Following recent announcements at the Federal National Council, the new Movable Security Law has now been issued replacing the previous law of 2016.
The New Law
Federal Law No. (4) of 2020, concerning Securing Rights in Movable Assets (“New Law”) has been issued and published in the UAE Official Gazette on 31 May 2020, and came into effect on 1 June 2020.
Replacement of existing law
The New Law replaces Law No. 20 of 2016 on the Mortgage of Moveable Property to Secure Debt (the “Old Law”).
It is, however, confirmed under the New Law that the executive regulations, decisions and circulars issued in relation to the Old Law remain effective until such time as they are replaced through the issuance of a new set of regulations under the New Law.
This is important as such regulations document the establishment and operation of the Emirates Movable Collateral Register (“EMCR”). Although the New Law refers to a register “to be established”, by confirming the continuance of the executive regulations, decisions and circulars, the EMCR would continue to be the relevant register under the New Law until replaced by any subsequent regulations. However, the interface of the EMCR may need to be updated to reflect the change in the type of interests that can now be registered on the EMCR under the New Law.
There has been a conceptual shift, starting with the name of the law itself.
The title of the New Law refers to security interests over movable assets, as opposed to a narrower scope under the Old Law referring to mortgages/pledges.
This is then reflected in the definition of “Security Interest” being:
“a right in rem over a movable asset created pursuant to a security agreement for the purpose of securing a liability, even if the parties have not expressly described the purpose of the agreement as a “security interest” and regardless of the type of the asset, the status of the security provider or the secured party or the nature of the secured debt. The Security Interest includes pledge under a pledge contract, lessor’s rights under a finance lease contract, seller’s rights under the sale contract of a movable asset, the transfer of title of a movable asset by way of security and the rights of the assignee under an assignment.”
Scope of New Law
Similar to the Old Law, the New Law covers tangible and intangible movable assets whether current or future. In this respect, the list of movable assets remains largely unchanged (i.e. accounts receivable, bank accounts, documents of title, commercial papers, equipment, crops and so on).
In terms of receivables, the language in the New Law corrects previous uncertainty under the Old Law by introducing the definition of ‘debt receivables’ (i.e. receivables due to the security provider), as opposed to the definition of ‘credit receivables’ under the Old Law. The New Law captures the registration of security interests over receivables which are due to a security provider other than coupon payments and related payments under negotiable bonds, payments in relation to securities (such as dividends of shares), and payments (including interest or profit payments) from deposits with banks. Debt receivables which are part of a ‘sale of a project’ are also excluded from the ambit of the New Law, however, no further guidance is given on the meaning of the term ‘project’.
The New Law also continues the same theme when it comes to special registers, so that assets subject to such registers are excluded (e.g. vehicles, vessels, aircraft as well as free zone security registers).
There are other changes in the scope:
Creation of a security interest
Creation of security remains largely unchanged, with a security contract necessary which describes the collateral and secured obligations. Importantly, the New Law provides that such secured obligations can be of any kind, current or future, and that the security interest automatically extends to sale proceeds and any replacement collateral.
The New Law provides the criteria of what it means for the security interest to be ‘enforceable vis a vis third parties’ (i.e. akin to the concept of perfection). In this respect three options are possible:
1. registration of the security interest in the register;
2. possession of the movable asset by the secured party; or
3. control of the movable asset by the secured party.
The options in limbs (2) and (3) may be relevant to collateral such as bank accounts, or collateral arrangements where independent warehouse/collateral managers are appointed (including bonded warehouses).
The New Law also confirms that registration on the register can occur prior to creation of the security interest, provided the security provider’s consent is obtained.
In relation to receivables, the New Law provides that a security interest created over the receivables shall not be impacted by any restriction in the contract which created those receivables. This is an important development as it means a registered security interest will trump any restriction in the contract, including retentions of title and restriction on sale.
The importance of a security interest becoming enforceable vis a vis third parties (i.e. being perfected) is that:
A perfected security interest will enable the secured party to ‘follow’ the collateral to any person to which it has been assigned, effectively a tracing right. However, a third party may obtain clear title to the collateral if the collateral is sold in the ordinary course of business of the security provider.
Interestingly, a new concept has been introduced dealing with asset financing, a concept which exists in other jurisdictions. Under this concept a security interest created for financing the purchase of equipment, stock, intellectual property rights shall have priority over any other security, including other general security registered prior. There are, however, priority rules in relation to the proceeds where such assets are stock and are subject to a prior security interest.
In relation to security interests created over an asset that subsequently becomes a fixture to a mortgaged property, such security interest shall have priority over the rights of the mortgagee of the property itself.
Another interesting inclusion in the New Law is in relation to account banks and the accounts they hold, with the law providing that such banks have priority over any security interests to set off the funds in such accounts against any debts owed to them. Practically, this is likely to mean that security over bank accounts held with other banks will hold little value without the relevant account bank waiving such set off right.
Although the Old Law referred to security over fungible assets (such as oil), there were no prescribed terms including in relation to comingling. The New Law rectifies this providing that security can be taken over fungible assets and it will continue after mixing with other identical assets. In addition, if there are multiple security interests over comingled assets, each secured party will rank equally, having a pro rata share in the comingled assets.
The concept of self-help continues under the New Law, as does the ability to enforce through summary proceedings. In particular:
1. The New Law confirmed the rights of banks and financial institutions to set off against bank accounts as a method of recovery under a security interest over bank accounts.
2. Similar to the Old Law, enforcement methods include:
The New Law sets out specific self-help enforcement methods for some types of security as follows:
The New Law also appears to restrict cross-acceleration or exercising cross–defaults by a secured creditor it such creditor’s debt (secured thereunder) has not matured or is subject to a default.
Bankruptcy of a Security Provider
The New Law confirmed that bankruptcy proceedings do not affect the security and priority rights created pursuant to the New Law. This position is contrary to the provisions of the Old Law do not apply in case of the commencement of bankruptcy of a pledgor of a movable asset under the Old Law.
The New Law has increased the penalties for offenders to prison or a fine of not more than AED 60,000, or both. Previously, the fine was AED 30,000 under the Old Law.
The New Law is now in effect.
The New Law does contemplate new executive regulations, however, as mentioned above, the existing regulations continue to apply in the interim.
Like the Old Law, a transitional period is provided, requiring all secured parties to register their security interests within six months from the executive regulation coming into force. Practically, on the basis that the existing regulations continue to apply which encompass the EMCR, it would appear that secured parties should continue to register security interests on the EMCR until directed otherwise by new regulations.