Microsoft Word - UAE Lending InfoPak

By in-house counsel, for in-house counsel.

Association of Corporate Counsel

1025 Connecticut Avenue, NW, Suite 200

Washington, DC 20036 USA

tel +1 202.293.4103, fax +1 202.293.4701

www.acc.com

By in-house counsel, for in-house counsel.

Association of Corporate Counsel

1025 Connecticut Avenue, NW, Suite 200

Washington, DC 20036 USA

tel +1 202.293.4103, fax +1 202.293.4701

www.acc.com

InfoPAK

Finance Multi-Jurisdictional Guide:

United Arab Emirates

Sponsored by:

Finance Multi-Jurisdictional Guide: United Arab Emirates

Finance Multi-Jurisdictional Guide: United Arab

Emirates

December 2014

Provided by the Association of Corporate Counsel

1025 Connecticut Avenue, NW, Suite 200

Washington, DC 20036 USA

tel +1 202.293.4103

fax +1 202.293.4107

www.acc.com

This InfoPAK

provides a high level overview of the lending market, forms of security

over assets, special purpose vehicles in secured lending, quasi-security, negative pledge,

guarantees, and loan agreements. It covers creation and registration requirements for

security interests; problem assets over which security is difficult to grant; risk areas for

lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and

trust concepts; enforcement of security interests and borrower insolvency; cross-border

issues on loans; taxes; and proposals for reform.

The information in this InfoPAK

should not be construed as legal advice or legal opinion

on specific facts, and should not be considered representative of the views of PLC or of ACC

or any of its lawyers, unless so stated. This InfoPAK

is not intended as a definitive

statement on the subject but rather to serve as a resource providing practical information for

the reader.

This material was developed by PLC. For more information about PLC, visit their website

at http://www.practicallaw.com/ or see the “About the Author” section of this document.

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks!

Contents

I. Overview of the Lending Market .................................................................................................... 5

A. What Have Been the Main Trends and Important Developments in the Lending Market in Your Jurisdiction

in the Last 12 Months? ............................................................................................................................................................ 5

II. Forms of Security over Assets ........................................................................................................ 6

A. Real Estate ................................................................................................................................................................................. 6

B. Tangible Movable Property .................................................................................................................................................... 9

C. Financial Instruments ............................................................................................................................................................. 12

D. Claims and Receivables ......................................................................................................................................................... 14

E. Cash Deposits ......................................................................................................................................................................... 14

F. Intellectual Property .............................................................................................................................................................. 15

G. Problem Assets ....................................................................................................................................................................... 15

III. Release of Security over Assets .................................................................................................... 16

A. How Are Common Forms of Security Released? Are Any Formalities Required? ................................................ 16

IV. Special Purpose Vehicles (SPVs) in Secured Lending ................................................................ 16

A. Is It Common in Your Jurisdiction to Take Security over the Shares of an SPV Set up to Hold Certain of

the Borrower's Assets, Rather Than to Take Direct Security over Those Assets? .............................................. 16

V. Quasi-Security ................................................................................................................................. 17

A. What Types of Quasi-Security Structures Are Common in Your Jurisdiction? Is There a Risk of Such

Structures Being Recharacterised as a Security Interest? ............................................................................................. 17

VI. Guarantees ...................................................................................................................................... 18

A. Are Guarantees Commonly Used in Your Jurisdiction? How Are They Created? ................................................ 18

VII. Risk Areas for Lenders ................................................................................................................... 18

A. Do Any Laws Affect the Validity of a Loan, Security or Guarantee (or the Terms on Which They Are

Made or Agreed)? .................................................................................................................................................................. 18

B. Can a Lender Be Liable under Environmental Laws for the Actions of a Borrower, Security Provider or

Guarantor? ............................................................................................................................................................................... 19

VIII. Structuring the Priority of Debts .................................................................................................. 19

A. What Methods of Subordination Are There? ................................................................................................................. 19

IX. Debt Trading and Transfer Mechanisms ...................................................................................... 20

Finance Multi-Jurisdictional Guide: United Arab Emirates

A. Is Debt Traded in Your Jurisdiction and What Transfer Mechanisms Are Used? How Do Buyers Ensure

that They Obtain the Benefit of the Security and Guarantees Associated with the Transferred Debt? .......... 20

X. Agent and Trust Concepts ............................................................................................................ 20

A. Is the Agent Concept (Such as a Facility Agent under a Syndicated Loan) Recognised in Your Jurisdiction? . 20

B. Is the Trust Concept Recognised in Your Jurisdiction? ................................................................................................ 20

XI. Enforcement of Security Interests and Borrower Insolvency ................................................... 21

A. What Are the Circumstances in Which a Lender Can Enforce Its Loan, Guarantee or Security Interest?

What Requirements Must the Lender Comply with? ................................................................................................... 21

XII. Methods of Enforcement ............................................................................................................... 21

A. How Are the Main Types of Security Interest Usually Enforced? What Requirements Must a Lender

Comply with? .......................................................................................................................................................................... 21

XIII. Rescue, Reorganisation and Insolvency ........................................................................................ 22

A. Are Company Rescue or Reorganisation Procedures (Outside of Insolvency Proceedings) Available in Your

Jurisdiction? How Do They Affect a Lender's Rights to Enforce Its Loan, Guarantee or Security? ................... 22

