The United Arab Emirates (UAE) has recently implemented its first federal law on factoring and receivables assignment following a number of previous announcements regarding this area, with the UAE’s UAE Factoring Law, Federal Decree-Law No. 16 of 2021 on Factoring and Transfer of Civil Accounts Receivable entered into effect on December 8, 2021 (the New Law).
This landmark legislation provides essential clarity on how these arrangements will operate in the UAE. It creates an integrated regulatory regime that regulates the legal conditions for the assignment and transfer of receivables, secures their validity and perfection, and delineates the rules for the ranking of the competing claims over the assigned receivables.
What is an Assignment? Understanding UAE Factoring Law and Receivables Transfers
The New Law regulates “Assignments,” where “contractual rights to settle a cash sum owed by the Debtor are transferred to the Assignee, with the Assignment creating a security right over the Debtor’s debt, transferring it as security and selling it in a final sale.” On first reading, this definition could imply that the law would apply only to arrangements that assign a debt and create a security interest in respect of that debt.
However, a number of factoring agreements or debt assignments are just transfers of a debt (not a security right). Additionally, the New Law does not specifically address various manners of factoring UAE such as the purchase or sale of receivables, discounting, or reverse factoring.
Regardless of whether or not a security interest is involved, however, the New Law appears to be cast in such a way that it applies to all factoring agreements and assignments of debt, therefore, it will be imperative that market participants ensure their factoring UAE structures comply with the law.
Types of Assignment Forms
The form of an assignment of receivables is flexible based on the UAE Factoring Law. Under the law, all that is required is that receivables be described in such a way that they can be identified generally or specifically and that an assignment is effective performantly.
Significantly the UAE Factoring Law settles previous ambiguities on how the assigned receivables can be described. For instance, one can describe the receivables in general, like all existing or future debts owed by a debtor or even in the form of a particular type or class of receivables.
The law further provides that an assignment agreement does not need to designate every single contract covered by the assignment. In addition, an assignment of future receivables is valid without a transaction of future debt each time.
Scope of the New Law: Understanding the UAE Factoring Law
The factoring law applies to all assignments of the receivables made in commercial or civil transactions. But there are some notable exclusions. For example, the law excludes assignments with respect to:
- Transactions for personal or family matters
- Financial contracts regulated by clearing agreements
- Foreign exchange transactions
- Interbank payment systems, systems of net-based clearing, securities, settlements of assets, or other financial instruments
- Repurchases of Securities, shown as deposits with the broker. assets or financial instruments
- Endorsable bonds lead you to gains of fixed financial payments
- Entitlements to payments held in deposit accounts at banks
- Entitlements to payments under securities, prorogue credits, or letters of guarantee.
These exclusions guarantee that the factoring law is about the intended commercial and civil transactions.
Conclusion
The UAE’s new Federal Decree-Law on Factoring No (16) of 2021 (the “Factoring Law”), came into effect on December 8, 2021, and provides welcome clarity on the treatment of factoring arrangements and the transfer of receivables.
This law provides a clear regulatory framework for the assignment and transfer of receivables, in particular, the validity and perfection of the security interest and priority issues amongst competing claims. The law covers commercial and civil transactions in a general way but expressly exempts personal, family, and some financial transactions, including foreign exchange and interbank settlements.
It also provides flexibility in the manner of assignments, allowing receivables to be described generally, or by receivable type. At the end of the day, whether there are security interests or not, market participants need to be mindful to comply with the UAE factoring law in their arrangements. Businesses like Khairallah Law Firm can help provide guidance to navigate these new regulations.
Having said that, Contact Khairallah Advocates & Legal Consultants and benefit from our free 30-min legal consultation.
*Disclaimer: our blogs, law updates and FAQ’s are freely distributed for educational purposes and to showcase recent updates and regulations in the UAE’s framework.
If you have any questions and need assistance, contact us at our number or book an appointment online.
