting the Collateral, including compensation for its impairment or loss.
- Obligee: The creditor who benefits from the Security Interest.
- Guarantor: The individual or entity with the authority to dispose of the Collateral, creating the Security Interest to secure their own or a third party’s obligations.
- Principal Debtor: The individual or entity owing the obligation secured by the Security Interest, if different from the Guarantor.
- Contract of Guarantee: An agreement between the Guarantor and Obligee establishing the Security Interest.
- Register: The electronic record where rights over movable assets are publicly disclosed.
- Publicity: The process of recording the rights over movable assets in the Register, including any changes or revocations.
- Accounts Receivable: The right to collect payments owed to the Guarantor by third parties, excluding specific types such as those in endorsable deeds or bank accounts payable.
- Purchase Money Security Interest: A specific type of Security Interest over a movable asset, intellectual property right, or licensee’s right under an intellectual property license, created to secure a payment obligation for the asset or rights acquired by the Guarantor.
Eligible Collateral:
As a creditor, it is crucial to understand the provisions related to collateral under Federal Law No. 4/2020. This law provides a comprehensive framework for dealing with movable assets as collateral in the UAE, offering clarity and enhancing secured transactions.
The law categorizes a wide range of movable assets as eligible for use as collateral. These include:
- Accounts Receivable: Rights to payments not involved in property ownership transfers.
- Bank Accounts Payable: Includes current and deposit accounts.
- Documentary Assets: This encompasses written deeds and documents like commercial papers, certificates of deposit, bills of lading, and warehouse bonds, which can transfer ownership through delivery or endorsement.
- Business Assets: Equipment, work tools, and both material and intangible elements of a business concern.
- Commercial Goods: Items intended for sale or lease, raw materials, and goods in various stages of production or transformation.
- Agricultural Products: Crops, animals, and derivatives, including fish and bees.
- Fixtures: Items attached to a property but retain their movable nature.
- Other Movable Assets: Any additional assets deemed suitable under the prevailing laws.
Exempted Assets:
Certain assets are explicitly exempt from being considered as collateral under this law:
- Special Registry Assets: Movable assets that require entry in special registers.
- Personal Compensation: This includes expenses, wages, salaries, and workers’ compensation.
- Funds: Public funds, endowment funds, and those of foreign diplomatic and consular entities and intergovernmental organizations.
Non-Possessory Pledge:
- A significant aspect of this law is the provision for non-possessory pledges. This means movable assets can be pledged as collateral without the need to transfer physical possession to the creditor or a third party. The registration of such a pledge in the official Register confers upon the creditor (pledgee) all the rights as if they were in possession of the pledged asset. This aspect is especially beneficial in transactions where maintaining possession of the collateral by the debtor (pledgor) is essential for business continuity or practical reasons.
Implications for Creditors:
- Broader Security Options: Creditors now have a wider range of assets to accept as security, increasing flexibility and security in lending.
- Enhanced Security: The registration of pledges, even non-possessory ones, offers greater legal protection and clarity.
- Streamlined Processes: The clear delineation of eligible and exempt assets simplifies decision-making in extending credit.
In summary, Federal Law No. 4/2020 significantly broadens the scope of assets that can be used as collateral, providing creditors with more options and security while also respecting the operational needs of debtors. This law thus plays a crucial role in facilitating secured transactions in the UAE.
Register Creation and Access under Federal Law No. 4/2020:
Understanding the creation and access to the Register as outlined in the Federal Law No. 4/2020 is essential. The law introduces a structured and transparent approach to recording and accessing information about security interests in movable assets.
Creation of the Register:
- Establishment: A Register for recording rights related to movable assets will be established by a Cabinet decision. This is a significant move towards formalizing the process of publicising security interests.
- Management: The authority responsible for managing the Register will be determined based on the Minister’s proposition. This ensures that a designated, authoritative body will oversee the Register’s operations.
- Regulations and Procedures: The Implementing Regulation of the law will organize how the Register functions. This includes specifying entry procedures and the fees associated with its use. This regulation ensures a standardized and efficient system for handling the Register.
Access to the Register:
- Public Accessibility: Crucially, the information in the Register is accessible to the public. This transparency is vital for creditors who need to verify the existence and status of security interests.
