The Law of Security 2024 (New Law) came into effect in the Dubai International Financial Centre (DIFC) on 8 March 2024 (Effective Date), replacing the previous Law of Security 2005 (Old Law). Modelled after the UNCITRAL Model Law on Secured Transactions, the revised regime brings DIFC’s security framework in line with international standards. The New Law introduces asset-specific regulations and provides clarifications on certain aspects not addressed in the Old Law. However, it poses challenges for existing creditors, who must take affirmative steps to ensure the continued effectiveness of their existing security rights.

This LawFlash outlines key amendments to the legal framework under the New Law and discusses practical considerations for existing and prospective creditors.  

TRANSITIONAL PROVISIONS

This section provides an overview of key transitional provisions and practical considerations to illustrate the impact of the New Law on existing deals and security rights established under the Old Law, as well as ongoing disputes, priority, and perfection under the previous regulations.

Application in Time

The New Law applies to all security rights, including those already created by agreements entered into before the Effective Date (Prior Security Rights).

Validity of Creation of Prior Security Rights

Whether a Prior Security Right was validly created is determined by the provisions of the Old Law. Such rights remain effective between the parties, even if they do not conform to the requirements of the New Law. However, as against third parties, the Prior Security Rights will cease to be effective upon the expiry of the transitional period described below, unless creditors take active steps to ensure that Prior Security Rights remain valid beyond such transitional period.

Continuation of Prior Security Rights: Actions Required from Creditors

A Prior Security Right will be effective against third parties until the earlier of (1) the time it ceases to be effective under the Old Law; and (2) 8 March 2025.

Before the Prior Security Right ceases to be effective, parties may ensure its continuation by fulfilling the perfection requirements stipulated in the New Law—namely, by filing a financing statement with the DIFC Registrar of Security. In such case, the relevant Prior Security Right will remain effective against third parties under the New Law from the time when it was first perfected under the Old Law.  

While the transitional rules of the New Law are not entirely clear, our interpretation suggests that failure to file the financing statement before 8 March 2025 will result in the respective security ceasing to be effective against third parties and losing its priority. In the absence of additional clarifications from the DIFC Registrar of Security, it is recommended that secured creditors whose security rights extend beyond 8 March 2025 take steps to ensure that financing statements are filed by 8 March 2025 in respect of their security registered in DIFC in order to maintain its priority and ensure its continued effectiveness.

Disputes and Enforcement

The Old Law remains applicable to matters that are the subject of proceedings before a court or arbitration tribunal initiated prior to the Effective Date. If enforcement measures were initiated before the Effective Date, the enforcement process may proceed either under the Old Law or under the New Law, at the discretion of the claimant.

The key amendments introduced by the New Law are discussed below.

CREATION OF SECURITY RIGHTS

Abolishment of the ‘Attachment’ Requirement

The Old Law was based on the English law concepts of “attachment” and “perfection” of a security interest as outlined in Articles 11 and 17 of the Old Law.

The New Law simplifies this process by stipulating in Article 13 that a security right is created by a security agreement, provided that the grantor has rights in the asset to be encumbered or the power to encumber it. Consequently, other requirements relating to the “attachment” of the security interest, such as the requirement that the value be given for the security interest to attach to the respective collateral, have been abolished.

Description of Secured Obligations

Article 16 of the New Law now expressly permits to describe secured obligations by reference to all obligations owed to the secured creditor at any time.

Form of a Security Agreement

Paragraph 4 of Article 13 of the New Law clarifies that a security agreement may be oral, provided that the secured creditor is in possession of the encumbered asset.

PERFECTION AND PRIORITY OF SECURITY RIGHTS

Perfection

Same as previously, under the New Law, the security interest is perfected (i.e., granted “effect against third parties”) by filing a financing statement with the DIFC Registrar of Security. However, the New Law introduces several practical rules and clarifications regarding certain assets:

• A security right in a negotiable instrument, made effective against third parties by possession of the instrument, takes priority over a security right in the same instrument made effective by registration of a financing statement in the Security Registry (Article 55 of the New Law).
• A security right in the right to receive proceeds under an independent undertaking (such as a letter of credit or guarantee), made effective against third parties by granting control to the creditor, holds priority over a competing security right established by any other method (Article 60 of the New Law). Control can be granted through various means for different types of assets, including, with respect to the rights under an independent undertaking, by an acknowledgment made by the respective debtor under that independent undertaking.