B. How Does the Start of Insolvency Procedures Affect a Lender's Rights to Enforce its Loan, Guarantee or

Security? ................................................................................................................................................................................... 22

C. What Transactions Involving Loans, Guarantees, or Security Interests Can Be Made Void if the Borrower,

Guarantor or Security Provider Becomes Insolvent? .................................................................................................... 23

D. In What Order Are Creditors Paid on the Borrower's Insolvency? ......................................................................... 24

XIV. Cross-Border Issues on Loans ....................................................................................................... 25

A. Are There Restrictions on the Making of Loans by Foreign Lenders or Granting Security (over All Forms

of Property) or Guarantees to Foreign Lenders? ........................................................................................................... 25

B. Are There Exchange Controls that Restrict Payments to a Foreign Lender under a Security Document,

Guarantee or Loan Agreement? ......................................................................................................................................... 26

XV. Taxes and Fees on Loans, Guarantees and Security Interests .................................................. 26

A. Are Taxes or Fees Paid on the Granting and Enforcement of a Loan, Guarantee or Security Interest? .......... 26

B. Are There Strategies to Minimise the Costs of Taxes and Fees on the Granting and Enforcement of a

Loan, Guarantee or Security Interest? .............................................................................................................................. 27

XVI. Reform ............................................................................................................................................. 27

A. Are There Any Proposals for Reform? ............................................................................................................................. 27

XVII. About the Authors ............................................................................................................................. 28

A. Bashir Ahmed, Partner ......................................................................................................................................................... 28

B. Rahat Dar, Associate ............................................................................................................................................................. 28

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks!

I. Overview of the Lending Market

A. What Have Been the Main Trends and Important Developments

in the Lending Market in Your Jurisdiction in the Last 12 Months?

As the market continues to recover from the 2008 financial crisis, the United Arab Emirates

(UAE) is starting to see a steady increase in bank and company appetite for lending. There

is a growing trend for acquisition, project and working capital financing through dual-

tranche (conventional and Islamic finance) structures. We have also seen increased

instances of UAE and overseas companies approaching UAE financial institutions to fund

their overseas construction projects and expansions plans (for example, financing retail

outlets overseas).

The creating of security interests in the UAE (outside the free zones) is principally governed

by:

■ UAE Federal Law No. 5 of 1995 relating to the law of Civil Transactions (Civil

code).

■ UAE Federal law No. 18 of 1993 relating to the law of Commercial Transactions

(Commercial Code).

There are several free zones in the UAE and each free zone has its own regulations for

creating security interests by entities licensed within that zone and/or over property

located within it. However, aside from the creation and enforcement of security interests in

the UAE, this chapter is restricted to security in the Jebel Ali Free Zone Authority (JAFZA),

the first free zone in the UAE, around which the laws and procedures of most other free

zones are modelled. For security interests created in the Dubai International Financial

Centre (DIFC), see Section II.A.1.d.

Finance Multi-Jurisdictional Guide: United Arab Emirates

II. Forms of Security over Assets

A. Real Estate

1. What Is Considered Real Estate in Your Jurisdiction? What Are the Most

Common Forms of Security Granted over It? How Are They Created and

Perfected (That Is, Made Valid and Enforceable)?

a. Real Estate

Real estate constitutes land and permanent structures on land that cannot be moved

without suffering damage or alteration.

The most common categories of real estate and real estate interests over which security can

be granted are:

■ Freehold land.

■ Buildings and construction on freehold land.

■ Leasehold interests in land.

■ Buildings and construction on leasehold land.

■ Usufruct (that is, the right to use (including develop), enjoy and occupy land or

property belonging to another person for a fixed term).

Mortgages over freehold land are generally registered with the land department in the

relevant Emirate (for example, in Dubai, this would be the Dubai Land Department). In

addition, some free zones provide their own mechanism for registering a mortgage over

freehold/leasehold interest relating to property located within that free zone.

b. Common Forms of Security

Depending on the type of financing and the nature of the borrower or obligors, common

forms of security include:

■ Guarantees (personal and corporate).

■ Assignment (over income, receivables, insurances (for example, personal or

project), contracts and project guarantees).

■ Chattel mortgage also known as a commercial pledge (over movable assets of a

company).

■ Real estate mortgage (over freehold interest, leasehold interest or building

constructed over leased land).

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks!

■ Business or commercial mortgage (includes tangible and intangible assets of a

company).

■ Pledges (over shares, accounts (including DSRA, collection accounts or project

accounts)).

There are three types of mortgage over real estate in the UAE, a mortgage over:

■ Land and buildings.

■ A leasehold interest in real property.

■ A building constructed on leased land.

A mortgage is defined in the Civil Code as a contract by which a creditor acquires the right

to be satisfied from the proceeds of the sale of the mortgaged real estate in priority to

unsecured creditors and other secured creditors of the debtor. To have effect, a mortgage

must be registered. The time of registration of the mortgage determines priority among

mortgages over the same real estate.

The mortgagor must be the owner of the mortgaged property. It is not essential that the

mortgagor be the principal obligor of the debt that is secured by the mortgage; the

mortgagor can be a guarantor of the debt.

