Taking and Enforcing Security in UAE Debt Transactions: Practical Challenges for Lenders

Security remains one of the most important parts of any debt transaction A lender may be comfortable with a borrower's business, financial position and future prospects. But lenders still need to consider what happens if the transaction does not perform as expected.

This is where security becomes important. In a typical UAE debt transaction, a lender may seek security over shares, bank accounts, receivables, movable assets, real estate and other valuable rights or assets. Guarantees may also form an important part of the wider credit support package. On paper, this can appear straightforward.

In practice, taking and enforcing security in the UAE requires careful attention to the nature and location of the assets, the identity of the secured parties and the legal framework that applies to each part of the transaction.

The challenge for lenders is not simply to obtain a comprehensive security package It is to ensure that the security will work when it is needed.

The Security Package Must Reflect the Transaction

There is no single form of security that works for every transaction The appropriate package will depend on the nature of the borrower and the assets that support the financing.

A lender financing a trading business may focus on receivables, bank accounts and inventory. A real estate transaction may involve a mortgage over land or property. In an acquisition financing, a share pledge may provide the lender with a more direct route to controlling the borrower following a default.

For many corporate transactions, lenders will seek security over as many material assets as possible. However, the value of an extensive security package depends on whether the relevant security has been properly created and perfected.

A lender can have many signed security documents and still face difficulties if registration requirements have not been satisfied or the security does not cover the assets in the way the lender intended.

This is why asset analysis should begin early in the transaction. The lender needs to understand what the borrower owns, where those assets are located and which legal regime governs the creation and enforcement of security.

 

Location Matters

One of the most important questions in a UAE security transaction is where the relevant assets are located.

The UAE has a federal legal framework, but its debt finance market also includes financial free zones such as the Abu Dhabi Global Market and the Dubai International Financial Centre, each with its own legal and regulatory framework.

An onshore UAE asset may therefore be subject to different security and enforcement requirements from an asset located within the ADGM or DIFC. This can be particularly important where a corporate group has operations across several jurisdictions.

A UAE group may have an onshore operating company, an ADGM or DIFC holding company, bank accounts in different jurisdictions and assets located outside the UAE. The security package needs to work across the group structure.

This is one reason why international lenders have increasingly used ADGM and DIFC holding company structures in cross-border and private credit transactions. These jurisdictions offer common law-based legal frameworks with more developed regimes for security and insolvency, which can provide additional structuring options for lenders.

The use of a free zone holding company does not remove the need to address onshore security issues. It simply creates another part of the structure that must be considered.

 

Movable Assets Have Changed the Security Conversation

The UAE's movable assets security regime has significantly improved the ability of lenders to take security over a range of assets that may be important to a business.

Federal Law No. 4 of 2020 on Securing Rights in Movables provides a framework for security over various forms of movable property, including certain receivables, bank accounts, goods and other tangible and intangible assets. The regime allows security interests to be perfected through registration or, in certain cases, possession or control, with priority generally determined by the date and time of perfection.

This has particular importance for lenders financing businesses whose value is not primarily held in real estate. Receivables, inventory and cash flows may be central to the value of the security package.

However, the lender still needs to ensure that the assets are described correctly, the security is properly perfected, and competing security interests are identified.

The existence of a movable assets’ security regime does not remove the need for careful due diligence. It makes the accuracy of that process even more important.

 

Share Security Can Provide a Practical Route to Control

In many UAE corporate financings, security over shares can be particularly important.

Rather than enforcing separately against many assets, a lender may seek to obtain control over the company that owns them.

This can create a more straightforward enforcement strategy. However, share security is subject to its own legal and practical requirements.

The process can depend on the type of company, its place of incorporation and the applicable corporate law or free zone regulations. Constitutional documents and existing shareholder arrangements may also need to be considered.

For onshore companies, formalities and restrictions may affect the creation and enforcement of a share pledge. Certain forms of onshore share security may also need to be held by, or structured through, a UAE-licensed financial institution where the secured lenders are international or non-bank investors.

