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  • Writer's pictureElhassan Abdelrazek

Assignment of rights under UAE Law



This article delves into the assignment of rights as per the laws of the United Arab Emirates (UAE), specifically focusing on the legal landscape within the UAE jurisdiction. It is important to note that the discussion herein does not encompass the assignment of rights in alignment with the regulations established by the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). We will be issuing a separate article focusing on the assignment of rights under the DIFC and ADGM regulations.


In the UAE, the regulation of assignment was traditionally governed by the Civil Transactions Law (Federal Law No. 5 of 1985). The intricacies of the assignment were addressed in detail from Article 1106 to Article 1132 of the Civil Code. It is noteworthy that the Civil Code specifically focused on the assignment of 'debt and claim,' underscoring obligations rather than rights. An essential requirement for the validity of an assignment was the service of notice to the counterparty, coupled with the necessity of obtaining acknowledgement. Article 1109 of the Civil Code stressed the significance of acceptance from the assignor, the assignee, and the counterparty for an assignment to be deemed valid. Nonetheless, the UAE Courts have consistently held that obtaining 'consent' or 'acknowledgement' in an assignment of rights from the underlying obligor is unnecessary, and serving notice to the underlying obligor is sufficient to complete the assignment.


The UAE Factoring Law was issued on 29 August 2021 1, published on 9 September 2021 and came into effect on 7 December 2021 (the “Assignment and Factoring Law”) which was a significant development in the UAE banking and finance legal landscape and a further enhancement to the UAE federal law No.20 of 2016 in relation to the charging or pledging of movables as security for indebtedness which, although was a significant development in its own right, was perhaps unclear in respect of certain aspects like the possibility of selling future receivables before these coming into existence.

 

The significance of the Assignment and Factoring Law is that is the first law in the UAE that deals with the assignment of rights and receivables in detail. According to the Assignment and Factoring Law, future receivables could be also assigned. The clear possibility to assign future receivables marks a noteworthy advancement with a substantial positive impact. By allowing for the assignment and capture of future receivables within the relevant agreement, this development presents a forward-thinking approach to financial transactions. Traditionally, securing future receivables was relatively unclear in certain aspects, limiting the scope of collateral. However, the ability to extend such interests to future receivables introduces a new level of flexibility and foresight in financial arrangements.


The UAE Assignment and Factoring Law extends its scope to receivables arising from any transaction within the realms of commercial or civil dealings, regardless of whether conducted through a regulated financial market. This includes transactions with or without the right to recourse against the assignor. Nevertheless, the law excludes its application to the following transactions:

 

  • Transactions undertaken by individuals for personal, family, or household purposes.

  • Financial contracts governed by netting agreements.

  • Foreign exchange transactions.

  • Systems and agreements related to interbank payment, netting systems, and adjustments concerning securities, assets, or other financial instruments.

  • Buyback of securities, assets, or financial instruments deposited with a broker.

  • The right to payments established through endorsable instruments.

  • The right to payments deposited into credit accounts with banks.

  • The right to payments arising from securities, documentary credits, and letters of guarantee.

 

Crucial aspects of the Assignment and Factoring Law encompass the necessity for a precise delineation of receivables, their relevance to prospective receivables, certain representations and warranties by the assignor, the enforceability of assignments notwithstanding contractual restrictions and the requirement to register the security interest in the Movables Collateral Register (the “Register”). Additionally, the legislation delineates the rights of the counterparty and emphasizes the irrevocable status of the assignment upon payment to the assignee.

  

An assignment becomes legally binding between the assignor and the assignee upon execution, even if notice is not served on the underlying obligor. This means that although the assignment retains its validity in the absence of notice to the underlying obligor, it only takes effect against the underlying obligor when appropriate notice is delivered. Otherwise, the underlying obligor shall continue to remit payments to the assignor. This aligns with the UAE Courts’ precedents to only requiring notification of the underlying obligor for the effectiveness of the assignment without requiring its consent.


An intriguing interpretation of the foregoing suggests that in the context of finance transactions, the assignment may function as a security interest in the receivables, not solely as a method of repayment.


The assignee of a receivable holds the authority to assert rights over the receivable either in accordance with the terms set forth in the receivables assignment agreement or aligning with the Federal Draft Law No 4 of 2020 on Securing Interest with Movable Property (and its Executive Regulations) (“Movables Security Interest Law”). This provision explicitly emphasizes the parties' ability to mutually agree on enforcement methods within a receivables assignment agreement, supplementing those outlined in the aforementioned law.

 

To ensure priority over other secured creditors, the assignee must register the security interest in the Register in accordance with the Movables Security Interest Law. It should be noted that in some non-financial free zones in the UAE, the relevant regulations governing the entities established in such non-financial free zones require registering the security interest in the security register maintained by the relevant registrar or the company.



Elhassan Abdelrazek

Partner

NHB LEGAL


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