In September 2023, the Dubai International Financial Centre (DIFC) commenced public consultations on a new law of security. Following public consultations, the DIFC announced the enactment of the DIFC Law No. 4 of 2024 (the LoS) on 13 March 2024.
Repeal of prior law
The LoS repeals the prior law of security, i.e., Law No. 8 of 2005 (the ELoS) and the Financial Collateral Regulations 2019; with provisions relating to financial collateral arrangements being included in Part 8 of the LoS. The LoS, modelled on the UNCITRAL Model Law on Secured Transactions issued in 2016, includes digital assets within its scope and makes improvements to the ELoS while continuing to regulate security creation and perfection with respect to movable assets and fixtures and retain the existing security register and filing processes.
Background and basis
The ELoS has been repealed and replaced with the LoS in light of the “rapid developments in international trade and financial markets arising from technological developments” in order to bring the law of security regime “in line with international best practice” (as quoted from the consultation paper issued by the DIFC). As the issuance of the LoS coincided with the issuance of the new DIFC Digital Assets Law, the LoS also includes provisions relating to the creation of security interests over digital assets.
The LoS is largely based on the UNCITRAL Model Law on Secured Transactions issued in 2016, but includes changes that are designed to make the LoS work efficiently in the DIFC legal framework. As with the ELoS, the LoS addresses the key aspects applicable to security interests – the rules of creation, effectiveness against third parties, priorities and rights and obligations of third parties.
Key features
Certain key features of, and/or initiatives under, the LoS are as follows: (a) potential recognition of rent as a receivable, thereby permitting creation of security exclusively over such receivable; (b) introduction of a concept of an “acquisition security right” and related rules (including the stipulation of a “super priority” ranking in certain cases) which are designed to enhance the positon of, mainly: (i) creditors taking benefit of security interests in the context of acquisition financings; (ii) lessors of tangible assets where the lease term exceeds one year; and (iii) persons providing financing for commercial consignments; (c) introduction of provisions relating to creating and perfecting security interests over digital assets and electronic trade documents (defined in the DIFC Law of Obligations as documents in electronic form that are commonly used for trade in or transport of goods or the financing thereof); and (d) limitation of the application of anti-assignment provisions in certain types of contracts which would have prevented the assignment between security grantors and security creditors.
Further, the DIFC Financial Collateral Regulations 2019 (FCR 2019) have been repealed; the matters regulated thereunder will be regulated in Part 8 of the LoS which covers, among others and in addition to those already covered by the FCR 2019, commodity futures contracts and interests therein and money claims arising out of close out netting arrangements. Part 8 also stipulates rules governing, among others, effectiveness against third parties and priority of competing interests. The DIFC Securities Regulations 2019 continue with minor consequential amendments.
Unchanged aspects
It is also worth noting that no changes have been made to the security registry, filing processes and fees in order to retain a sense of continuity with respect to such matters from the ELoS.
The revision to the law of security indicates the DIFC’s aim to establish itself as a key hub for financial activity. The LoS enhances the clarity and certainty with respect to creation and perfection of security which will make secured lending more efficient.