Priority

The rules governing the perfection and priority of security rights under the New Law generally mirror those of the Old Law. Priority is determined based on the order in which security rights are made effective against third parties, typically achieved through the registration of a financing statement.  

However, the New Law provides further clarity on various issues commonly arising in the context of priority of security, including the following:

• Resolving competing security rights in tangible assets commingled in a mass or transformed into a product.
• Addressing conflicts between security rights and rights of judgment creditors and other similar rights.
• Setting out rules dealing with acquisition security rights (being security rights in tangible assets securing an obligation to pay any unpaid portion of the purchase price of that asset, as well as certain other types of security rights).

Subordination

Article 52 of the New Law expressly permits creditors to subordinate the priority of their rights under the New Law at any time in favour of any existing or future competing claimant. The beneficiary does not need to be a party to the subordination agreement.

Creditor’s Knowledge of Existing Security Rights

Article 54 of the New Law provides that the knowledge of a secured creditor regarding any preexisting security rights in the collateral does not impact the priority of the security right created in favour of that creditor.

The practical implication of this rule is that only the timing of perfection of the security determines its priority, regardless of any knowledge the secured creditor may have about other existing (but not properly perfected) security interests in the collateral.

ASSET-SPECIFIC RULES

Proceeds of Collateral

Under the Old Law, the secured party was already entitled to any “identifiable proceeds” of the collateral. Article 17 of the New Law now provides that “identifiable proceeds” encompass whatever is received in respect of an encumbered asset. This includes proceeds from sales or other transfers, leases, licenses, collections, insurance, claims resulting from defects, damages, or losses, as well as proceeds of such proceeds.

Commingling of Assets

Article 17 of the New Law further clarifies that where proceeds in the form of money, digital assets, or financial collateral (Assets) are commingled with other assets of the same kind, the security right extends to the commingled Assets, even if they are no longer identifiable. This extension is subject to the following conditions:

• The security right in the commingled Assets is limited to the amount of Assets immediately before they were commingled.
• If, at any time after commingling, the amount of the commingled Assets is less than the amount of the Assets immediately before commingling, the security right in the commingled Assets is limited to the lowest amount between the time of commingling and the time of enforcement of the security right.

Digital Assets

The New Law incorporates specific provisions for digital assets, reflecting the adoption of DIFC’s Digital Assets Law. While many provisions of the New Law, such as those regarding the commingling of assets, are applicable to digital assets, it also recognizes certain specifics unique to digital assets. For instance, the New Law acknowledges that a security right concerning digital assets can be perfected by granting control over such assets to the secured creditor.

Assignment of Receivables

The New Law stipulates that a security right in a receivable remains effective despite any agreements which limit the grantor's right to create a security right over such receivable. The same approach applies to independent undertakings. The beneficiary of such independent undertaking may establish a security right over the future proceeds, even if the right to draw under the independent undertaking is non-transferable.

ENFORCEMENT OF SECURITY

The legal framework for enforcing security interests generally remains similar under the New Law compared to the Old Law. However, the New Law introduces several procedural clarifications.

One significant clarification is found in paragraph 1 of Article 84 of the New Law, which specifies that secured creditors can enforce security without applying to DIFC Courts. However, even under the New Law, this process remains unclear with respect to tangible assets. Article 88 of the New Law provides that taking possession of collateral out of court (which is usually necessary, in practice, for an out-of-court enforcement) requires consent from both the grantor and the person having possession of the collateral.

It is not entirely clear whether in practice such consents can be granted in advance in the security agreement. Paragraph 3 of Article 83 of the New Law prohibits the unilateral waiver or variation of rights under Part 6 of the New Law, which includes Article 88.

As a result, out-of-court enforcement of the security is likely to remain a challenging procedure for the secured creditors under the New Law, with enforcement through DIFC Courts remaining the primary method.

CONCLUSION

The New Law marks a significant shift for DIFC towards enhancing the legal framework for secured transactions, aligning the local regime with global best practices and recognizing the nuances of creating security over different types of assets.

By providing clarity on the creation and perfection of security rights and introducing more precise rules for their enforcement, the New Law offers a clearer, more comprehensive, and adaptable system for securing transactions. This development not only solidifies DIFC's position as a leading global financial hub, but also establishes a robust foundation for future innovations in the financial sector.

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