Project Finance in the United Arab Emirates

Project Finance – Q&A – Practical Guide - UAE

What are the key difference in the legislation in the UAE and other key international jurisdiction?

In comparison with other jurisdictions, the laws regulating the project financing in UAE are not too strong. The Federal Law Number 18 of 1993 concerning the Commercial Transactions Law (the commercial law) and the Federal Law Number 5 of 1985 concerning Civil Code (the civil code) governs the project finance in the country. However, these laws are not at par and are in comparison with other major countries are not too detailed. Further, concerning the civil code and the commercial code, the following are the main transactions which are not regulated by security laws of UAE:

1. The first and the principal difference in UAE and other jurisdictions is the lack of a concept of floating charges, the security law in UAE do not recognize the creation of security interest, either by mortgage or through the pledge. The security interest can only be created for assets that can be identified and ascertained.
2. In several jurisdictions, the court or the relevant government authority of that country requires them to register a mortgage over a movable property to allow for filling financing documents. However, UAE does not need parties to record for pledges over the movable property.
3. The UAE imposes a mandatory requirement on the parties to register the mortgage at Lands Department in the relevant Emirate and depositing documents of title in the bank is not sufficient.
4. In other jurisdictions, the assignor, and assignee enters into an assignment to notify the assignment debtor, however, under UAE law debtor’s consent is required for that particular assignment to be created.

Are there differences in the way project finance operates in the free zones and secondary jurisdictions?

Yes,  there are variations in the operation of project financing in free zones and other jurisdiction since the free zone is in itself a separate jurisdiction in UAE. Henceforth, all the free zones have their own rules and regulations governing the project finance. The first difference that in most of the free zone the mortgages over land is not possible, however, the Jebel Ali Free Zone (JAFZA) passed Law Number 1 of 2002 concerning the lease of immovable property in JAFZA which allows for a mortgage over a building but still not over a land.

Within UAE, different Emirates have promulgated their local laws which govern the mortgage and pledge apart from the commercial code and the civil code. The Emirate of Dubai has implemented its own real estate law, Dubai Law Number 13 of 2008 concerning the Interim Real-Estate Register, this law conforms with the UAE laws to facilitate the registration of a security interest in the land.

It is advisable to operate in the free zones rather than the mainland because of the ownership restriction in the mainland. The foreign investors can enjoy hundred (100) percent ownership in the free zone as opposed to forty-nine (49) percent in the mainland.

 Do Islamic finance concepts impact the way the project finance is structured?

Islamic finance concepts do not impact the way project finance is structured in the UAE. Most project financings are done through conventional financing methods and instruments, such as lending streams. On the other hand, Islamic finance techniques should comply with the prohibition of charging interest as per Shariah Law. This does not mean that Shariah prohibits making profits, but rather it promotes the idea that making profits as charging interest is harmful to borrowers. Although there is a lack of effort by the financier, they will still enjoy profits. Given that customers are looking for new funding sources, the mixture of Islamic finance concepts and conventional methods are becoming more common in the United Arab Emirates’ market.

What types of collateral can be used?

The laws governing securities in the United Arab Emirates differ from those in Common Law jurisdictions. In the United Arab Emirates, floating charges does not exist, and there is no requirement for registration for pledges of movable property, and no mortgages can be created by mere deposit of title deeds. In the United Arab Emirates, the most common securities include assignments over contracts and receivables, property mortgages and pledges over moveables, shares and bank accounts. Assignments over contracts and receivables, which involve the transfer of rights from one person to another, are used as securities for financing agreements. As for pledges of shares and bank accounts, companies can pledge their shares with lenders by providing the shares in exchange for loans from banks. Federal Law Number 20 of 2016 has allowed product stocks to be securitized which has brought more security to financing transactions. The Central Bank of UAE and the Securities and Commodities Authority (SCA) regulate securities in the United Arab Emirates.

How do creditors assure themselves?