Legislation now exists in Dubai that, among other things, governs the registration of

property and security interests by expatriates in certain demarcated zones. The Dubai Land

Department has exclusive jurisdiction to register the following three types of title in the

name of foreign nationals and foreign-owned companies in certain demarcated areas (Law

No. 7 of 2006 on Registration of Real Property in the Emirate of Dubai and its implementing

regulations):

■ Freehold.

■ Long-term lease (99 years).

■ Usufruct (musataha), to receive the benefit from the property (up to 50 years).

The developer must register any disposition of an off-plan property in the Interim Register,

which is maintained by the Dubai Land Department (Law No. 13 of 2008 regulating Initial

Property Registration in the Emirate of Dubai). The disposition of a completed property must

be registered in the Real Property Register, also maintained by the Dubai Land Department.

It is unclear, however, which party is responsible for registration. Both parties must attend

the Dubai Land Department to complete registration. A disposition that is not registered in

the Interim Register or the Real Property Register is invalid.

Each unit owner (defined as a person who is registered with the Dubai Land Department as

the owner, including the tenant under a long term lease, of a flat, villa, house or other real

estate) can create a mortgage over that unit in favour of a bank or financial institution (Law

No. 27 of 2007 concerning the Ownership of Joint Properties (Condominiums) in the Emirate of

Dubai).

Finance Multi-Jurisdictional Guide: United Arab Emirates

Security interests relating to real estate in demarcated zones in the Emirate of Abu Dhabi

can also be registered. The following are permitted (Law No. 19 of 2005 concerning Property

Ownership in the Emirate of Abu Dhabi):

■ For UAE nationals: to own freehold title to land anywhere in Abu Dhabi.

■ For nationals of the Gulf Co-operation Council (GCC): to own freehold title to

land in certain demarcated areas.

Law No. 19 of 2005 was amended in February 2007 to permit non-UAE nationals to:

■ Own buildings in certain demarcated areas (but not the underlying land).

■ Enter into a long-term lease agreement (up to 99 years) for real property in those

demarcated areas under agreements.

■ Enjoy usufruct rights over real property under agreements of up to 50 years.

Holders of usufruct rights in excess of ten years can sell or mortgage their

interests without seeking the permission of the land owner.

In the Jebel Ali Free Zone (JAFZ), a mortgage can be created over a building constructed on

leased land.

c. Formalities

Mortgages over real property must be both:

■ In writing.

■ Registered with the appropriate real estate authority in each Emirate. The

registered mortgage deeds are generally pre-printed documents prescribed by

the relevant authorities.

In the JAFZ, all land is owned by the government of Dubai. The JAFZ Authority (JAFZA)

leases land for construction of office premises and warehouses. Under the provisions of the

standard lease agreement between the JAFZA and a lessee, the lessee can assign its rights

under the lease in favour of a lender. All assignments of lease rights must be registered

(using prescribed forms) with the JAFZA.

d. Security in the DIFC

The Dubai International Financial Centre (DIFC) is unique among the free zones as it has an

entirely separate body of laws and regulations. The relevant security laws include the:

■ Law of Security (DIFC Law 8 of 2005, as amended), which, subject to certain

exclusions, applies to all transactions, regardless of their form, that create a

security interest in personal or real property by contract.

■ Real Property Law (DIFC Law 4 of 2007), which specifically covers mortgages

over land.

■ DIFC Security Regulations (Security Regulations).

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks!

To perfect a security interest in the DIFC, it must be filed in the Security Registry. If the

security holder is a natural person, he must submit the following information to the

registrar:

■ His identity.

■ His residence and domicile.

■ Any other information required under the Security Regulations, for example, a

financing statement.

The Security Regulations also govern attachment, perfection and enforcement of a security

interest in financial property.

Account holders can pledge eligible securities held in the Central Securities Depositary

(CSD) of the Dubai International Financial Exchange (DIFX) by submitting a pledge

instruction to the CSD in favour of a pledgee. The CSD designates pledged eligible

securities as being held to the order of and controlled by the pledgee. The DIFX will not

accept any instructions from the account holder unless otherwise instructed by the pledgee.

B. Tangible Movable Property

1. What Is Considered Tangible Movable Property in Your Jurisdiction? What

Are the Most Common Forms of Security Granted over It? How Are They

Created and Perfected?

a. Tangible Movable Property

Tangible movable property includes:

■ Machinery.

■ Trading stock (inventory).

■ Aircraft and ships.

Under the Commercial Code, all property that is not classified as immovable is considered

to be movable property. Tangible property includes goods, inventory, stores and

machinery.

The Commercial Code provides for the creation of the following types of security interests

over tangible (and intangible) movable property.

b. Common Forms of Security

Business/commercial mortgage. A business/commercial mortgage is a mortgage of

movable assets of an entity. It can only be created in favour of banks or other financial

institutions. The definition of a business mortgage/commercial includes (Commercial Code):

Finance Multi-Jurisdictional Guide: United Arab Emirates

■ All of a company's tangible movable property comprising:

• goods;

• stores;

• machinery; and

• tools.

■ All of a company's intangible movable property, such as:

• contract rights;

• goodwill;

• trade name;

• intellectual property; and

• licence rights.

The mortgaged assets must be described in as much detail as possible. If they are not, only

the following intangible property is deemed mortgaged (Commercial Code):

■ Trade name.

■ Contract rights.

■ Goodwill.