This is one of the reasons why the role of the security agent is so important. The structure should not be treated as a technical issue to be resolved after the commercial terms have been agreed. The identity of the lender may affect the structure from the beginning.

The Security Agent Needs to Be the Right Party

International financing transactions frequently involve multiple lenders.

The security package is therefore usually held through a security agent acting for the benefit of the finance parties.

In the UAE, this arrangement can require additional structuring considerations. UAE law does not recognise trust concepts in the same way as common law jurisdictions. Finance documentation therefore often uses contractual mechanisms, including parallel debt provisions, to support the ability of the security agent to hold and enforce security for the wider lender group.

In addition, certain forms of security over onshore assets may only be held by UAE financial institutions licensed by the Central Bank of the UAE. This can mean that an international lender group or private credit fund needs to appoint a local security agent to hold specific categories of security. This issue should be addressed at the structuring stage.

A transaction can become more complicated if the parties only consider the identity of the security holder after the financing documents have been negotiated. The lender needs to know not only what security it wants. It also needs to know who can legally hold it.

Real Estate Security Remains Highly Formal

Real estate can provide valuable security, but the process is highly dependent on the location and nature of the property.

Mortgages generally need to be registered with the relevant land authority in order to be effective. Different rules may apply depending on the emirate, the type of property and whether the asset is located within a free zone.

The enforcement process is also more formal than for certain forms of movable asset security.

A lender should therefore consider the practical route to enforcement from the beginning.

If the value of the financing depends heavily on real estate collateral, the lender needs to understand how the mortgage will be registered, what competing interests may exist and how the asset could ultimately be realised.

A mortgage is not simply evidence that the lender has an interest in the property. Its practical value depends on the lender's ability to enforce and recover against the asset.

Guarantees Require Careful Drafting

Guarantees remain an important form of credit support in UAE debt transactions. A corporate parent may guarantee the obligations of a subsidiary. A founder may provide a personal guarantee in support of a borrowing company. Different companies within a group may provide cross-guarantees.

The enforceability of a guarantee will depend on its terms and the circumstances in which it is provided. UAE law generally treats guarantees as secondary obligations. Their effectiveness is therefore connected to the validity and enforceability of the underlying obligations.

Guarantees should be in writing and properly authorised by the relevant guarantor. Lenders should also consider issues relating to corporate authority, constitutional documents and corporate benefit.

Time limits can also be relevant in certain circumstances. Market practice therefore commonly includes provisions intended to address potential limitation issues that could otherwise affect the continued enforceability of a guarantee.

A guarantee may appear commercially straightforward. The legal and corporate foundations still need to be examined carefully.

Enforcement Is Where the Real Test Begins

The creation of security is only the first part of the process. The real test comes after a default. The UAE has developed clearer routes for the enforcement of different forms of security, but the process remains dependent on the nature of the underlying asset.

Many forms of security may require court involvement and a formal enforcement process. This can include judicial procedures and, in some cases, the sale of the secured asset through a court-mandated auction.

By contrast, the movable assets security regime can provide additional enforcement mechanisms, including extra-judicial enforcement in appropriate circumstances where the legal and contractual requirements have been satisfied.

This distinction is important. A lender should not assume that the enforcement route will be the same for every asset. The security package should therefore be assessed as a practical enforcement strategy rather than simply a collection of collateral documents.

Timing Can Affect the Value of Security

Enforcement is not only about legal rights. It is also about time.

A secured asset may lose value while enforcement proceedings are ongoing. A business may face operational disruption. Receivables may deteriorate or be collected by another party. A real estate asset may be affected by market conditions.

The lender therefore needs to consider how quickly control can be established over key assets. This is particularly important in transactions where the value of the borrower depends on ongoing cash generation.

A lender may have security over bank accounts and receivables, but that security needs to operate effectively when the borrower experiences financial distress.

This is one reason why account control arrangements, cash management structures and contractual notices can be important.

