Last month we provided an overview of the new Movables Pledge Law, in the following article we take a more in-depth look.
The Federal Cabinet has recently issued Cabinet Decision No. 29/2021 regarding the Executive Regulations (the “New Executive Regulations”) for the Federal Law No. 4/2020 (the “New Movables Pledge Law”).
The New Movables Pledge Law was promulgated last year and replaced the Federal Law No. 20/2016 (the “Old Movables Pledge Law”). It is worth mentioning here that the New Movables Pledge Law mostly retained the features of the Old Movables Pledge Law, with some notable exceptions such as addition of pledge of contractual receivables and out for court enforcement remedies for the lenders. However, the New Movables Pledge Law further stated that until the issuance of new regulations to implement the New Movables Pledge Law, the executive regulations in place for the Old Movables Pledge Law (the “Old Executive Regulations”) will remain in effect on interim basis.
The New Executive Regulations have now replaced the Old Executive Regulations.
The following are the significant highlights of the New Executive Regulations and their possible impact on the lending and taking of security in the UAE for the secured lenders to take note of:
- Existing security registry to continue under a new name
The Emirates Movables Collateral Registry (“EMCR”), an online security registry which is established pursuant to the Old Movables Pledge Law to register the security interests over movable assets, has now been renamed as the Emirates Integrated Registries Company (“EIRC”).
Following the promulgation of the New Movables Pledge Law, the questions were lingering whether a new security registry will be established. These questions were to be answered by the New Executive Regulations. Had a new security registry been established, it would have caused all the existing security holders (i.e., the banks and financial institutions holding security interests) to record the security interests created in their favour, once again in such new registry. However, the New Executive Regulations have not established a new security registry.
All existing security interests duly recorded in the EMCR will continue to remain recognised by EIRC and be in full force and effect.
- Incorrect identity information to render registration unenforceable
The registration of security interest will not be enforceable where an incorrect identity information is included in the application to EIRC.
- Security registry to not be responsible for the accuracy of any information registered
The EIRC will not be responsible for the correctness or accuracy of any information entered by the applicants when recording the security interests in EIRC’s database. However, EIRC retains the right to reject any application if mandatory information is not furnished by the applicants.
It is imperative for the lenders to ensure that the pledgors enter correct and accurate information when registering security interests at EICR.
- Control agreements
A concept of “control agreement” has been introduced. This control agreement will be between pledgor, pledgee and financial institution (or security agent) where the parties will agree that the financial institution will follow the pledgee’s instructions with respect to the balance of the credit or deposit account without obtaining any further consent from the pledgor.
This is a significant step forward and it is expected that the lenders will now insist such control agreements to be included in the security packages.
- Out of court enforcement
The New Executive Regulations have clarified the position of Article 27 of New Movables Pledge Law. A lender can now seek out of court enforcement under Article 27 of New Movables Pledge Law provided it has sent a legal notice to the borrowers / pledgors. Such legal notice must satisfy the following requirements before an out of court enforcement by a lender is exercised:
- intention to take possession of the pledged property and to enforce against it;
- identification of the pledgor and the pledged property against which enforcement will be made;
- the method of enforcement against the pledged property; and
- the time and place of enforcing against the pledged property.
It is anticipated that the secured lenders may in near future commence out of court enforcement against the borrowers and pledgors after the above clarification by the New Executive Regulations.
Authored by Musab Iftikhar