In a move that will be welcomed by financial institutions across the UAE, Federal Law No. 20 of 2016 concerning the Mortgage of Movable Assets to Secure a Debt (“Law”) has been passed. We are not aware as yet when the Law will be published (if not already), however the Law will come into force 90 days from publication. The Law fundamentally changes the ability of lenders to take effective security over moveable assets, a problem both lenders and debtors have struggled with for some time.
Highlights of the Law include:
Movable Assets – Article 3 of the Law defines the assets that can be mortgaged. The definition includes “any movable tangible or intangible assets, existing or in the future”. It also specifically includes the “payables” and “credited and deposits bank accounts including the current accounts”. The ability to deal with future assets, and also bank accounts, could solve historical issues with such security.
Excluded Assets – The provisions of the Law do not apply to movable assets that, pursuant to applicable law, require registration in a special register (for example vehicles, ships and aircraft).
Security Registry – The Law requires the registration of mortgages over movable assets in a special register to be created by a Cabinet resolution (“Registry”). We expect the Cabinet resolution to give more insight into the structure of the Registry, where it will be located, who will manage it and possibly registration requirements.
No possession – The Law permits the mortgage of movable assets without the need to transfer the possession to the mortgagee or third party (eg bailee), if the mortgage is registered in the Registry. This signals a substantial shift from the current position under UAE law regarding possessory security.
Other security – The Registry can accept the registration of other rights, such as (i) the lessor’s right over the assets in the case of operational lease agreements, if the agreement is for one year or more; and (ii) the lessor’s right under finance lease agreements.
Public searches – third parties will be entitled to search the Registry and obtain basic information from the Registry (as the Cabinet resolution will further clarify).
Payment in kind – The Law gives the mortgagee the right during the mortgage, or at maturity of the debt, to agree with the mortgagor to receive the title of the mortgaged assets (wholly or partly).
Direct enforcement – The Law introduces direct enforcement procedures through the summary judge meaning streamlined and quicker enforcement remedies for secured parties.
The enforcement provisions in the Law also give the court wide powers to either permit the mortgagee to sell the mortgaged assets at a price of not less than the market price without following the sale procedures under the Civil Transaction Law (ie no public auction required) or to allow the mortgagor to sell the mortgaged assets if it is proven that the mortgagor can obtain a better price (under the supervision of the court).
The Law penalizes the mortgagor, the mortgagee, the debtor or the possessor of the mortgaged assets in case of the disposal or damaging the mortgaged assets contrary to the mortgage agreement. The penalty is the imprisonment and fine of not less than AED 30,000. If such 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.
Compliance period – The Law allows a period of one year from the enactment of the Law for existing mortgages to be registered.