Real estate owned by the business is not covered by a business mortgage. However, the

landlord of the premises has a lien over the mortgaged assets in the leased premises for

unpaid rent (subject to a maximum of two years' rent) in priority to the mortgagee's rights

(Commercial Code).

Chattel mortgage. Unlike the business/commercial mortgage, the chattel mortgage, also

known as a commercial pledge cannot either:

■ Be perfected through registration.

■ Mortgage intangible assets of a company.

■ A chattel mortgage is a pledge over movable property. A chattel mortgage can be

created over:

■ Stock in trade or inventory.

■ Movable plant and machinery.

■ Receivables.

■ Negotiable instruments.

Other mortgages. In addition to the above, mortgages can be granted and registered over:

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks!

■ Vehicles. There may be cases where the scope of the mortgage is not clear. For

example, a detachable trailer attached to a vehicle, may fall outside the scope of

the mortgage, depending on how the mortgage was registered.

■ Vessels.

■ Aircraft.

■ The UAE is a signatory to the (Federal Decree No. 32 of 2006):

■ Convention on International Interests in Mobile Equipment (Cape Town, 2001)

(Convention).

■ Protocol to the Convention on Matters Specific to Mobile Equipment (Cape

Town, 2001) (Protocol).

Security over movables in the Jebel Ali Free Zone (JAFZ). A business/commercial

mortgage can be created by a JAFZ Authority (JAFZA)-licensed entity over its business

and/or specific assets can be registered with the JAFZA.

DIFC. See Section II.A.1.d.

c. Formalities

Business/commercial mortgage. To be valid and effective, a business mortgage must be:

■ In writing (with specific details of assets covered).

■ Executed before a public notary.

■ Registered in the Commercial Register (only the Emirates of Dubai and Abu

Dhabi currently register business mortgages in the commercial register). Once

registered, the mortgage is valid for five years.

Notice of the mortgage must be published in an Arabic daily newspaper two weeks before

registration.

Chattel mortgage. To create a chattel mortgage, possession of the pledged asset must be

transferred to the pledgee or a third party (that is, the bailee), who must retain possession

until either:

■ The debt is satisfied.

■ The asset is placed in common possession to prevent the pledgor from disposing

of the pledged asset without the pledgee's consent.

The transfer of possession can be actual or constructive.

Other mortgages. A vehicle mortgage is registered with the local traffic police, the road or

transport authority and a notation is made in the title deed of the vehicle. The borrowing

party still retains the legal ownership of the vehicle, subject to the mortgage.

A mortgage over a vessel can be created by a notarised instrument that must be registered

in the register of ships (in the jurisdiction where the vessel is registered). Vessel mortgage in

Finance Multi-Jurisdictional Guide: United Arab Emirates

the UAE are created under the Commercial Maritime Law No. 26 of 2981 (as amended by

law No. 11 of 1988) (Maritime Law). The Maritime Law permits the mortgage of a vessel if

its total tonnage exceeds ten tonnes. A vessel being mortgaged in the UAE must be

registered with the National Transport Authority (NTA) (that is, the vessel should maintain

a UAE flag). A UAE vessel mortgage must be created once both:

■ A notarised vessel mortgage agreement is registered with the NTA.

■ The NTA has issued a new vessel registration certificate noting the mortgage

registered in favour of the mortgage.

A mortgage over an aircraft, registered in the UAE can be created by submitting a copy of

the executed aircraft mortgage agreement to the UAE General Civil Aviation Authority

(GCAA). However, the UAE Federal Act No. 20 of 1991 promulgating the Civil Aviation

Law (Civil Aviation Law) does not specify the formalities for the creation and registration

of mortgages over the UAE-registered aircraft. However, in practice, the GCAA notes a

mortgagee's interest over a UAE-registered aircraft. Once the mortgage is perfected, the

GCAA issues a certificate of registration confirming the details of the owner, the operator

and the financing bank as mortgagee. In addition to the registration of the mortgage with

the GCAA, banks and financial institutions also require the registration of an additional

security over the aircraft (airframe and engines) at the International Registry pursuant to

the Cape Town Convention on International Interests in Mobile Equipment 2001 as adopted

under UAE law. Such registration is effected through the GCAA, which acts as an

Authorised Entry Point in relation to the International Registry for the UAE.

Security over movables in the JAFZ. The business or commercial mortgage is registered by

completing the JAFZA's standard mortgage registration forms.

DIFC. See Section II.A.1.d.

C. Financial Instruments

1. What Are the Most Common Types of Financial Instrument over Which

Security Is Granted in Your Jurisdiction? What Are the Most Common

Forms of Security Granted over Those Instruments? How Are They

Created and Perfected?

a. Financial Instruments

Shares (in private or public companies) are the most common financial instruments that

may be pledged as security.

b. Common Forms of Security

Commercial pledge. A commercial pledge can be granted over both (Commercial Code):

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks!

■ Negotiable instruments.

■ Nominative instruments (that is, documents with specified obligees).

Security over shares under the Companies Law. The UAE Federal Law No. 8 of 1984, as

amended regarding commercial companies (Companies Law), regulates the creation of

mortgages and pledges over shares of public shareholding and private shareholding

companies.

Shares can be mortgaged by delivering them to the mortgagee (Article 164, Companies Law).