- Reports: Both hard-copy and electronic reports of the Register’s contents can be requested. These reports are legally binding as evidence of the recorded information, including dates and times of entries. This feature is particularly useful for creditors in establishing the precedence and validity of their security interests.
- Authentication: Information from the Register, when authenticated by the managing authority, gains official recognition. This authentication adds a layer of credibility and legal standing to the information, which is critical in any legal or financial dispute.
Implications for Creditors regarding creation and access to the Register:
- Enhanced Security and Confidence: The establishment of a formally managed Register provides a secure and reliable source of information, enhancing the confidence of creditors in the legal backing of their secured assets.
- Ease of Verification: Creditors can easily verify the existence of security interests and their status, which is crucial in assessing risk and making informed lending decisions.
- Legal Certainty: The availability of authenticated reports from the Register provides legal certainty and can be used as evidence in any dispute related to the security interest.
- In essence, the creation and accessibility of the Register under Federal Law No. 4/2020 provide a solid foundation for creditors to safely and confidently engage in transactions involving movable assets as collateral.
Creation and Enforcement of Security Interest:
Article 8 and 9 outlines the crucial process of creating and enforcing security interests, a key aspect for creditors. Understanding these provisions is essential for ensuring legal compliance and safeguarding interests in financial transactions involving movable assets.
Creation of Security Interest:
- Contract of Guarantee: A fundamental requirement is the conclusion of a Contract of Guarantee between the Guarantor and the Obligee. This contract is the legal foundation of the security interest.
- Guarantor’s Authority: The Guarantor must have the legal capacity to dispose of the Collateral or be duly authorized to create the Security Interest. This ensures that the Guarantor is legitimately able to offer the asset as security.
- Description of Collateral: The Contract must include a detailed description with collaterals clearly marked and clearly identified. This can be general or specific but must be sufficient to identify the Collateral. It could range from the Guarantor’s entire assets to a specific class or type of asset.
- Description of Secured Obligation: The Contract should also describe the obligation that the Security Interest secures. The law stipulates guidelines for how detailed this description should be, including the maximum amount of the secured obligation.
- Settlement of Consideration: The Obligee is required to settle or commit to settle the consideration agreed upon in the Contract of Guarantee.
- Additionally, the Security Interest is not limited to the current obligations but can extend to future, determinable, conditional, fixed, or variable obligations. It also automatically extends to the returns on Collateral, its products, and substitutions, unless the parties agree otherwise.
Preservation of Collateral:
- Duty of Care: The individual or entity in possession of the Collateral is obligated to exercise due care in its preservation, relative to the nature of the asset. This provision ensures that the value and condition of the Collateral are maintained during the tenure of the Security Interest.
Implications for Creditors:
- Legal Clarity and Security: The detailed requirements for creating a Security Interest provide clarity and legal security for creditors. It ensures that all parties are aware of their rights and obligations.
- Flexibility in Collateral Description: The allowance for both general and specific descriptions of Collateral provide flexibility for different types of transactions and assets.
- Protection of Investment: The automatic extension of Security Interest to returns and products of the Collateral and the duty of care for its preservation protect the creditor’s investment.
- In summary, the provisions related to the creation and enforcement of security interests under Federal Law No. 4/2020 provide a comprehensive legal framework for creditors. These regulations ensure that creditors can securely lend against movable assets while having clear legal recourse and protection for their interests. This framework is essential for maintaining the integrity and reliability of secured transactions in the UAE.
Enforceability of Security Interest Against Third Parties:
The law outlines the enforceability of security interests against third parties, ensuring that creditors’ rights are protected and prioritized in the presence of other claims on the same collateral.
Enforcement of Security Interest:
- Methods of Enforcement: The law stipulates that a security interest can be enforced against third parties through several methods:
- Publicising in the Register: The most common method, ensuring transparency and legal recognition.
- Possession of Collateral: Direct physical possession of the collateral by the Obligee.
- Control of Collateral: Where the Obligee gains control over the collateral without necessarily having physical possession.
- Switching between these methods does not impact the enforceability of the security interest.
Publicity Timing:
Importantly, the publicity of the security interest can occur before the actual creation of the security interest or the conclusion of the Contract of Guarantee, provided the Guarantor consents in writing.
