Rita Al Semaani Jansen Partner
UAE Movable Assets Register: moving UAE lending market forward
In March 2018, the United Arab Emirates took a significant step in developing the legislation necessary to be regarded as a mature financial jurisdiction when it published Cabinet Resolution No (5) of 2018 (the “Regulations”); the regulations to Federal Law No (20) of 2016 on Mortgages of Movables as Guarantees for Debts (the “Law”).
The Law, published at the end of 2016, is likely to positively impact the UAE lending market. Pending implementation of the Regulations, it has been difficult to fully assess the impact of the Law. The clarification of the Law provided by the Regulations is further evidence of the UAE’s desire to create the legal framework that is necessary for a developed financial market and to homogenise a previously disparate registration system (previously managed by the various Emirates and free-zones).
Prior to the Law entering into force, security over movable assets was primarily created by way of a possessory pledge under the relevant provisions of the UAE Civil Code (Federal Law No (5) of 1985) (the “Civil Code”) and the UAE Commercial Code (Federal Law No (18) of 1993) (the “Commercial Code”). One of the criteria for an effective and enforceable possessory pledge over movable assets under these laws required that the mortgagor deliver the relevant asset to the mortgagee. This requirement often created practical difficulties for those seeking to take security for a loan; most commonly when the mortgagee wanted to allow the mortgagor to retain possession of the asset. In instances when the mortgaged asset was integral to the mortgagor’s business and loss of that asset would likely hinder the mortgagor’s ability to repay the loan itself, the existing legislation was not fit for such purposes. Whilst parties sought to create alternative solutions, it was not clear how the UAE courts would construe those solutions and whether they would provide the mortgagee with the security it had premised the loan upon. This, in turn, led to some uncertainty in the market, which meant that financing was typically denied and, when it was available, the sums offered were significantly reduced.
Historically, it was not possible to pledge future assets, i.e. receivables or to create what is known in other jurisdictions as a “floating” charge. This created issues for parties seeking financing with fluctuating assets. The need under some financing contracts to issue new mortgages in relation to additional sums credited to a bank account was regarded as an onerous obligation that unnecessarily increased legal fees. Alternatively, some lenders required personal guarantees from senior management, which was rightly regarded as onerous in a commercial context.
Finally, enforcement of security over assets as permitted by the Civil Code and Commercial Code was generally regarded as requiring UAE court involvement, which led to delay and additional cost.
With the introduction of the Law, the UAE’s legal position changed and the Law now allows a mortgage to be created over various movable assets by registering it on a publicly-searchable electronic register. The anticipated development of a centralised register was welcomed in a jurisdiction that comprises a number of different emirates and free zones (some of which have their own security registers, i.e. the DIFC and the ADGM).
Under the Law, it is also no longer necessary for the mortgagee to take possession of the pledged asset. It is also now possible to mortgage account receivables. The Law also allows parties to enforce against the secured assets without the need to involve the UAE courts.
These changes will allow lenders to identify a greater pool of possible assets to act as security for loans. Furthermore, should the need arise at a later date, enforcement may be significantly less onerous and costly. In turn, it is expected that those seeking to obtain finance will be able to provide movable assets as a collateral. It is anticipated that this will result in financing being offered on better terms.
With the publication, in March 2018, of the Regulations, clarity has now been provided as to how the register will be formed and managed.
The Regulations provide that a party seeking to register a mortgage will need to file a registration form with the Emirates Movables Collateral Registry (the “EMCR”), which has now been set up. The parties to the mortgage are able to indicate to the EMCR whether they wish to give the public access to all the information provided in the registration form or whether they instead wish only the basic information to be accessible by the public.
The registration form requires that the identity of the mortgagor and mortgagee is provided along with a description of the movable asset mortgaged. The form requires further information including parties’ addresses and an indication of the effective date of the registration.
Furthermore, the Regulations set out the fees that will be charged for registration of a mortgagee’s interest over moveable assets. The fees range from AED50 to AED200 depending on the service requested. It is also worth noting that some information will be publicly accessible. For a fee of AED 200, it will be possible to search the EMCR and have a search certificate issued; potentially useful as part of a lenders’ due diligence process.
The Regulations clarify how the electronic register will be managed and set out the fees that will be charged for the various services. It is encouraging that the UAE has remedied a previous gap in its existing financial services law with the publication of both the Law and Regulations. As set out above, we anticipate that this will result in lenders offering financing on better terms and that this will, in turn, result in an increase in the number of financing deals entered into locally.
With a publicly searchable register, lenders will need to ensure that they have searched the EMCR before entering into a loan agreement with any party offering a moveable asset as security. Further, due diligence checks in the region are expected to also become easier and more economical. This step towards greater transparency in the region is to be welcomed.