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In Brief:

  • Advisers to both lenders and borrowers may believe that in order to secure business assets, the only way forward is to register all business assets of a movable nature in the EIRC pursuant to the Movables Law.
  • Few lenders since 2020 elect to register security over a borrower’s business assets (commonly known as a commercial mortgage) in the Commercial Register.
  • However, the Commercial Register and the right to register business assets in the Commercial Register under the Commercial Code are not repealed, and parties are still able to register and to renew commercial mortgages in the Commercial Register. Yet there appear to be legal conflicts between the Commercial Code and the Movables Law in the registration of security over business assets.

We explore these below:

The new Commercial Code Law 50 of 2022 defines business and business assets as follows:

Article (36)

Business assets constitute a group of tangible and intangible property allocated for the practice of physical or virtual commercial activities, whether in technological sectors, via modern means of technology or using traditional methods.

Article (37)

1. Business assets shall include elements necessary for the commercial activity. Such elements are divided into tangible elements, such as goods, equipment, machines, tools, and intangible elements, such as customer contacts, goodwill, trade name, right to lease and industrial and intellectual property rights and licenses.

Federal Law 4 of 2020 on Security over Movables defines business assets that can be secured:

Article 3 Funds that may be pledged

Any movable property, tangible or intangible, or part thereof, or an indivisible right therein, whether current or in future, may be pledged, including the following:

  1. Accounts receivable unless they are part of a transaction for the transfer of a project.
  2. Credit accounts with banks, including the current and deposit accounts.
  3. Bonds and documents transferable through delivery or endorsement, which prove the entitlement of an amount or ownership of goods, including commercial instruments, bank deposit certificates, bills of lading and goods deposit certificates.
  4. Equipment and work tools.
  5. Tangible and intangible elements of the business.
  6. Goods intended for sale or renting, raw materials and those under manufacturing or transformation.
  7. Crop yields, animals and their products; this includes fish and bees.
  8. Fixtures.
  9. Any other movables that the laws applied in State stipulate their suitability to be pledged according to the provisions of this Law.

History

Since 1998, project lenders in a UAE project financing have taken security over all the business assets of project companies by way of Commercial Mortgages (“CM”) registered in the DED Commercial Register. In project finance transactions in relation to a borrower’s business assets, there were two key established government registers of importance, namely (i) the Commercial Register and (ii) the Real Estate Register for interests in land, such as leaseholds and musataha assets. Lenders took comfort that they had adequately perfected security by such registration until 2020 with the advent of Federal Law 4 of 2020 the Security over Movables law (“Movables Law”). From 2020 onwards, project assets including plant and machinery, were registered with the Emirates Integrated Registries Company L.L.C (“EIRC”) pursuant to the Movables Law.

It is worth noting that although the previous Movable Pledge Law 20 of 2016 (repealed by the Movables Law) contained a provision stating that registering pledges over tangible and intangible elements of the business in the EIRC was “without prejudice to the provisions of the Commercial Code”, such provisions have not been restated in the Movables Law. The Movables Law is silent on this point. Our understanding was that the “without prejudice” wording meant that the Commercial Code and the Movables Law would operate side by side, and the exclusion in the Movables Law based on the special register concept would apply to avoid duplicate security/registrations.

Since 2020, lenders in project financing have registered all business assets of a project company borrower as movable security in the EIRC, and renewed existing CM in the Commercial Register. However, both the Commercial Code and Movables Law cover the same ground. The key difference is that business assets registered under the Commercial Code have to be ascertained and renewed every 5 years. The Movables Law has no such limitation.

Conflict between CM and Movables Law security

In recent times the DED has in practice rejected applications to register CM renewals in the Commercial Register upon expiry of the 5 year statutory renewal period, on the basis that the business assets are movables, and asserted that such assets must now be registered in the EIRC. This is despite the undertaking of most borrowers in their finance documents undertaking to maintain the CM security and to renew it every 5 years according to the Commercial Code.

In general, borrowers are obliged in their finance and security agreements to keep the CM security registered and renew it when required. Borrowers have a statutory right under the Commercial Code to register the CM in the Commercial Register (not the EIRC), as well as the DED being obligated under the Commercial Code, and the Commercial Register Law, to register and renew the CM.

There appears to be a conflict between Article 4 of the Movables Law which says; “if there is a special register to register movable property (i.e. the Commercial Register) then such property cannot be registered in the EIRC”- , and Articles 45 - 47 of the Commercial Code regarding registration of CM. Article 46 of the Commercial Code says that a CM may only be made by a notarized contract registered in the Commercial Register. Article 47 says that the CM must be renewed every 5 years. There is also custom and practice that prevails in case of ambiguity by which project borrowers have historically renewed their CMs in the Commercial Register at the DED.

Some argue that the Commercial Register is not a special register but UAE law does not make that clear. There is ambiguity as to what constitutes a “special register” and the Movables Law provides no definition but market practice generally seems to be that a “special register” refers to a register held by a government authority covering specific types of assets- e.g. ships, shares, real estate etc.

As there is no definition of what constitutes a special register, it could possibly be argued that the Commercial Register fits into such a category. This is not clear however, and as noted above, registrations of CM have been rejected on the basis that the applicable registration should be done at the EIRC.

It appears that currently if a borrower wishes to renew a CM upon its expiry in the Commercial Register the DED may reject the application on the grounds that the same assets can be registered in the EIRC. However, by doing so the borrower may contravene Article 4 of the Movables Law if such assets should be registered in a special register such as the Commercial Register.

Furthermore, Article 44 (1) of the Movables Law provides fines and imprisonment if a deliberate registration of a security right is made (in the EIRC) in contravention of the provisions of the Movables Law.

Therefore, if lenders elect to register business assets in the EIRC instead of the Commercial Register, or if a borrower registers such assets in the EIRC upon renewal of its CM in the Commercial Register, the borrower may violate Article 44(1) of the Movables Law because the borrower is registering the security in the EIRC when it can be registered in the Commercial Register (if it is a special register).

Lenders have the option to register CMs in the Commercial Register or to elect to register business assets in the EIRC. The fact that a Commercial Register exists should not penalize parties if they choose to register in the EIRC.

Both the Commercial Code and Movables Law intended security over business assets to cover more than merely movable plant and machinery and to include IP, goodwill, receivables etc. and left it to lenders to decide where such assets should be registered. Only the Movables Law prohibits registration in more than one register where a “special register” exists. The issue does not arise where a new borrower is required to secure its business assets, but it arises where an existing borrower wishes to renew its CM. There needs to be some clarity to enable existing CMs to be renewed, and for borrowers and lenders to be able to determine in which register they should register business assets without penalty.

For the time being:

  1. lenders may consider that due to a change of law (Movables Law) the DED may no longer recognize CM renewals under the Commercial Code; and
  2. the change of law may impact some force majeure contractual provisions of project agreements and parties may need to amend their finance and security agreements to ensure that obligations to renew and keep the CM registered in the Commercial Register should be revised, to enable business assets to be registered in the EIRC.

If you require further information in this regard, please contact Alan Rodgers at a.rodgers@hadefpartners.com.

 

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