Under the United Arab Emirates’ regulations, there are very few to no remedies that allow a creditor to assure themselves: creditors will have to obtain court orders to auction assets as they cannot take possession of them. Ensuring repayments can be made should be the creditor’s top concern when agreeing. Federal Law Number 20 of 2016 on the pledge of movables as security for debts is bringing more security to financing transactions as credit balances, and commodity stocks can now be securitized. The law also aims to reduce the multiple undeclared pledges through an updated registration process.

Outside bankruptcy/ insolvency procedures, how can a project lender enforce their rights as a secured creditor?

The lender of the project is expected to be involved in the project more closely. There is one self-help through which the project lender can enforce their rights is by discussing their interest with the relevant stakeholders to ascertain the position. The lender should ensure the real value of the security, as in some cases the true value is hidden in the underlying assets that is mentioned in the concession agreement.

Are there preferences periods or clawback rights, creditor rights which can impact collateral?

UAE has implemented Federal Law Number 9 of 2016 concerning Bankruptcy (the Bankruptcy Law), the regime considers secured creditors as “preferred creditors,” and the creditors are on the top on the list of priorities. The secured creditors can claim their amount to the extent of their security. Whereas, fees and reasonable expenses are deducted in the sale of such assets before the actual distribution.

Bankruptcy was earlier regulated by the companies law and the commercial code. However, the UAE government introduced the new bankruptcy law where now all the matters concerning the creditors rights are dealt by this law, however there are several issues with the new bankruptcy law and in order to resolve such issues, the UAE bank Federation introduced a scheme thereby allowing debtors 15 day-period in order to agree with the restructuring scheme with creditors. The laws protecting the rights of creditors are still underdeveloped in comparison with other jurisdictions such as the United States and the United Kingdom.

What procedures other than court procedures can be used to seize project company assets?

Outside the court, the parties cannot use any procedures to seize the project company assets; and the standard procedure is through the court, and the secured assets will be sold at public auction to redeem the outstanding amounts.

Is there any relevant tax, fee or foreign currency restrictions which can impact project finance?

Though the country has implemented Value Added Tax (VAT), it is not applicable to transfer or conversion of foreign currency.

What are the rules governing how project companies can maintain foreign currency accounts locally and outside the jurisdiction?

UAE law does not impose any restrictions for operating or maintaining foreign currency accounts inside or outside the UAE. However, the country might oppose or impose sanctions for receiving and sending money to certain countries due to political reasons.

How does repatriation of foreign earnings work?

The UAE laws have not provided for any procedure with regards to the repatriation of foreign earnings, and thus, there are no restrictions for the same.  

Does any financing and project documentation need to be registered with authorities - if so who?

The law does not require any financing and project documentation to be registered with the authorities except in the case of registerable security such as real estate mortgages.

Are government or government agency approvals needed for project finance transactions?

Government agencies’ approvals are required for project finance transactions in the United Arab Emirates. The relevant ministry will differ based on the type of activity concerned.

Are any incentives provided to foreign investors?

Incentives are provided to foreign investors in the United Arab Emirates. The United Arab Emirates’ regulations offer foreign investors the right to fully own property, the right to be the partners in a company, tax-free initiatives, and investment opportunities in oil, gas and other hydrocarbons.

Which jurisdiction's laws typically cover project agreements?

Project agreements will typically be covered by the United Arab Emirates’ law, the law of the Emirate in which the project is located or any foreign law with international arbitration options.

Which arbitration bodies are typically cited in project agreements?

There are various arbitration centres in the UAE such as the Dubai International Arbitration Centre (DIAC), Abu Dhabi Commercial Conciliation & Arbitration Centre (ADCCAC) and DIFC-LCIA where companies may refer their disputes.The International Chamber of Commerce (ICC) is the arbitration body typically cited in project agreements in the United Arab Emirates.

What are the typical structures of project companies?

The type of corporate structure of project companies depend upon the requirement of the parent entities and the length  (or period) of the project.  Limited liability companies and joint stock companies are the most popular forms of corporate structures in the UAE.

Originally published by STA Law Firm on Lexis Middle East Law Alert