Federal Decree-Law Number 16 of 2021 on Factoring and Transfer of Civil Accounts Receivable
The Government of the United Arab Emirates has recently brought in the Federal Decree-Law Number 16 of 2021 to deal with issues regarding the Factoring and Transfer of Accounts Receivable within the country. The New Law is the first of its kind in the country to deal with the factoring and assignment of receivables exclusively. Before the Law, there has been uncertainty about how an arrangement of this sort is to be carried out legally within the UAE. The current Law provides a framework that regulates and sets forward the basic requirements needed to legally enforce the transfer and assignment of receivables, the various provisions for ensuring their validity and perfection, and the various rules to be adhered to determine the priority over those assigned receivables amid other claims in competition.
The Law governing this area has always been quite vague and uncertain within the country and has often been dealt with gradually. The previous laws governing the assignment of receivables included Federal Law Number 5 of 1985 and Federal Law Number 4 of 2020, which was done via securities. Under these laws, there was inevitable confusion regarding what Law should be applied in specific situations and the vagueness in the correlation between different rules. The New Law has taught an integrated framework wherein this issue has been unified under a single law, a much-needed development in the UAE.
The scope of the recent Law applies to those assignments of receivables made by way of civil and commercial transactions. However, some assignments are restricted and do not come under the application of the new Law. These include those transactions related to family or personal affairs, foreign exchange related, contracts financed under the regulation of clearing agreements, securities/ assets/ financial instruments deposited with a broker that are repurchased, etc., as provided for under the Law.
"Assignments" are regulated and governed under the New Law. The definition for the same is provided under the provision of the Law, which provides the reasoning that the Law would govern those assignments that are exclusively those that assign debts and those assignments of debts that have a security interest over them. However, it is more common in factoring and terms of obligations to involve the mere assignment of debts rather than those with security interest over them. Further, insufficiency in the New Law includes the lack of specifications relating to the various factoring arrangements, including those of buying or selling receivables, discounting and reverse factoring, etc. The New Law is intended to regulate and govern all factoring arrangements and debt assignments within the UAE. Considering this, all participants in the market must ensure that they strictly adhere to the requirements and regulations provided for under this Law concerning their factoring arrangements and debts assignments, whether they include the creations of securities or not.
The New Law is not insistent on any specifications regarding the form of assignment that the receivables need to be taken in. It is merely stated and indicated that as long as receivables contingent on the assignment is expressed and described in a manner that general or specific can be identified, then such work will be approved and considered adequate. Further, there are specifications and clarifications in the New Law with regards to the description of assigned receivables in those areas where there were uncertainties and vagueness in the previous Laws.
There are certain clarifications provided by the New Law concerning the effectiveness and priority of agreements for assignments of debts against third parties. There are specific references given to the Moveable Assets Mortgage Law to deal with assignments in this regard. It mandates under its provisions that for such assignments to be effectuated to third parties, they are required to be declared on the electronic register of the Moveable Assets Mortgage Law functioning under the Emirates Integrated Registries Company (EIRC). Before introducing the New Law, there was uncertainty regarding whether it was mandatory to declare such assignments on the electronic register functioning under the EIRC. However, registrations under the EIRC were quite common. However, it was not strictly adhered to, especially for those assignments of receivables under the Civil Code, which did not pertain to creating security interests over the debts.
The various specific requirements needed to be adhered to for those situations regarding the assignment of receivables against a debtor and the effectuation of the same are generally governed and regulated under the Civil Code (Federal Law No. 5 of 1985) precedent cases according to the specific situations. The New Law has not made any significant changes or replacements to the provisions of the Civil Code in respect to this area of assignment of receivables; therefore, adherence to the condition provided under the Civil code is to be met accordingly. Under the Civil Code, for the effectuation of an assignment of receivables against a debtor, a notice and declaration must be made to the debtor relevant in the particular situation, and such debtor must acknowledge the specific assignment of receivables. However, the New Law gives certain rights to the assignee of the assignment of receivables to address notification to the particular debtor regarding the instructions for payment of the relevant receivables that are assigned to the assignee. The debtor is mandated to accept the terms of this notification even when there is an amendment to the contract between the parties. The debtor agrees to the terms of the notification sent to them by the assignee even if there is a breach of the existing contract between the parties.
Regarding the priority of the assignment of receivables in regards to competing claims within the market are similarly under the governance of the Moveable Assets Mortgage Law (Federal Law No. 4 of 2020). The New Law does not make any changes or replacements in the provisions provided under the Moveable Assets Mortgage Law in this area of Law. Therefore, under this Law, provisions are provided for the allocation of priority to retain the rights of the assignees above the receivable accounts. This is done to ascertain the assignor's obligations and to ascertain the priority of the assignment concerning non-contractual rights.
In Conclusion, the development of the New Law by way of Federal Decree-Law No. 16 of 2021 was much needed in the laws governing the factoring and transferring of civil accounts receivable within the UAE. The enactment of the Law has brought in clarifications in various uncertain areas of the assignment of receivables and has successfully created a unified framework for the same. There is clarity regarding the description required in the assignment of receivables, including those with future receivables. There is also clarity in enforcing the provisions provided under the Moveable Assets Mortgage Law for the assignment of receivables concerning registration and priority rules and requirements. However, there continue to exist certain discrepancies in specific factoring arrangements and debts assignments even with the New Law in place, especially in regards to those absolute assignments and do not involve security rights. Further, there is a lack of understanding on the future interpretation of Courts of the provisions given under the Civil Code, with the New Law in place. The efforts of the same will be told with time.