Purchase Financing in UAE – Recent changes in Law

September 13, 2020by Admin0
Purchase finance 1

On 01/06/2020, Federal Law No. 4 of 2020 on Guaranteeing Rights Related to Movables (New law) repealed Federal Law No. 20 of 2016 on mortgaging of movable property as security for debts (Old law). The Old law, had put in place a regime for registering security interests over movable assets in UAE and bridged various gaps in the earlier security registration regime through the introduction of floating charge, registration and maintaining a public register for security interests.

The New law maintains many positive features of the Old law. The most significant differences are the new Security Registry and Implementing Regulations.

  • New Security Registry, to be established by a resolution of the Council of Ministers replaces the Emirates Movable Collateral Registry (“EMCR”) operated by the Emirates Development Bank.

New Implementing Regulations to be issued by the Ministry of Finance, within six months of publication (before 02.12.2020) will regulate the procedural matters including public access to the register, the requirements for registering a security interest, additional priority terms for certain classes of security interests etc.

Other key aspects are:

  • The assets that my constitute collaterals include:
    1. Accounts receivables unless they are part of a property ownership transfer transaction;
    2. Accounts payable at banks;
    3. Written deeds and documents including commercial papers, certificate of deposits, bills of lading and warehouse bonds;
    4. Equipment and work tools;
    5. Material and moral elements of a business concern;
    6. Goods intended for sale or lease, raw materials, goods in the process of manufacturing;
    7. Agricultural crops, animals and products thereof; and
    8. Fixtures and any other movable assets deemed by law as a collateral.
  • Assets exempted under the law include:
    • Movable assets over which Security Interests should be entered in special registers under the legislation in force;
    • Expenses, wages, salaries, and workers’ compensation; and
    • Public funds, endowment funds and funds of foreign diplomatic and consular entities and intergovernmental organizations.
  • Under the Old law, goods could be disposed of without any security interest even if the purchaser was aware of the security interest. Under New law, if secured assets are sold/disposed of in the ordinary course of business, they shall pass to the purchaser free from any security interest only if the purchaser was unaware of such interest.
  • Purchase Money Security Interests (PMSI) relating to purchase financing (equipment, inventory, IP) will take precedence over other competing security interests created that is not related to purchase finance, if PMSI is publicized in the register within 7 working days of security provider gaining possession.
  • Under the Old law, the execution procedures on the mortgaged property would not be valid if bankruptcy procedures commence against the security provider. Now, a security interest shall survive any bankruptcy procedures and it shall retain the priority that it had prior to procedures.
  • If multiple security interests are enforceable over the same fungible product or mass, these rights shall have equal priority status over the product/mass. Every secured party may claim their right at the ratio of their security interest to the product/mass at the time of integration.

For violations and offences like deliberate misrepresentations related to security interest, deliberate destruction of collateral and deliberate impeding of collateral enforcement shall be punishable under the new law with imprisonment and a minimum fine of 60,000 dirhams. 

About ATB Legal

ATB Legal is a full-service legal consultancy in the UAE providing services in dispute resolution (DIFC Courts, ADGM Courts, mainland litigation management and Arbitrations), corporate and commercial matters, IP, business set up and UAE taxation. We also have a personal law department providing advice on marriage, divorce and wills & estate planning for expats. Please feel free to reach out to us at office@atblegal.com for a non-obligatory initial consultation.

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