Security interests in the UAE

By Jayanthi Guru, Afridi & Angell
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Security interests in the UAE are governed largely by Federal Law No 5 of 1985 (Civil Code) and Federal Law No 18 of 1993 (Commercial Code). The former provides for business or commercial mortgages and commercial pledges and the latter provides for real property mortgages and possessory pledges.

Jayanthi Guru Associate Afridi & Angell
Jayanthi Guru
Associate
Afridi & Angell

Business mortgage

A business mortgage is a mortgage over the tangible and intangible property of a business other than real property. This includes goods, stores, machinery, client contacts, goodwill, trade name and intellectual property rights. The mortgage is made in favour of a bank or a financial institution, under a notarized document. To ensure the mortgage is valid for five years and can be renewed, it must be registered in the commercial register of the mortgagor.

The mortgaged assets must be specified in detail as otherwise only the trade name, right to let, client contacts and goodwill are deemed to be mortgaged. The premises where the business is conducted is not considered as part of the business and the Commercial Code appears to suggest that its lessor has a prior lien on it for unpaid rent (subject to a maximum of two years’ rent).

The mortgagee is not entitled to exercise any self-help. In case of a default, the mortgagee may apply to a court for sale of the mortgaged assets.

Moveable property

A commercial pledge covers the moveable property of a business, e.g. stock, plant and machinery, nominative instruments, receivables and negotiable instruments. To ensure that the pledgor cannot unilaterally dispose of the pledged object there must be a transfer of the pledged object to either the pledgee (or a mutually designated third party) or to the joint possession of the pledgor and pledgee.

The transfer of possession can be actual or constructive. In the event of a default by the pledgor, the pledgee may apply to a court for sale of the pledged object.

Real property mortgages

The real property mortgage is a contract by which a creditor acquires the right to the proceeds of the sale of mortgaged property in priority over all unsecured creditors and other subsequent secured creditors. The mortgage must be registered and the time of registration determines priority. The mortgagor must own the real property that is to be mortgaged. Property owned by third parties may be mortgaged with consent of the owner under a notarized instrument. However, the mortgagor may be the borrower or guarantor of the debt.

Strict foreclosure of a mortgage over real property, whereby the title vests in the mortgagee upon a default in repayment of the debt, is not recognised in the UAE, save under the laws of the Emirate of Sharjah, where title to the mortgaged property can be transferred following certain administrative action. Under UAE law an attachment and sale order from a court is required before a mortgagee can sell mortgaged property, which happens by way of a public auction.

Possessory pledges

A possessory pledge is a contract by which a creditor acquires a right to the property in its possession or in the possession of a stakeholder. It is similar to a commercial pledge.

Other securities

Mortgages can also be registered over vehicles and ships. Vehicle mortgages are registered with the local traffic police and recorded on the title deed of individual vehicles. Ship mortgages are registered in the register of ships and held in a notarized instrument. The ship mortgage debt ranks in priority directly after statutory dues, crew wages, salvage and general average contributions, compensation for certain specific claims and certain contracts lawfully entered into by the master.

A pledge over shares of public or private joint stock companies must be registered by the company in its share register. In the case of public joint stock companies the pledge must also be registered with the stock exchange on which the shares are listed.

The shares of limited liability companies may generally not be pledged, as they are the intangible interests of the shareholders in the capital of the company. However, recently in Dubai, the Dubai Department of Economic Development has registered a commercial mortgage in the commercial register of the limited liability company whose shares are being pledged by its shareholders.

Security interests may be created by entities in the free zones of the UAE, although the procedure for creating them differs between the various zones. They can include mortgage over property, assignment of leases, pledge over moveable assets, and pledge of shares.

Jayanthi Guru is an associate in the Dubai office of Afridi & Angell, a UAE-based law firm. She can be contacted at jguru@afridi-angell.com. Afridi & Angell has offices in Abu Dhabi, Dubai and Sharjah.

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