This is subject to the following conditions (Article 162, Companies Law):

■ Ownership of shares is transferred on entry of the disposition in the Commercial

■ The entry of the disposition must be endorsed on the shares.

■ The disposition becomes effective against the company or third parties only from

the date of its entry in the register.

Pledge over shares in the Jebel Ali Free Zone (JAFZ). The Implementing Regulations

No.1/92 (Free Zone Establishment Regulations) and Implementing Regulations No. 1/99

(Free Zone Company Regulations) provide for the creation of a pledge over shares of Free

Zone establishments and companies respectively.

c. Formalities

A commercial pledge is created by endorsing the relevant instrument indicating that the

instrument has been pledged and perfected by delivery of the relevant instrument to the

pledgee.

A valid pledge over shares of a Free Zone establishment or company requires:

■ Execution of certain forms, prescribed by the JAFZ Authority (JAFZA), by the

pledgor, pledgee and the company whose shares are being pledged.

■ Filing executed documents with the JAFZA to register the pledge.

Under UAE law, shares are treated as movable assets. Therefore, a share pledge requires

possession of the certificates for the pledged shares. This is not always possible, given that

most LLC and free zone companies do not issue share certificates.

In certain free zones it is possible to perfect a share pledge by registration (over the shares

of a free zone company in that free zone) with the free zone. This will prevent the free zone

company from transferring the pledge shares or otherwise dealing with the pledged shares,

until such pledge is released by the pledgee.

In the case of a share pledge over shares registered on stock exchanges, it will be necessary

to comply with the specific requirements of the particular exchange and the relevant

regulatory bodies in the UAE.

In respect of the Dubai International Financial Centre (DIFC), see Section II.A.1.d.

Finance Multi-Jurisdictional Guide: United Arab Emirates

D. Claims and Receivables

1. What Are the Most Common Types of Claims and Receivables over Which

Security Is Granted in Your Jurisdiction? What Are the Most Common

Forms of Security Granted over Claims and Receivables? How Are They

Created and Perfected?

a. Claims and Receivables

The most common types of claims and receivables over which security is granted are

receivables, income and insurances.

b. Common Forms of Security

Common forms of security include assignments of receivables, income and insurances.

c. Formalities

Under UAE law, an assignment of rights requires only notification from the assignor to the

third party, confirming the assignment to the assignee. Where this is not possible or

practical (for example, the assignment of income for a retail business), the banks may

require such income to be deposited into a collection account (that will be covered by an

accounts pledge).

E. Cash Deposits

1. What Are the Most Common Forms of Security over Cash Deposits? How

Are They Created and Perfected?

a. Common Forms of Security

The most common form of security over cash deposits is an accounts pledge.

b. Formalities

The UAE does not recognise the concept of a floating charge, therefore, a pledge over an

account relates to the sums standing in the pledged account on the date of the pledge

agreement. Consequently, banks usually require the pledge to be amended on a periodic

basis or at the request of the bank, so as to pledge the new sums standing in credit in the

pledged account.

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks!

F. Intellectual Property

1. What Are the Most Common Types of Intellectual Property over Which

Security Is Granted in Your Jurisdiction? What Are the Most Common

Forms of Security Granted over Intellectual Property? How Are They

Created and Perfected?

a. Intellectual Property

It is not common to grant security over intellectual property (IP) in the UAE. IP rights are

generally only pledged by a commercial mortgage.

b. Common Forms of Security

See Section II.F.1.a.

c. Formalities

See Section II.F.1.a.

G. Problem Assets

1. Are There Types of Assets over Which Security Cannot Be Granted or

Can only Be Granted with Difficulty? Which Assets Are Difficult or

Problematic When Security Is Granted over Them?

a. Future Assets

The concept of security over future assets does not exist in the UAE. Therefore, a floating

charge is not permitted. The assets to be pledged must be in existence at the time of the

creation of the pledge (see Section II.E.1.c).

b. Fungible Assets

As the UAE does not recognise the concept of a floating charge, a pledge over assets such as

raw material stock in a warehouse that will be used to manufacture end products (for

example, plastic pellets used in the manufacture of plastic products) may become

indistinguishable. In these circumstances, the bank requires an assignment over income

generated from the sale of the end products and may ask for any pledge over such assets to

be amended on a periodic basis or at the request of the bank, so as to cover any changes in

the quantity of the pledged assets. This would result in a new fixed charge over the revised

quantity of the pledged assets.

Finance Multi-Jurisdictional Guide: United Arab Emirates

III. Release of Security over Assets

A. How Are Common Forms of Security Released? Are Any

Formalities Required?

Most unregistered securities can be released with a release and discharge letter from the

secured party. For registered securities (such as a land mortgage or vehicle charge) it may

be necessary to follow the procedure of the relevant regulatory authority. There may also be

additional requirements for securities registered with free zones.

IV. Special Purpose Vehicles (SPVs) in Secured

Lending

A. Is It Common in Your Jurisdiction to Take Security over the

Shares of an SPV Set up to Hold Certain of the Borrower's

Assets, Rather Than to Take Direct Security over Those Assets?

It is not common to take security over the shares of a special purpose vehicle (SPV) set up to

hold certain of the borrower's assets. However, in relation to financing a fleet of aircraft for

airlines or private operators, the structure involves an SPV (jointly owned by the financier

and the relevant airline) that is the owner of the aircraft. The SPV then leases the aircraft to

the airline.

