UAE Law and Practice Contributed by: Arsalan Tariq, Nil Acar and Ahmed Kamran, BSA LAW
5. Guarantees and Security 5.1 Assets and Forms of Security
• Guarantees must be in writing and specify the secured obligation or amount. Corporate and personal guarantees are enforceable, including downstream, upstream and cross-stream guaran- tees, subject to constitutional authorisation and board/shareholder approvals. PJSCs are restricted from providing financial assistance for acquisition of their own shares, but LLCs are exempt. • Business/commercial mortgage is another type of security that can be established over movable assets. Such a mortgage may extend over the entirety of a commercial enterprise (or defined parts thereof), including goodwill, trade name, contracts, equipment and other intangible rights of a business. It must be registered with the relevant Department of Economic Development’s Commer- cial Register in the emirate of incorporation, and once registered is valid for five years (renewable). A commercial mortgage can only be granted in favour of banks and financial institutions. Owing to these limitations, it is less flexible, and following the introduction of the Moveables Security Law it has become more common in practice to establish security over movable assets under the Moveables Security Law framework. Failure to comply with the relevant perfection require- ments typically renders security unenforceable against third parties and reduces priority against subsequent security interests. 5.2 Floating Charges and/or Similar Security Interests The Moveables Security Law allows pledges to be established over present and future assets, providing functional equivalents to all-assets charges. It is com- mon practice in respect of future assets for parties to enter into an addendum to the moveables security agreement and to register the future secured assets with the EIRC once such future assets crystallise. DIFC and ADGM expressly permit floating charges. 5.3 Downstream, Upstream and Cross- Stream Guarantees There is no prohibition on a parent company to pro- vide a downstream guarantee, provided that its con- stitutional documents permit this, and the relevant corporate approvals are obtained.
Security may be created over real estate, movable assets, shares, receivables, bank accounts, cash deposits and intellectual property. • Real estate mortgages must be registered with the relevant land department. Registration is manda- tory for validity and priority, and fees are typically calculated as a percentage of the secured amount. Mortgages may cover freehold, leasehold or usu- fruct rights. • Moveable pledges under the Moveables Security Law include inventory, equipment, receivables, deposits, IP and contractual rights. Perfection is achieved by registration in the EIRC. Registration gives priority over unregistered interests and ena- bles limited self-help remedies. • Shares in LLCs are pledged via notarised agree- ments registered with the relevant departments of economic developments where such LLCs are incorporated (eg, Dubai Economic Department for onshore Dubai LLC shares); PJSC shares are pledged through the clearing systems. Free zone share charges follow the rules of the relevant free zone – usually requiring registration with the corpo- rate register of that relevant free zone. • Receivables may be assigned or pledged under the Moveables Security Law. As a matter of perfection, notice is sent out to the creditors of the underly- ing contracts including such receivables, and such security is registered with the EIRC. • Accounts can be pledged under the Moveables Security Law. Perfection can be achieved through the account bank, the pledgee and the pledgor entering into a tri-partite control agreement and registration of the account pledge with the EIRC. • Cash deposits are pledged by pledging the account where such cash deposits are held. • Promissory notes are widely used as negotiable instruments to evidence indebtedness. Promissory notes provide an enforceable payment obligation that can be executed through a fast-track court process. Promissory notes may also be pledged as part of a commercial pledge or registered under the Moveables Security Law.
646 CHAMBERS.COM
Powered by FlippingBook