Enforceability Over Returns:
- The security interest remains enforceable against third parties over the returns on collateral, its products, and substitutions without additional action.
- If the Obligee does not publicize their right over the returns within a specified timeframe, the enforceability ceases unless the returns are cash-based and determinable or already described in the publicity.
Assignment and Cancellation:
- Assignment of Security Interest: Creditors (Obligees) can assign their security interest without needing the Guarantor’s consent. The assignment should be publicized for continued enforceability.
- Cancellation of Publicity: The Obligee is responsible for cancelling the publicity in various situations like the fulfilment of the secured obligation or upon a court’s decision. Failure to cancel in time can lead to liability for damages caused to the Guarantor.
- Priority of Security Interest:
Priority Over Other Creditors:
The enforceability against third parties grants the Obligee priority over other creditors, including unsecured and privileged debts. This priority is established based on the time and date of the security interest becoming enforceable against third parties.
- Coverage: This priority covers all secured obligations, including those arising after the security interest becomes enforceable.
- Awareness of Competing Interests: The Obligee’s knowledge of competing security interests does not affect their prioritized position.
Implications for Creditors:
- Legal Protection: Creditors are legally protected, and their rights are prioritized, particularly in situations involving multiple claims on the same collateral.
- Flexibility in Enforcement: Multiple methods of enforcement provide flexibility, allowing creditors to choose the most suitable method based on the situation.
- Priority Assurance: The law assures creditors of their priority status over other claims, including unsecured and privileged debts, which is critical in risk management and decision-making processes.
- In conclusion, the law offers a comprehensive legal framework that safeguards creditors’ interests, especially in cases involving third-party claims. This framework not only enhances the security of credit transactions but also ensures that creditors’ rights are enforceable and prioritized in the UAE’s legal system.
Right of Pursuit and Priority in Security Interests:
The law also addresses the Right of Pursuit and Priority concerning security interests, a critical area for creditors and outlines how security interests are prioritized and enforced, especially in complex scenarios involving third parties, multiple interests, and different types of collateral.
Right of Pursuit:
- Enforcement Against Assignees: Creditors (Obligees) have the right to enforce security interests against any person to whom the collateral is assigned. This ensures that the creditor can claim their rights even if the collateral changes hands.
- Transfer Free of Security Interest: Collateral can be transferred free of any security interest if the creditor consents. In the ordinary course of business, a corporeal asset can be sold free of security interest, provided the buyer is unaware of any violation of the creditor’s rights.
Priority in Various Contexts:
- Purchase Money Security Interest: This type of interest takes precedence over other competing interests in certain assets, like equipment or intellectual property. However, its priority over accounts receivable returns from inventory is contingent on its publicity timing in the Register.
- Fixtures: Security interests remain effective even after the collateral becomes a fixture, retaining enforceability against third parties, including mortgage creditors.
- Right of Offset: Banks and financial institutions have prioritized rights to offset the Guarantor’s liabilities against cash payments in the Guarantor’s account, superseding other security interests over these accounts.
- Agricultural Crops: Security interests in agricultural crops take precedence over mortgages or other rights on the property where the crops are grown.
- Fungibles: Security interests in fungibles (interchangeable goods) remain enforceable post-integration with other goods. In cases of multiple security interests over the same product or mass, these interests have equal priority.
Assignment of Priority Status:
- Creditors can assign their priority status in writing, within the limits of their secured rights. This assignment can be publicized in the Register, and failure to publicize does not affect its enforceability or priority.
Implications for Creditors:
- Enhanced Protection: The right of pursuit and detailed priority rules protect creditors’ interests, especially in scenarios where collateral is transferred or mixed with other goods.
- Priority Clarity: The law provides clear guidelines on priority status in different situations, aiding creditors in understanding their rights in complex transactions.
- Flexibility in Enforcement: The ability to pursue collateral across different hands and to assign priority status provides flexibility and assurance in securing creditors’ investments.
- In conclusion, this provisions in the law is crucial in ensuring that creditors’ rights are safeguarded, especially when dealing with third parties and complex collateral situations in the UAE.
Rights of Obligee/Creditor:
This provisionis vital for creditors as it defines their rights and obligations in the context of good faith while handling security interests and ensures that the creditors’ rights are protected during the enforcement process while maintaining fair practices.
