Legal Overview 

Among the most challenging issues facing international companies doing business in the United Arab Emirates (UAE) is the ability to take and perfect security over assets. This is due largely to the developing nature of the country's legal system, requiring businesses to resort to less orthodox methods to reduce risk in the event of default or non-payment.

Currently, only banks licensed by the UAE central bank can register and perfect security over a debtor's real property, business premises, vehicles, and company shares. Non-financial commercial companies have limited options to take security, which are largely regulated by the UAE civil law system, which incorporates elements of Shariah (Islamic Law). The primary laws governing security in the UAE are the core legal codes:

  • Federal Law No. 5 of 1985 regarding civil transactions ("Civil Code");
  • Federal Law No. 3 of 1987 promulgating the penal code ("Penal Code");
  • Federal Law No. 18 of 1993 regarding commercial transactions ("Commercial Code"); and
  • Federal Law No. 9 of 2016 regarding bankruptcy ("New Bankruptcy Law").

The New Bankruptcy Law is coming into effect at the end of 2016. It remains unclear how security will be treated in many of the court-supervised insolvency proceedings set out in the New Bankruptcy Law.

This article outlines typical forms of security and quasi-security seen in UAE commercial transactions for commercial parties. It does not address the security available to banks and financial institutions.

Post-Dated Checks

A post-dated check ("PDC") is a method of payment by which the debtor issues a check that is undated, or dated at some point in the future. PDCs are given by individuals or companies and are the most common form of "security" seen in UAE commercial transactions. While not creating any proprietary right over assets of an individual or company, issuing a check that is not honored (i.e. a "hot check") creates personal criminal liability for the signatory, whether the person be an individual or company manager.

In order to enforce, the creditor simply claims payment of the amount written on the PDC when the date comes due by presenting the check at a bank. If the PDC is honored then the debt is settled. But if the PDC bounces, the creditor must bring the bounced check to the police station, file a criminal complaint, and request that the police arrest the signatory of the bounced check until it is honored.

This is not always successful. In practice, criminal cases require the cooperation of the police and the public prosecutor's office. Governmental officials may be hesitant or reluctant to pursue a case for any number of reasons. It is also possible for a debtor to issue a PDC and then leave the UAE, where prosecution then becomes much more challenging.

Finally, even if the signatory of the PDC incurs criminal liability, this does help the creditor to recover the debt. Debt recovery requires a separate civil case.

Personal Guarantees and Corporate Guarantees

The Civil Code and the Commercial Code contain provisions on guarantee or "surety," which is one of the simpler types of quasi-security. While the Commercial Code provides that a guarantee can last up to 10 years from the date that it falls due, the Civil Code allows guarantors to escape liability after as little as six months. Making sure that a guarantee is granted under the Commercial Code is critical to avoiding this short-term expiration under the Civil Code.

Retention of Title

Retention of title allows a creditor to maintain title over goods or equipment even though the debtor is in possession of and continues to use and maintain the goods or equipment.

Retention of title is a common way of preserving a creditor's ownership interest in goods or equipment until payment is made in full. It may also deter debtors from selling the goods or equipment to innocent third parties. But there is considerable uncertainty as to how retention of title agreements will be viewed by the courts, and under current law and practice, retention of title cannot be perfected. This undermines its effectiveness against any disposal to a bona fide third party, and it unknown to what extent a UAE court would respect the intent of the parties or reject retention of title against a third party acting in good faith.

Therefore, retention of title is a common contractual arrangement, but its effectiveness as "security" may be questionable.

Assignment of Debtor Receivables

A debtor's future contractual right to monies can be assigned to a creditor if certain criteria are met. Article 1190 of the Civil Code provides for the assignment of rights with the consent of the transferor (debtor), the transferee (creditor), and the obligor of the receivable.

Article 1113 of the Civil Code sets out additional requirements to be met, which primarily include:

  • the receivable to be assigned must be unconditional;
  • the performance thereof must not be deferred to an unknown future date;
  • it must be limited in time to a specific time limit; and
  • the receivable cannot be amended after it has been assigned.

In practice, assignments of receivables may be common by contract, but enforcement in courts has not been clearly tested and is not guaranteed, particularly in insolvency or bankruptcy proceedings.

Commercial Pledge

The Commercial Code allows for the creation of a commercial pledge over a company's assets and movable property. Commercial pledges are only effective if possession of the pledged property passes to the creditor or a third party appointed by the creditor and debtor to maintain possession of the pledged property. The creditor, or the appointed third party, is deemed to have possession of the pledged property when it is placed at his disposal in a way that will lead others to believe that the property has come into his custody, or if he has received a deed representing the pledged property that vests unto the holder the sole right to take delivery of the property. Securing future assets that have not yet vested is not permitted.

When the debtor fails to pay on the date of maturity, the creditor may, after the lapse of seven days from the date of notice, submit a petition to the court authorizing him to sell the pledged property .

The priority of pledges is determined by the date of execution. Pledges via promissory notes are made valid by an endorsement stating that the value of the promissory note is for a pledge or security. Notarizing the pledge document can help a creditor identify the priority of claims in the event there are multiple claimants to the pledged asset.

Pledge Over Bank Accounts

Monies held in bank accounts can be pledged in favor of creditors with the agreement of the creditor, debtor, and the bank with which the account is held.

Has the security been perfected? Can the security be enforced?

Because perfection of security involves so many uncertainties, savvy creditors take a "belt and braces" approach to obtain as many forms of security as possible. A company trading with a UAE company that has a credit risk should consider asking for, and obtaining, the following prior to incurring a debt:

  • reservation of title over any goods sold for which full payment has not been made;
  • post-dated checks for the full amount of the debt;
  • personal guarantees from managers and shareholders;
  • if possible, assignments over receivables and pledges over bank accounts; and
  • any other forms of security that are available outside of the UAE, including in the Dubai International Financial Centre ("DIFC"), a free zone within Dubai, permits floating pledges.

As another challenge, the UAE does not have clear systems to determine whether one creditor is superior or subordinate to another. The New Bankruptcy Law does not, as of yet, provide further clarity on this system.