UAE law update: Developments relating to "adequate security" requirements

In recent updates to the UAE legal framework, provisions have been introduced in the Banking Law (Federal Decree-Law No. 14/2018) and the Commercial Transactions Law (Federal Decree-Law No. 50/2022) obliging UAE banks and financial institutions to obtain "adequate" or "sufficient" security when granting credit facilities. However, ambiguity remains regarding the precise scope and interpretation of these new requirements.

Key points to note:

Article 121(bis) of the amended Banking Law requires licensed financial institutions to obtain "sufficient guarantees" for facilities granted to individuals and sole proprietorship. Failing to do so can result in claims being rejected by UAE Courts and potential sanctions.
Similarly, Article 409(2) of the new Commercial Transactions Law states that banks "shall obtain adequate securities or collaterals against loans granted by them". This arguably extends the adequate security requirement to corporate borrowers as well.
In the absence of further guidance, it remains unclear what exactly constitutes "adequate" or "sufficient" security, how this will be determined and whether these provisions have retroactive effect. Early indications suggest UAE Courts may apply the requirements retrospectively in some instances.
While developments are still unfolding, lenders should carefully review their existing facilities and approach to taking security in light of these changes. Structuring options may be available to mitigate these risks.

One potential mitigant that is gaining traction in the market is to have key finance documents such as guarantees governed by a foreign law (e.g. English law) and subject to the jurisdiction of the DIFC Courts. A DIFC Court judgement obtained in relation to a guarantee could then potentially be recognised and enforced in the UAE under established procedures, without the UAE Courts having to directly opine on the adequacy of the collateral under UAE law.

Having guarantees subject to DIFC Court jurisdiction in particular provides the added benefit of judgements being easily "passported" for enforcement into the Dubai and broader UAE Court system. However, the viability of this and other structuring solutions remain to be fully tested.

Next steps

Creditors are advised to continue closely monitoring legal and market developments in this space. Please contact the debt finance team at Stephenson Harwood for further details and advice on navigating the UAE's evolving financial regulatory landscape.

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