Rights of Obligee/Creditor in Possession of Collateral:
- Expense Recovery: Creditors can recover reasonable expenses incurred in preserving the collateral. This is important for maintaining the value of the secured asset.
- Use of Collateral: They have the right to use the collateral reasonably and apply any returns from it towards settling the secured obligation.
- Inspection Rights: Creditors can inspect the collateral even when it’s in the possession of the Guarantor or a third party.
Collateral Acquisition Offer:
- Acquisition Agreement: The creditor and the Guarantor can agree on the total or partial acquisition of the collateral by the creditor to fulfill their rights.
- Notification to Rights Holders: Any acquisition offer must be communicated to other rights holders over the collateral, who can object within a specified timeframe.
- Court Settlement of Objections: If there are objections, the creditor can seek court intervention for resolution. The court’s decision is final and binding.
Unilateral Enforcement Rights:
- Notification Requirements: Creditors must notify other rights holders, including those in possession of the collateral or those with interests in the property where it’s located, before enforcing their security interest.
- Disposal of Collateral: Creditors can specify the terms of collateral disposal, such as sale methods, without needing to request court approval.
Judicial Enforcement and Bankruptcy:
- Seizure Request: Creditors can request a magistrate for collateral seizure and enforcement.
- Bankruptcy Consideration: Security interests enforceable against third parties remain effective even if the Guarantor enters bankruptcy, retaining their priority.
Distribution of Enforcement Proceeds:
- Order of Distribution: Proceeds from collateral enforcement are distributed in a specified order, covering expenses, enforcement fees, and rights of obligees according to their priority.
- Surplus Handling: Any surplus is returned to the Guarantor.
Stay of Enforcement:
- Temporary Stay: The Guarantor can request a temporary stay on enforcement, subject to the magistrate’s decision.
- Negotiation Opportunity: The magistrate may allow time for settlement negotiations between the creditor and Guarantor.
Compensation for Violation:
- Liability for Damages: Creditors are liable for compensating the Guarantor and Principal Debtor for any damages or loss of profits due to violation of enforcement procedures.
Implications for Creditors:
- Protection of Rights: The chapter ensures that creditors’ rights, especially regarding expense recovery and collateral use, are protected.
- Good Faith Requirement: It emphasizes conducting enforcement and collateral management in good faith, ensuring fairness in financial dealings.
- Legal Framework for Disputes: Provides a clear legal framework for dealing with disputes and objections in collateral acquisition and enforcement.
- In conclusion, the provisions in this chapter of Federal Law No. 4/2020 provide a comprehensive and fair framework for creditors in managing and enforcing security interests. This includes clear guidelines on their rights, the need for good faith actions, and a structured approach to resolving disputes, all of which are crucial for maintaining trust and integrity in financial transactions involving secured assets in the UAE.
Conclusion:
In conclusion, Federal Law No. 4/2020 represents a significant advancement in the legal framework governing secured transactions in the United Arab Emirates. For creditors, this law offers enhanced security and a broader range of collateral options, ensuring more dynamic and flexible credit practices. The establishment of a comprehensive public register adds a layer of transparency, aiding in effective risk management. Importantly, the law stipulates clear guidelines for the enforcement of security interests, prioritizing creditors’ rights while upholding principles of good faith and fair dealing.
Author’s Bio:
Nikhat Sardar Khan, a distinguished legal expert with extensive experience in the UAE’s legal landscape, currently heads the Department of Litigation, ADR and Corporate at Hilal & Associates Advocates & Legal Consultants. Her expertise encompasses complex litigation and dispute resolution in commercial matters, banking, finance, corporate practice, and more. As a qualified arbitrator and experienced mediator, she holds certifications from prestigious institutions like the Chartered Institute of Arbitrators (FCIArb) and The Royal Institution of Chartered Surveyors (RICS). Her legal acumen, honed over decades of practice in both India and the UAE, positions her as a formidable figure in the field of law.
Nikhat Sardar Khan (FCIArb)(RICS)
Head of DIFC Litigation, Corporate & Arbitration- UAE,
MENA and India.
Arbitrator | Mediator | DIFC Practitioner
Email: nikhat@hilalassociates.com