Further developments on “adequate securities” under Decree-Law No. 23 of 2022 amending the UAE Banking Law

Further to our previous client alert on Decree-Law No. 23 of 2022 coming into force on 2 January 2023 amending Law No. 14 of 2018 (the “Banking Law”), the Abu Dhabi Execution Department has issued Abu Dhabi Execution Action 143 of 2022 (“Execution Action”) providing some insights into the possible interpretation of the requirement for obtaining “adequate securities” against financial facilities.

Meaning of Adequate Security

The amendments to the Banking Law pursuant to Decree-Law No 23 of 2022 introduced the need for financial institutions to obtain ‘adequate securities’ when lending to natural persons and sole proprietorships taking into account the relevant facility and the customer’s income and financial position. Article 121 of the Banking Law states that “Licensed Financial Institutions must obtain adequate securities for all types of facilities offered to customers who are natural persons and sole proprietorships, in accordance with the customer’s income, or the security – if any – and the size of the required facilities as determined by the Central Bank” . The consequences of failing to obtain “adequate securities” are that no application, suit or argument shall be accepted before the competent judicial authorities or arbitral tribunals when the financial institution has not obtained ‘adequate securities’. The UAE Central Bank also reserves the power to impose administrative and financial penalties for non-compliance.

The law itself does not define or provide any guidance on what is considered “adequate securities”.

Article 121 was raised as a defence in the Execution Action, with the Execution Department providing commentary on the underlying rationale for this Article. The Execution Action itself concerned the issue of whether a bank was entitled to present the security cheque for enforcement.  The individual (the objector) ultimately sought a decision discharging him from the amounts subject to enforcement and closing the execution file permanently. The court in its decision accepted the grievance filed against the bank and decided to reject the enforcement of the cheque as it exceeds the provided securities – a property mortgage.

The court stated that the underlying rationale is to protect customers (individuals and sole proprietorships) obtaining financial facilities, in the event of their default, by limiting enforcement action against them to the security they have provided to the financial institutions. This is to guard against the risk of the customer facing financial and social distress, should enforcement extend to the rest of the customer’s assets.

Cheque as Security

The Execution Action also clarified the use of cheques handed over as a means of payment of an amount when due. The Execution Action makes reference to the Commercial Transactions Law (as amended) which provides that a cheque that bears an annotation by the drawee with no or insufficient funds shall constitute a writ of execution under Article 667 of the new Federal Decree by Law No. (50) of 2022, Promulgating the Commercial Transactions Law read together with Article 147 of the new Federal Law No 42 of 2022 Promulgating the Civil Procedure Code. The bearer of such cheque may seek its enforcement, coercively, in whole or in part. The provisions, procedures and rules of the executive regulations referred to above hall apply to enforcement and enforcement disputes in connection with such cheques.

The Execution Action clarified that a cheque is principally used as an instrument of payment of a debt owed by the drawer to the beneficiary. However, it may also be given, not in payment of a debt, but rather, in commercial practice, as security for payment. In this case the Enforcement Department found that the cheque was ineligible for enforcement as the cheque was issued (as a security) in connection with a loan secured by a mortgage. The mortgage was therefore deemed sufficient security and the cheque was ineligible for drawing.

Key takeaway

The Execution Action did not involve substantive proceedings and therefore it is difficult to say whether the same interpretation and approach will be taken by all courts or become standard practice.

It does however provide insights into possible interpretation which if consistently applied, would require financial institutions to carefully consider the extent of their security packages taken from consumers and the method of enforcement (historically the cheque default could be used to evidence a failure to pay the mortgage loan, for example). In any proceedings there is the possibility the court could consider what assets were secured and their value, what assets are being executed against and the appropriateness of the same. As a result financial institutions may need to consider whether to over-collateralize so as to provide a menu of recovery options, while at the same time acknowledging that actual reliance on all of the security may face obstacles, or in the alternative, to narrow the security taken to the likeliest path of enforcement.

How can we help?

Please reach out to us for any further assistance on taking adequate securities or for any other financial services related matters.