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks!

V. Quasi-Security

A. What Types of Quasi-Security Structures Are Common in Your

Jurisdiction? Is There a Risk of Such Structures Being

Recharacterised as a Security Interest?

In the UAE, a significant number of recent financings have been structured according to

Islamic Sharia law. Islamic financing structures rely heavily on the quasi-securities listed

below.

1. Sale and Leaseback

Ijarah financings are similar to conventional sale and leasebacks. The sale forms the basis of

the Ijarah transaction although, for certain assets (typically land) the sale is often not

registered to avoid the transfer charges.

2. Factoring

Factoring, hire purchase, retention of title and other forms of quasi-security are used in the

UAE. The UAE courts respect the parties' decision regarding the form of the transaction.

Therefore, the risk of such structures being recharacterised as a security interest is low.

3. Hire Purchase

See Section V.A.2.

4. Retention of Title

See Section V.A.2.

Finance Multi-Jurisdictional Guide: United Arab Emirates

VI. Guarantees

A. Are Guarantees Commonly Used in Your Jurisdiction? How Are

They Created?

Personal and corporate guarantees are commonly used in the UAE. Guarantees must be in

writing and specify the amount secured by the guarantee.

VII. Risk Areas for Lenders

A. Do Any Laws Affect the Validity of a Loan, Security or Guarantee

(or the Terms on Which They Are Made or Agreed)?

1. Financial Assistance

The UAE Companies Law does not prohibit financial assistance. There is no doctrine

requiring corporate benefit to grant security.

2. Corporate Benefit

A parent company can guarantee, or grant a security in respect of, a loan given to a related

company (that is, a company in the same corporate group), subject to two conditions:

■ The parent company's constitutional documents contemplate a grant of this type

of security.

■ Necessary corporate approvals (that is, board resolution and, where necessary,

shareholders' resolution) are obtained.

A subsidiary can also guarantee, or grant a security in respect of, a loan to its parent, subject

to the conditions above.

3. Loans to Directors

The Companies Law prohibits a company from making a loan of any kind to a director of

the company and from guaranteeing the payment to a director of a loan made by any

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks!

person to that director. The exception to this prohibition relates to loans made to directors

by companies whose ordinary business is lending money. The exemption applies only if a

loan is given in the ordinary course of the company's business and is not on more

favourable terms than would be offered to an unconnected customer of the company.

4. Usury

The courts of the UAE generally permit the charging of interest of up to 12% per annum.

B. Can a Lender Be Liable under Environmental Laws for the Actions

of a Borrower, Security Provider or Guarantor?

A lender who holds or enforces security over a vessel may be liable for environmental

damage caused by that vessel.

VIII. Structuring the Priority of Debts

A. What Methods of Subordination Are There?

1. Contractual Subordination

Subordination of debt is possible under UAE law. It is usually achieved by a subordination

agreement between the senior and junior creditors.

2. Structural Subordination

Structural subordination of loans is not common. However, banks regularly require

shareholders to enter into agreements to subordinate their loans to the banks' loans to their

corporate entities.

3. Inter-Creditor Arrangements

Inter-creditor arrangements are common for syndicated financing. The parties to the inter-

creditor agreement would include the borrower, lenders, facility agent, security agent, lead

arranger (if applicable) and the obligors.

Finance Multi-Jurisdictional Guide: United Arab Emirates

IX. Debt Trading and Transfer Mechanisms

A. Is Debt Traded in Your Jurisdiction and What Transfer

Mechanisms Are Used? How Do Buyers Ensure that They Obtain

the Benefit of the Security and Guarantees Associated with the

Transferred Debt?

Secured debt can be transferred through participation agreements. Under a participation

agreement, a pledgee or registered mortgagee continues as the pledgee or registered

mortgagee but transfers all or part of the loan, on a funded or unfunded basis. Participation

may be disclosed or undisclosed, depending on the terms of the participation agreement.

X. Agent and Trust Concepts

A. Is the Agent Concept (Such as a Facility Agent under a Syndicated

Loan) Recognised in Your Jurisdiction?

The concept of the facility and security agent are recognised in the UAE. The facility agent

would generally act on the instructions of (and on behalf of) the lenders and/or the

instructions of the majority lenders (as per standard Loan Market Association (LMA)). The

security agent can enforce the security in the courts of the UAE, as agent of the lenders.

B. Is the Trust Concept Recognised in Your Jurisdiction?

The UAE is a civil law jurisdiction that does not recognise a common law trust.

The concept of a local security agent, holding security for the benefit of third parties, is

recognised. A trustee under a trust arrangement in another jurisdiction would be

recognised as the equivalent of a security agent. Therefore, a security trustee could enforce

its rights in the UAE courts.

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks!

XI. Enforcement of Security Interests and

Borrower Insolvency

A. What Are the Circumstances in Which a Lender Can Enforce Its

Loan, Guarantee or Security Interest? What Requirements Must

the Lender Comply with?

Generally, a secured creditor can enforce its security only after both:

■ An event of default has occurred.

■ A UAE court has granted an enforcement order. Only a pledge of cash can be

enforced without a court order.

XII. Methods of Enforcement

A. How Are the Main Types of Security Interest Usually Enforced?

What Requirements Must a Lender Comply with?