The goal is not simply to create a right over the asset. It is to ensure that the lender has a workable route to controlling value when an event of default occurs.

Insolvency Can Change the Enforcement Process

The borrower's insolvency can create additional complexity. A secured creditor generally has priority over the proceeds of its secured assets, subject to the applicable insolvency framework and the terms of the security.

However, enforcement may be affected by restructuring or insolvency proceedings. A secured creditor may therefore need to consider not only its security rights, but also the timing of enforcement and the wider insolvency process.

The value of the security package can be particularly important in this context. A lender with properly created and perfected security is in a different position from an unsecured creditor.

However, security does not necessarily guarantee immediate recovery. The interaction between security rights, judicial supervision and business continuity considerations may affect how and when the lender can realise its collateral.

This is particularly relevant where the secured assets are essential to the borrower's business.

The lender may need to balance the benefits of immediate enforcement against the potential value of a restructuring or continued operation.

Foreign Lenders Face Additional Structural Questions

The growth of private credit and cross-border lending is creating additional challenges. A foreign lender may be familiar with a security package based on English or New York law concepts.

However, security over UAE assets will generally need to comply with the relevant local law requirements. This can create a split legal structure. The facility agreement may be governed by English law, while security documents relating to UAE assets are governed by UAE law.

This is common in international finance transactions. The challenge is ensuring that the documents work together.

Lenders also need to consider issues such as licensing, the appointment of local security agents, foreign judgment recognition and the requirements for Arabic translations in enforcement proceedings.

Where UAE courts are involved, official Arabic translations may be necessary for certain documents to be admitted and relied upon. For registered onshore mortgages and share pledges, Arabic documentation and local formalities can also be critical to the validity and registration of the security. These are practical issues. But they can have a direct impact on whether the lender can enforce its rights efficiently.

Due Diligence Is the First Line of Protection

Security cannot be evaluated in isolation. Before accepting an asset as collateral, the lender needs to understand whether the borrower owns it and whether it is already subject to another security interest.

This may require corporate searches, registry searches, review of financing documents and examination of the relevant asset registers. The lender should also consider restrictions on transfer.

A contract may prohibit the assignment of receivables. A shareholder agreement may restrict the transfer of shares. A third-party consent may be required before security can be created over a particular right.

These issues are often identified during due diligence. But they should also be considered from an enforcement perspective. The key question is not simply whether security can be granted today. It is whether the lender will be able to realise value from the asset following a default.

The Documentation Needs to Reflect the Enforcement Strategy

Security documents are often negotiated alongside the facility agreement. But the enforcement strategy should influence the drafting from the beginning.

A lender may need notices, powers of attorney, account control arrangements, acknowledgements from counterparties and direct agreements with important contractual parties.

A project financing may require step-in rights that allow lenders to take control of key contracts or support the continued operation of a project.

An intercreditor agreement may establish enforcement priorities and regulate how proceeds are shared between different classes of creditors.

These arrangements need to work together. A well-drafted security document may have limited value if the wider transaction documents prevent the lender from taking the steps required to enforce it.

This is why security should be considered as part of the entire financing structure.

The Next Challenge Is Execution

The UAE's debt finance market is becoming increasingly sophisticated. Private credit, cross-border financing and more complex capital structures are creating greater demand for flexible forms of debt.

This is increasing the importance of security. The challenge for lenders is no longer simply whether a comprehensive security package can be negotiated. The more important question is whether the package has been structured correctly.

Are the assets identified properly? Has the security been perfected? Are the relevant registrations complete? Does the lender have the right security agent? Have priority issues been addressed? Is there a clear route to enforcement?

The answers to these questions can have a significant impact on recovery. For lenders, the value of security is not measured by the number of documents signed at closing. It is measured by what the lender can recover if the transaction goes wrong.

As the UAE debt finance market continues to develop, that practical approach to taking and enforcing security will become increasingly important.

The strongest security package will not necessarily be the most extensive. It will be the one that has been structured with enforcement in mind.