UAE Federal Law No. 20 of 2016 (the New Law) on Mortgaging Movable Property as Surety for Debts was published in the Federal Gazette no. 609 dated 15 December 2016 and came into effect 90 days after publication.
The Mortgage of Movable Assets law introduces a new regime for registering a security interest over movable assets within the UAE. The new law addressed some of the issues encountered under the previous UAE laws on taking a security over movable assets, including significant limitations on the types of movable assets that were previously acceptable as security, together with revised provisions for taking possession of movable assets given s security.
The UAE Federal Law provides lenders with the ability to register effective security over movable assets. This has been a problem hindering both lenders and debtors for some time. The Mortgage of Movable Assets law applies to pledges over tangible or intangible movable assets that exist either currently or in the future.
The law does not apply to movables covered by a registration requirement under existing laws or under an existing special register. Examples of these categories include a pledge over shares registered with the Economic Department in an Emirate or a pledge over a vehicle registered with the applicable traffic departments in an Emirate.
Prior to the introduction of UAE Federal Law No. 20 of 2016, lenders relied on the provisions of the Civil Code to create a possessory pledge over movable assets. Under the Civil Code, such a pledge over movable assets was only valid under three conditions:
- The assets were capable of being delivered at the time the pledge was made and capable of being sold by public auction
- The assets were in the possession of the pledgee or a neutral third party as bailee
- The pledgor was the owner of the assets pledged and competent to make dispositions over it.
The new law has altered this situation by allowing a mortgage over movable assets without the need to transfer the possession to the mortgagee or a third party as bailee if the mortgage is registered in the new registry that is introduced under the Law (“Security Registry”). The practical existence of the new Security Registry is particularly important because previously, the Civil Law did not appoint an authority for the registration of possessory pledge rights over a movable asset. Therefore, now, when competing security interests exist, who has priority possessory pledge rights over the same movable asset is no longer in ambiguity. The Emirates Movable Collateral Registry is currently available to the public.
Other substantial changes introduced under the new Mortgage of Movable Assets legislation include:
- Definition of Movable Assets: Article 3 of the Law defines the assets that can be mortgaged. The definition in the Law encompasses all movable assets including, among other things (i) any movable tangible or intangible assets, existing or in the future; (ii) “indebtedness” (ie accounts payable owed to the pledger); (iii) credited and deposits bank accounts including the current accounts; (iv) documents of title (including bills of lading); and (v) property accessory to immovable property.
- No possession: The law permits the mortgage of movable assets without the need to transfer possession to the mortgagee or third party.
- Registration in the Security Registry: Article 10 of the Law specifies that a pledge over movable assets is only effective against third parties if it is registered in the Security Registry. Article 10(2) also specifies that once a pledge has been registered in the Security Registry in accordance with the Law, no further pledge or charge shall be created on the same asset unless it is registered on the Security Registry. This provision, together with Article 17 allows for ranking charges to be registered on the Security Registry. The priority in the ranking is based on the date and time of registration of the pledge in the Security Registry.
- Enforcement: The right of recourse and enforcement to registered pledges has been simplified and clarified. The registration establishes priority and allows the trace of goods in third-party custody eliminates the risk of fraud and disposition.
- Public Searches: A notable issue confronting lenders previously was the absence of any way to verify if any charges existed on the assets that they intended to take a pledge over. This issue has been addressed by the new law, which allows for public searches of the Security Registry. Article 7 of the Law allows third parties to search the Security Registry and obtain basic information from the Security Registry. The parties to the pledge may decide how much of the information relating to the pledge will be available to the public on the Security Registry, however, the Law provides that in all cases some basic information will be searchable.
- Payment in Kind: The Law gives the mortgagee the right during the mortgage, or upon maturity of the debt, to agree with the mortgagor to receive the title of the mortgaged assets (wholly or partly).
The Law does not apply to movable assets that require registration in a special register under an existing law such as listed shares, vehicles, ships, aircraft and certain free zone security.
Penalties for Security Unlawful Sale
The law contains penalties against the pledger, the pledgee, the debtor, or the possessor of the mortgaged assets in case of the disposal or damage to the mortgaged assets contrary to the mortgage agreement.
The penalty is potential imprisonment and a fine of not less than AED 30,000. If criminal actions are committed by a corporate entity, the penalty shall be applied to the board members, the joint shareholders and appointed employees at the corporate entity committing such acts.
This is significant as it imposes penalties on the pledgor and its staff for unauthorized disposals, while it also implies that bank officers may be subject to penalties for non-compliance with the Law.
There are certain related regulations that are yet to be issued and published. These will likely outline the more operational aspects of the Law. The Law also allows a period of one year from the enactment of the Law for existing mortgages to be registered. For many banks, this will involve reviewing all existing security packages to assess whether all or part of the security involved should be registered on the new Security Register.
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The Law has introduced substantial changes in the market for secured lending while also providing lenders with more accurate information on borrowers and providing them with greater comfort in taking security over movable assets. While there are many aspects, which remain uncertain as to how the law will be implemented in practice, the ability to deal specifically with indebtedness, future assets, title documents, fungible assets and bank accounts under the Law should afford greater comfort to Lenders interested in pursuing these forms of security.