Zouhdi Yakan and Sameer Goel delve into the effects of registration of security rights in the Emirates Movable Collateral Registry Corporation (EMCR).
The Federal Law no. (20) of 2016 on the Mortgage of Movable Property to Secure Debt (the Law) tackles, inter alia, the mortgage/pledge of movables and registration of the same. The Law necessitated for a register to be created for the declaration of rights over movables and to be managed and supervised by an entity (Art. 6.1). The Emirates Development Bank was appointed as the entity for the purpose of the Law and in turn established the Emirates Movable Collateral Registry Corporation (EMCR). The Central bank of UAE via Circular no. CBUAE/BSD/N/2018/2925 dated October 9, 2018 issued the EMCR Booklet (the Booklet) which provided guidelines and much needed clarity on the registration process of the securities on the Register. ‘Register’ being referred to as an advanced electronic system application located on the EMCR website (https://www.emcr.ae) launched for the declaration of rights on movable property.
We will shed light on the nuances involved with the registration process of security rights in the Register attained from our research on the subject as well as discussions with the concerned personnel involved with financial institutions (FI) and EMCR (the Personnel) pertaining to the implementation of the Register.
The Booklet stipulates that “The Law makes publicising in the Emirates Movable Collateral Registry (EMCR) the only means of making pledge effective against third parties”, which emphasises what the Law aimed for as per Art. 10.1 which states that “the mortgage right shall be enforceable and produce its legal effects towards third parties upon mere declaration in the Register” and has further confirmed the scope of applicability and effects of the Law in particular to the priority of security rights with the existence of the Federal Law No. (5) for the year 1985 – Civil Transactions Law, as amended (Civil Code). For example, the previous practice which necessitated the signing of a pledge agreement before the notary public to make it opposable towards third parties to gain priority based on a fixed date obtained upon the signature of the instrument before the notary, as inferred from Art 1487 of the Civil Code, is no longer required or applicable to the pledge of movables as now the mere declaration of the pledge in the EMCR isthe only means to make a pledge effective against third parties.
The Law clearly distinguishes between the priority of security interests that post-date and pre-date the Law. The security interests that post-date the Law become effective against third parties and gain priority from the date and time of declaration in the Register (Art. 17) while the security interests that pre-date the Law become effective against third parties according to the date of emergence of such security interests rights i.e. the date of execution of the security document (Art. 44.3). Notably, the Law (Art. 44.1) specifies that the mortgagees/pledgees had until 15th March 2018 to upload such pre-date security interest on the Register. However, the Register was itself launched on April 02, 2018 and it accepted all the existing security interests i.e. until April 01, 2018 as the pre-dated registration effective against third parties from the date of execution of the security document as opposed to the registration date.
We have inquired with the Personnel on the scope of applicability of the Law in relation to the type of security interests over movables which are covered under the Law. Apparently, the intent of the legislature is to protect and include any rights over the movables and hence the interpretation of the term “mortgage” or “mortgage contract” under the Law has been interpreted to include other forms of securities even if they do not fall under the ambit of mortgage, such as “assignment of rights”. Even though assignments in their legal nature are distinct from mortgage and have special provisions governing its terms under the Civil Code; however, for the purposes of the Law and the declaration in the Register, assignments shall be treated as mortgage and thus, must be declared in the Register.
Creating mortgage notices on the Register by FI is fairly a simple process. It requires uploading the relevant information concerning the security instruments such as fixed deposits under lien, pledge of movables, all types of assignments, etc., as the case may be, along with all other relevant information on the type of mortgage and its specifications. Once successfully uploaded, a ‘Notice of Security Right’ is created and an automated notification is received by mortgagor and mortgagee to their registered emails confirming the publication of the said notice on the Register.
As regards to the consent of the mortgagor, the Law (Art. 7) has given the parties the freedom to specify in their agreements “if they wish to allow the public to access the information declared in the Register”. And as per the Personnel, seeking the customer’s consent is a must for uploading any information of the customer and the security subject of the pledge regarding mortgages dated post the go-live of the Register. Thus, from April 2nd 2018 onwards, the FI customer’s explicit consent must be obtained either in a separate form or in the body of the security agreements.
In short, the impact of the Law is fairly significant as it has introduced through the Register a new transparent and accessible means for proclaiming rights over movables, as it made it reasonably convenient for the interested public (who enrol with the Register) to have access to the Register. The creation of the Register has improved transparency for both lenders and authorised third parties alike as it allows them to search freely and determine whether or not security in subject is already pledged.
Importantly, the Register has provided greater certainty with respect to priority over security rights and will also be of assistance to FIs in the evaluation of the borrower’s credit history by minimising any misleading and/or insufficient information which may be provided by the borrower to the lender.
- Zouhdi Yakan, partner, Shaikha AlMehrzi Advocates and Legal Consultants-LAW HOUSE
- Sameer Goel, senior associate, Shaikha AlMehrzi Advocates and Legal Consultants-LAW HOUSE