Introduction:

Federal Law No.4 of 2020 promulgated for Securing the Rights over the Moveable Assets (“Law”) allows creation of pledge over moveable assets viz., tangible and intangible, present and future as security for indebtedness.

The Law is relatively new and the courts of UAE have differing views with regard to its interpretation and implementation. MAS Law successfully represented the Pledgee in Case No. 101/2021 wherein the Fujairah Federal Court of Appeal overturned the decision of the Fujairah Court of First Instance and issued a landmark judgment clarifying the procedure of enforcement of a pledge stipulated by the Law.

Fujairah Court of First Instance:

The Pledgee advanced certain facilities to the Pledgor under a Murahaba Agreement. Pursuant to which, the Pledgor by way of an Asset Pledge Agreement, pledged the existing and future goods including fuel oil located in the storage facility in Fujairah (“Pledge Assets”) in favour of the Pledgee as a continuing security for payment, discharge and performance of its secured obligations under the Murahaba Agreement (“Pledge”). The Pledge was registered in the Emirates Moveable Commodities Register (“EMCR”). The Pledge Agreement entitled the Pledgee to enforce the Pledge inter alia in the event of any breach of secured obligations by the Pledgor and/or occurrence of any event of default defined in the Murahaba Agreement.

On account of Pledgor’s failure to fulfil its secured obligations under the Murahaba Agreement, the Pledgee, filed an ex-parte application before the Magistrate Summary Judge of the Fujairah Court of First Instance under Article 29 of the Law, requesting the Court to seize the Pledged Assets and allow the Pledged Assets to be sold by the Pledgee to recover its dues. The Magistrate Summary Judge dismissed the Pledgee’s application on the grounds that the Pledgee has not furnished evidence to prove that the Pledged Assets belong to the Pledgor & borrower under the Murahaba Agreement.

Fujairah Federal Court of Appeal:

The Pledgee appealed the decision of the Fujairah Court of First Instance before the Fujairah Federal Court of Appeal within five (5) working days in accordance with Article 31 (2) of the Law. Pursuant to which the summons of appeal was served upon the Pledgor, Bailee and the owners of the vessels wherein the Pledged Assets were stored.

The Pledgee filed the appeal challenging the decision of the Fujairah Court of First Instance on the following ground (“Appeal”):

• The Pledgee argued that its application for enforcement of Pledge by way of seizure and sale of the Pledged Assets under Article 29 was duly filed alongwith the documents stipulated under Article 29 (3). The Pledgee further argued that the Law does not require the Pledgee to submit any document evidencing that the Pledged Assets are owned by the Pledgor/the borrower. Therefore, the ground for dismissal of the Pledgee’s application by the Fujairah Court of First Instance is invalid and should be overturned by the Fujairah Federal Court of Appeal. Article 29 (3) of the Law is re-produced herein below for reference:

“Article 29(3)-

Without prejudice to the Obligee’s rights to follow the ordinary judicial proceedings, they may submit a request to the Magistrate of Summary Justice to order the seizure and enforcement of the Collateral in accordance with the provisions of this Law. The request shall be accompanied by the following documents and information:

1. Copy of the Contract of Guarantee and extract of the Publicity of the Security Interest in the Register;
2. Name and address of the party requesting enforcement;
3. Name and address of both the Guarantor and the Principal Debtor;
4. Name of the holder of the Collateral, if it is held by a third party;
5. Name and address of the owner of the movable asset to which the Collateral is attached, the holder of the asset if they are a different person, the owner of the property where the Collateral is found and the holder of this property if they are a different person, as the case may be.”

The owners of the vessels and the bailee objected to the Appeal on the following grounds:

• The Appeal not filed within five (5) days of the decision issued by the Magistrate Summary Judge of the Fujairah Court of First Instance;
• Pledgee failed to serve a notice under Article 27 (1) of the Law.

 Legal arguments by the Pledgee:

• The Pledgee clarified and confirmed that the Article 31(5) of the Law stipulates that the Appeal should be filed within five (5) working days and not within five (5) calendar days. Therefore, the Appeal was duly filed within the stipulated period under the Law.
• The Pledgee argued that Article 27(1) of the Law is not a mandatory provision but merely a directory provision. The use of the word ‘may’ instead of ‘shall’ in Article 27(1) reflects that intention of the Law is to construe it in a discretionary manner and not as obligatory or mandatory. Both the terms ‘may’ and ‘shall’ used in the Law are used in contradistinction of each other and should be given their natural meaning. The determination as to whether the statute is mandatory or directory can be determined from the reading of the relevant statute in reference to the context thereof (Article 27(1) is reproduced herein below for reference). Therefore, the Pledgee it is not legally obligated to comply with the requirements set out in Article 27(1):

 “Article 27 (1) –

If the Guarantor or the Principal Debtor fails to fulfil the obligations set out in the Contract of Guarantee, the Obligee may notify the Guarantor and the Principal Debtor in writing of their intention to seize and enforce the Collateral, to separate it from any other asset attached thereto, if need be, and to dispose thereof within the period specified in the notification, provided that the following conditions are met:

1. Giving notice to the other holders of rights over the Collateral publicised in the Register.
2. Notifying the holder of the Collateral if it is held by a third party.
3. Notifying the owner of the property where the Collateral is found or the mortgagee creditor of this property as well as the owner of the movable asset to which the Collateral is attached and the holder of the asset.”

 Final Decision by Fujairah Federal Court of Appeal:

Fujairah Federal Court of Appeal vide its judgment dated 28^th June, 2021 upheld and accepted the arguments advanced by the Pledgee and overturned the decision of the Fujairah Court of First Instance and accordingly dismissed the arguments made by the owners of the vessels and the bailee.

Conclusion:

The Courts of UAE have distinct opinions regarding the interpretation, implementation and enforcement of the Law. In our experience the Courts of Sharjah and Dubai have in the past insisted for notice under Article 27(1) to be issued. However, Fujairah Federal Court of Appeal has set a precedent through its landmark judgment and has upheld the Pledgee’s interpretation on the requirement for following the procedure under Article 27(1). For a brief background on the Law, the readers may kindly refer to our Legal Glimpse on Moveable Asset Securities Law.

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