UAE Law and Practice Contributed by: Arsalan Tariq, Nil Acar and Ahmed Kamran, BSA LAW
In respect of upstream and cross-stream guarantees, in addition to the permissibility under the constitution- al documents and the relevant corporate approvals, and subject to the financial assistance restrictions set out in 5.4 Restrictions on the Target , the guarantor can provide a corporate guarantee, provided that the guarantor demonstrates the corporate benefit. As a method to mitigate the risk of challenge by minority shareholders and during insolvency proceedings, the guarantor may introduce a liability cap as well. 5.4 Restrictions on the Target Financial assistance rules apply to public joint stock companies (PJSCs), which are prohibited from provid- ing loans, guarantees or security for the acquisition of their own shares. LLCs are exempt and may provide such assistance if properly authorised. 5.5 Other Restrictions Under the Companies Law, companies are prohib- ited from extending loans to their directors, they are prohibited from guaranteeing the obligations of their directors and they are prohibited from extending a loan to another company if their director holds more than 20% of the share capital (including the shares of their immediate and second-degree family) of the borrower company. Regulated entities may require regulatory approvals before granting security. Mort- gages over UAE real estate may only be held by locally licensed entities, so foreign lenders appoint a local security agent. 5.6 Release of Typical Forms of Security Releases depend on asset type. Real estate mortgag- es are discharged through deregistration at the land department. Moveables pledges are released online in the EIRC. Share pledges require registrar filings or clearing system releases. Account and receivable pledges are released by notice to counterparties and the EIRC de-registration. 5.7 Rules Governing the Priority of Competing Security Interests Priority is established by the time of perfection – whether it be registration or possession. Under the Moveables Security Law, the first registered security prevails. Real estate mortgages rank according to reg- istration date at the land department.
Contractual subordination relies on contractual arrangements between lender groups. Intercredi- tor agreements and contractual subordination are enforceable and recognised in insolvency proceedings to the extent of the waterfall of payments in an insol- vency. However, if the court adopts a preventive set- tlement procedure or a restructuring procedure under the UAE law, there is a possibility that the court may terminate any agreement between the debtor and a third party, including loan agreements. This may affect the enforceability of the intercreditor agreements. 5.8 Priming Liens Certain statutory liens take precedence over contrac- tual security, including landlord’s liens, contractors’ liens, and maritime liens. While it is not so common for these to be enforced, they can rank ahead of secured creditors in insolvency. Lenders manage this risk through covenants, direct agreements and contrac- tual undertakings from borrowers. 6. Enforcement 6.1 Enforcement of Collateral by Secured Lenders In the UAE (onshore jurisdiction), a secured lender may enforce its collateral upon the occurrence of an event of default as defined under the loan or security agreement. The method and process of enforcement depend on the type of collateral and whether the secu- rity interest has been duly perfected and registered. Enforcement Procedures • Movables assets – under the Moveables Security Law, a secured creditor may enforce a registered security interest over movable assets (eg, receiva- bles, bank accounts, inventory) through extra- judicial enforcement (ie, without court intervention), provided this right is expressly stipulated in the security agreement. Enforcement typically requires prior notice to the debtor and registration of the enforcement notice with the EIRC. • Immovable property (real estate) – enforcement is judicial in nature and must proceed through the UAE courts, generally requiring a court order for auction and sale.
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