All security interests, with the exception of pledges over cash, can only be enforced through

a court. The concept of self-help (or extra-judicial enforcement) is not recognised. The

security must be enforced by a sale of the secured asset in a public auction.

Enforcement of a mortgage over real property is time consuming. As a matter of policy,

mortgages over property, owned and occupied by a UAE national as his personal residence,

generally cannot be enforced. Further, in the Emirate of Abu Dhabi, enforcement of a

mortgage over real estate requires governmental approval and approval has not been given

in over two decades. However, this is expected to change in view of the Abu Dhabi and

Dubai governments' support for the ownership of freehold and leasehold property by

foreign nationals.

Finance Multi-Jurisdictional Guide: United Arab Emirates

XIII. Rescue, Reorganisation and Insolvency

A. Are Company Rescue or Reorganisation Procedures (Outside of

Insolvency Proceedings) Available in Your Jurisdiction? How Do

They Affect a Lender's Rights to Enforce Its Loan, Guarantee or

Security?

No company rescue or reorganisation procedures, outside of insolvency proceedings, are

available in the UAE.

B. How Does the Start of Insolvency Procedures Affect a Lender's

Rights to Enforce its Loan, Guarantee or Security?

Legal actions cannot be brought by, or pursued against, the insolvent debtor after the

pronouncement of the bankruptcy judgment, except for actions (Commercial Code):

■ Connected with assets, rights and disposals that are specifically exempt from any

distraint (that is, seizure of property for security or satisfaction of a debt) on

administration or disposal under the Commercial Code.

■ That the law permits the insolvent debtor to bring in connection with the

bankruptcy proceedings.

■ Under criminal law.

■ Preparing for a judgment to close proceedings.

After the bankruptcy judgment is pronounced, all creditors (including those who are

secured) must deliver to the trustee in bankruptcy:

■ The documents relating to their debts.

■ A statement of the debts and security interests granted in relation to them (where

applicable).

Creditors who fail to submit their claims within the stipulated times are not entitled to

participate in any current distribution. These creditors can file an objection to the current

distributions. However, objections do not stop the current distributions ordered by the

judge, supervising the insolvent debtor's estate. Rather, they entitle the creditors to

participate in any further distributions.

The bankruptcy rules were enacted by the Commercial Code in 1993. In practice, these

provisions remain largely untested as most bankruptcy petitions brought before the UAE

courts to date have been rejected or settled outside court.

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks!

C. What Transactions Involving Loans, Guarantees, or Security

Interests Can Be Made Void if the Borrower, Guarantor or

Security Provider Becomes Insolvent?

Transactions entered into by the insolvent debtor during the "preference" or "suspect"

period (under the Commercial Code) before the announcement of bankruptcy can be set

aside by the court or trustee in bankruptcy. The duration of the preference period, however,

is unclear.

The Commercial Code refers to the suspension of payments date, which is a notional date

before the court's declaration of bankruptcy. Transactions by the insolvent debtor after this

date can be challenged. The Commercial Code does not specify the date of suspension of

payments and appears to leave determination of this date to the bankruptcy court.

Therefore, a bankruptcy court determines the date on a case-by-case basis, subject to the

following basic conditions (Articles 658 and 659, Commercial Code):

■ If the bankruptcy judgment does not specify the date of suspension of payments,

the date of the bankruptcy judgment is deemed to be the date of suspension of

payments (Article 658(1)).

■ If the debtor has died, gone out of business or lost his legal capacity before

pronouncement of the bankruptcy judgment, the date of the debtor's death,

going out of business or loss of legal capacity is deemed to be the provisional

date of suspension of payments (Article 658(2)).

■ The court can amend the provisional date for suspension of payments to a date

"ten days after the date on which the verified list of debts is deposited with the

court clerk's office" (Article 659(1)).

■ The cut-off date (that is, the date of suspension of payments) cannot precede the

date of the bankruptcy judgment by more than two years (Article 659(2)).

However, it should be noted that the critical date is the date of the "bankruptcy judgment".

Bankruptcy judgment appears to mean the court's determination that the relevant party

meets the statutory bankruptcy criteria (set out in Article 645(1) of the Commercial Code),

as opposed to the final decision regarding the distribution of assets to creditors.

In the bankruptcy judgment, a civil court must state that the relevant party "fails to pay his

commercial debts by their due dates because his financial status has deteriorated and his

credit undermined" (Article 645(1), Commercial Code). Considering the nature of civil court

proceedings in the UAE, this statement will take a substantial amount of time after the

filing of a voluntary or involuntary bankruptcy petition. Interested parties (that is,

creditors) will therefore have the opportunity to present evidence regarding:

■ The substantive question as to whether the relevant party should be declared

bankrupt.

■ The date of suspension of payments.

Finance Multi-Jurisdictional Guide: United Arab Emirates

A bankruptcy court in the UAE therefore appears to have discretion to set aside certain

actions by a grantor of security during a period of up to two years before the declaration of

bankruptcy under the circumstances set out in Article 696 of the Commercial Code or if the

court determines that both:

■ Such actions were harmful to the creditors of the grantor of security.

■ The lenders were aware at the time that the grantor of the security was insolvent.

