Taking and enforcement of security in UAE and China

By Shi Peng, Al Tamimi & Company
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The market has seen, in recent years, increasing numbers of Chinese banks establishing a presence in the United Arab Emirates (UAE), including at the Dubai International Financial Centre (DIFC).

石鹏 Shi Peng Al Tamimi & Company 银行金融部律师 Associate in the Banking & Finance Department Al Tamimi & Company
Shi Peng
Associate in the Banking & Finance Department
Al Tamimi & Company

As a Chinese lawyer practising banking law in the UAE, the author is often called upon to ensure Chinese banks comprehensively understand the local legal environment. This article sheds some light on the taking and enforcement of security – which is always of essence to the banking business – in the UAE, in comparison with that under the laws of the PRC.

PRC law provides for three types of security – namely mortgage, pledge and lien, the perfection of which enables the secured party to enjoy a priority right over secured property above unsecured creditors and secured creditors subsequent in rank.

In comparison, generally under UAE law security would either be a mortgage or pledge without necessarily guaranteeing the right of priority, except for a registered mortgage or pledge. In practice, six types of security or quasi-security are widely used based on the type of property to be secured. These are discussed below.

Mortgage over immovable property

Under UAE law, very similar to that under PRC law, a mortgage over immovable property is perfected by signing a written mortgage contract and registering the contract with the relevant authority.

However, a mortgage over immovable property under UAE law differs from that under PRC law, in that under UAE law: (i) an interest in land could be freehold, leasehold, usufruct, musataha, granted or gifted, which will dictate the mortgageability of a property and impact the interest and value of a mortgagee; (ii) a mortgage over land will automatically extend to any building or structure to be constructed on the land in the future; and (iii) certain registered leases can be mortgaged.

Pledge over movable property

Under UAE law, registered mortgages can be granted over registered property such as vehicles, ships and aircraft, and such registered mortgages are perfected by signing a mortgage contract and registering the contract with the relevant authorities. While the perfection requirement of registered mortgage, or its equivalent, under PRC law is very similar to that under UAE law, the scope of mortgageable properties is more extensive.

Similar to that under PRC law, a possessory pledge can be granted over movable property under UAE law, and can be perfected by signing a written pledge agreement and delivering the pledged property under possession of the pledgee (either actual or constructive). However, it is worth noting that UAE law requires that pledged assets must be in existence and identified, and security cannot be granted over future assets.

Mortgage over commercial business

Under UAE law, commercial business comprises tangible elements – i.e. goods, machines and equipment – and intangible elements – i.e. trade name, goodwill, intellectual property rights and contracts with clients – and is mortgageable. A mortgage over commercial business can be perfected by signing and notarising an Arabic (or bilingual) mortgage contract and registering the mortgage with the relevant commercial registry.

PRC law does not contemplate mortgage over commercial business, although certain tangible elements of a business – i.e. manufacturing facilities, raw materials, half-finished products – can be mortgaged.

Pledge over bank accounts

As a general principle under UAE law, very similar to that under PRC law, funds in an account subject to an account pledge must be ascertained and identified at the time of perfection of the pledge. Practically, pledges over operating accounts, or accounts with fluctuating balances, are problematic.

To overcome the problem, and as a common practice in the UAE, it is preferable to hold cash flows in an account held with or controlled by the pledgee, i.e. the lender, or look at alternative structures such as sweep mechanisms, reserve accounts or an offshore account.

In China, it is possible to overcome the problem by pledging a deposit certificate or pledging a “special account”.

Pledge over shares

Four types of companies may issue shares in the UAE and can therefore be pledged: public joint stock companies; private joint stock companies; partnerships limited by shares; and free zone companies.

Equity interest, or quota, in a limited liability company may not be pledged (this may, however, be changed with the introduction of the new companies law). In contrast, pledges over shares, equity interest and fund units are commonly recognised and widely used in China.

Shares or equity interest, as the case may be, in most types of companies under PRC law are capable of being pledged.

Assignment of rights

Rights, in particular contractual rights under an underlying agreement including receivables, are typically secured by way of assignment under UAE law.

In essence, assignment of rights is merely a contractual arrangement between the parties and there is no priority right granted by law that can be enjoyed by the assignee.

Alternatively, certain rights (such as bills of exchange, warehouse receipts, bills of lading, bonds, certain receivables) are pledgeable under PRC law.

Taking the pledge of receivables for example, perfection of pledge of receivables requires a written pledge contract and registration of the pledge with the credit reference centre maintained by the China central bank.

Enforcement of security

The concept of “self help” is not recognised under UAE law and an order from a UAE court will be required to enforce a security. In contrast, enforcement of security in China is much less onerous.

PRC law encourages the parties to realise a security between themselves and the court will be involved only when an agreement cannot be reached.

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