28 June 2024
Ajmal Khan Nadakkal
The
new Security Law implemented in the Dubai International Financial Centre (DIFC)
introduces significant changes impacting creditors' rights and how they secure
their loans.
Dubai:
The DIFC implemented DIFC Law No. 4 of 2024 the Law of Security 2024 (New Law)
on March 8, 2024, replacing the previous Law of Security 2005 (Old Law). This
update aligns DIFC’s security framework with international standards,
particularly the UNCITRAL Model Law on Secured Transactions. While the new
regulations bring clarity and modernize the framework, they also pose
challenges for existing creditors who must take action to maintain their
security rights.
Key Changes and Considerations:
Transitional Provisions:
Creation of Security Rights:
The new law emphasizes the importance of "perfection" for a
security right to be enforceable against third parties. This means creditors
need to take specific steps to register their security interest with the
relevant authorities (typically the DIFC Registrar).
Previously, creditors might have relied on "attachment" (simply
creating the security agreement) to secure their claim. Under the new law,
perfection takes precedence.
Knowledge of Existing Security Rights (Section 54):
A
creditor's knowledge of existing security rights in the collateral (the asset
used to secure the loan) does not affect the priority of their own security
right.
Impact: Creditors should conduct thorough due diligence to identify any
pre-existing security interests in the collateral before extending credit.
Security
Rights in Receivables (Section 55):
The
new law allows creditors to create security rights over future receivables
generated by the debtor (the borrower). This provides more flexibility for
creditors to secure their loans.
Perfection and Priority:
Enforcement:
Asset-Specific Rules:
Independent
Undertakings (Section 56):
The
beneficiary of an independent undertaking (a third-party guarantee) can create
a security right over the future proceeds of the undertaking. This offers
additional protection for creditors relying on such guarantees.
Key
Benefits for Creditors:
· Enhanced Clarity and Certainty: Clearer rules on perfection and priority can help creditors ensure the
enforceability of their security interests.
· Increased Options for Securing Loans: The ability to create security rights over future receivables and
independent undertakings provides creditors with more tools to mitigate risk.
Recommendations
for Creditors:
· Review Existing Loan Agreements: Ensure existing loan agreements comply with the new law's perfection
requirements.
· Consult with Legal Counsel: Seek advice from a lawyer specializing in secured transactions to
understand how the new law impacts your specific situation.
· Conduct Thorough Due Diligence: Before extending credit, investigate the presence of any pre-existing
security interests in the collateral.
Conclusion:
The
New Law significantly enhances the legal framework for secured transactions in
DIFC, aligning it with global best practices. By providing clearer rules for
the creation, perfection, and enforcement of security rights, it strengthens
DIFC’s position as a leading global financial hub and lays a solid foundation
for future financial sector innovations.
For
detailed advice and steps to ensure compliance, creditors should consult legal
experts or the DIFC Registrar of Security.
ALKETBI TOUCH:
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