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New UAE Pledge Law

On 12 December 2016, Federal Law No. 20 of 2016 regarding the Pledge of Moveable Properties in Guarantee of Debt (“Pledge Law”) was issued and published in the Official Gazette on 15 December 2016.

The Pledge Law, which comes into effect around 15 March 2017, will seek to introduce a new regime for registering a pledge (or mortgage) over movable assets (including future assets) which are pledged as security for the repayment of a debt.

Previously, unregistered pledges simply created a contractual right that required enforcement by the UAE civil courts. The Pledge Law allows a pledgor to perfect its legal rights over the movable assets through registration. Once registered, the pledgor has priority over third parties, and the registration is deemed notice to third parties. The new law should also enable security to be taken over a much wider range of movable property.

Key features:

  • Lenders will no longer be required to take possession of movable assets in order to perfect a pledge over the same. Instead, parties can enter into a written agreement which complies with the Executive Regulations (to be introduced) in order to create security.
  • Lenders may secure a pledge over tangible / intangible assets of a commercial business, as security for any funding provided to acquire such commercial business. Provided that the pledge is registered before the creation of any other rights on the relevant assets, such pledge will have priority over the rights of any purchaser or lien holder.
  • It is not yet clear to what extent this would replace the current use of commercial mortgages, which also secures an interest over tangible and intangible assets.
Examples of registerable pledges Examples of non-registrable pledges
  • Bank accounts
  • Receivables
  • Commercial paper
  • Tangible and intangible assets (e.g. bonds)
  • Title deeds
  • Raw materials
  • Movable property affixed to real property capable of division
  • Future assets (previously not possible)

 

  • Moveable assets that can only be pledged by possession.
  • Assets where UAE laws require an interest to be registered under a specific register (e.g. automobiles, vessels, LLC company shares).
  • Personal goods, unless pledged as security for financing their purchase.
  • Proceeds under insurance policies (unless related to a pledged asset)
  • Future inheritance

If the pledgor fails to perform its obligations under the pledge contract then the pledgee may (following prior written notice) request the sale of the pledged asset at market value within 10 working days, provided that certain conditions are met.

There is currently no requirement under the Pledge Law for a secured creditor to be a licensed UAE bank. It remains to be seen whether this restriction appears in the Executive Regulations, or would be required in practice in order to register a security interest.

At Davidson & Co we can help with all of your commercial or property law requirements.  For more information on how to register a pledge, including drafting a pledge contract, please do not hesitate to get in touch.

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