However, the following actions are not binding on the insolvent debtor's creditors if they

are taken during the suspect period (Article 696, Commercial Code):

■ Donations, with the exception of small customary gifts.

■ Payment of any term facilities before the due date.

■ Payment of immediate debts other than in the form agreed.

■ Granting a mortgage or any other charge on the insolvent debtor's assets to

secure a prior debt.

Further, an insolvent debtor's transaction (subject to Article 696) during the suspect period

can be ruled as unenforceable against the creditors if the following requirements are met

(Article 697, Commercial Code):

■ The transaction is harmful to the creditors.

■ The party to whom the disposal was made was aware, at the time, of the debtor's

insolvency. An insolvent person is someone who "uses extraordinary or illegal

means to settle his debts, thus indicating that his financial situation is bad"

(Article 645(2), Commercial Code).

D. In What Order Are Creditors Paid on the Borrower's Insolvency?

On the borrower's insolvency, the following priority of claims applies:

■ Statutory and mandatory claims preferred by law. These are:

• wages and salaries due to the employees of the insolvent debtor for the

30-day period before the declaration of bankruptcy;

• tax claims for the two-year period preceding the bankruptcy judgment.

■ Secured creditors' claims. Secured creditors are entitled to receive the proceeds

from the sale of the secured asset to satisfy their claim, provided that:

• all formalities required to perfect that security interest have been

complied with;

• the creditor has lodged his claim when called for by the trustee in

bankruptcy;

• the claim is uncontested.

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks!

If a secured creditor's claim cannot be satisfied in full, he becomes an unsecured creditor for

the purpose of the outstanding balance. He will be paid a pro rata share of the remaining

funds of the insolvent estate.

Security is generally created by transfer of possession of the secured asset or registration of

the security. The time of registration of a security interest over the same property

determines priority among those interests.

If a security interest has not been validly perfected, the creditor ranks as an unsecured

creditor on insolvency.

XIV. Cross-Border Issues on Loans

A. Are There Restrictions on the Making of Loans by Foreign

Lenders or Granting Security (over All Forms of Property) or

Guarantees to Foreign Lenders?

Security over immovable property cannot be granted to foreign banks unless they have a

commercial banking licence in the particular Emirate where the immovable property is

located, with the exception of the Dubai International Financial Centre (DIFC) (see below). In

practice, however, foreign banks lending to UAE borrowers normally appoint a local

security agent to hold the UAE-located security on their behalf.

Security over movable property can be granted to non-resident foreign banks, except in the

following cases:

■ A business mortgage, whether under the Commercial Code or in relation to

assets in the Jebel Ali Free Zone (JAFZ), can only be granted to banks or financial

institutions with a commercial banking licence.

■ A pledge over funds in a bank account can only be granted to the account-

holding bank.

■ In practice, foreign non-resident banks normally appoint an onshore security

agent to hold the security on their behalf.

Foreign lenders can hold security in the DIFC. Foreign lenders can be mortgagees on vessel

mortgages.

Finance Multi-Jurisdictional Guide: United Arab Emirates

B. Are There Exchange Controls that Restrict Payments to a Foreign

Lender under a Security Document, Guarantee or Loan

Agreement?

There are no exchange controls restricting payments to foreign lenders. The UAE Dirham

(AED) is fully convertible and there are no restrictions on the movement of funds

(denominated in Dirhams, US dollars or otherwise) into or out of the UAE.

XV. Taxes and Fees on Loans, Guarantees and

Security Interests

A. Are Taxes or Fees Paid on the Granting and Enforcement of a

Loan, Guarantee or Security Interest?

1. Documentary Taxes

There are no applicable documentary taxes.

2. Registration Fees

Fees are payable to the local Emirate authority to register the security. Fees vary, depending

on the authority, and form a percentage of the secured amount (for example, 1% for a

mortgage over land and 0.2% for a mortgage over shares). These fees can be costly.

Enforcement of a security interest triggers court fees, prescribed by the relevant courts. If a

secured asset is sold by public auction, a public auction fee is also payable.

3. Notaries' Fees

Notarial fees for documents required to be notarised are 0.25% of the secured amount, up to

a maximum of AED10,000 (about US$2,720).

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks!

B. Are There Strategies to Minimise the Costs of Taxes and Fees on

the Granting and Enforcement of a Loan, Guarantee or Security

Interest?

There are no strategies available to minimise costs.

XVI. Reform

A. Are There Any Proposals for Reform?

No major reforms are anticipated in the area of security.

Finance Multi-Jurisdictional Guide: United Arab Emirates

XVII. About the Authors

A. Bashir Ahmed, Partner

Afridi & Angell

T +971 4 330 3900

F +971 4 330 3800

E bahmed@afridi-angell.com

W www.afridi-angell.com

Professional qualifications. New York State Bar, Attorney at Law; Lahore High Court Bar

Association, Advocate

Areas of practice. Banking and financial services; corporate and commercial; dispute

resolution; private equity, acquisitions; maritime, shipping and transport; infrastructure

projects and project finance.

B. Rahat Dar, Associate

Afridi & Angell

T +971 4 330 3900

F +971 4 330 3800

E rdar@afridi-angell.com

W www.afridi-angell.com

Professional qualifications. England and Wales, Solicitor

Areas of practice. Banking and finance; Islamic finance; corporate and commercial; mergers

and acquisitions; capital markets.