Receivables financings and the UAE Factoring Law: update on current market practice

Since UAE Federal Law No. 16 of 2021 (the UAE Factoring Law) came into force, receivables financing structures in the UAE have been evolving rapidly. The UAE Factoring Law has provided much needed certainty to the receivables financing industry in relation to key requirements under UAE law to effect a true sale of receivables and to protect the priority position of a financier in relation to sold receivables against competing creditors (refer to our earlier article here for further details). However, in our view, certain key aspects of increasingly common market practice that have started to develop and take root in the UAE since the inception of the UAE Factoring Law may not currently be taking into account precisely what the UAE Factoring Law appears to anticipate. In particular, increasingly common approaches involving receivables financing framework agreements, single registrations of such framework agreements and anticipatory (i.e. early) notices of possible future transfers of receivables may not deliver the level of legal protection or risk allocation that financiers and investors assume they do or require. In this article, we take a look at these key elements, outline the tensions created by current market practice and suggest some improvements to put UAE-law-governed receivables financings on a clearer legal footing going forward.

Where we see the key legal tension

Different types of framework agreement

The UAE Factoring Law is structured around the transfer of identified receivables and does not expressly cater for framework-style arrangements under which possible future transfers of receivables may be effected. It assumes that there is a bespoke sale and purchase of all of the receivables (whether specific or a class of receivables) at the time the transfer is effected. It follows that framework-style agreements for the sale of receivables under UAE law do not align closely with the approach anticipated by the UAE Factoring Law.

We are aware of two types of framework agreements entered into by corporates and financiers:

• an uncommitted framework agreement whereby a corporate sells all of its receivables up front, but only decides whether or not to finance them with the financier at a later date (by making an election to objectively identify the relevant receivables – for instance, nominating the account of the financier in the invoice to the relevant receivables debtor) (a Day One Sale Agreement); and
• an uncommitted framework agreement whereby the type of receivables eligible for financing are identified, but the actual sale of such receivables only takes place later at the time the corporate elects whether or not to finance them (an Ad Hoc Sale Agreement).

A Day One Sale Agreement is typically entered into to reduce the burden on the relevant corporate of needing to deliver multiple notices on receivables debtors in the future. However, the structure of the Day One Sale Agreement in particular gives rise to a number of complicated legal questions in respect of which the position under UAE law is not clear, including: (i) whether such corporate still has the right to the receivables after such day one sale; and (ii) whether the corporate can finance such receivables with a different financier notwithstanding such day one sale. On first principles, it would appear the answer to both questions is no, as the relevant receivables have already been sold, so more risk-averse financiers will likely be of that opinion. However, the UAE Factoring Law also anticipates possibly having multiple tiers of interest in a single receivable (for instance, Article 8 (Priority among Competing Claimants) which provides that the priority of rights of transferees over a receivable shall be determined as per registration priority in line with UAE Federal Law No. 4 of 2020 (the UAE Movables Security Law) thereby potentially making the analysis more complicated).

Further official guidance will be needed on such details to provide market participants with more certainty on precisely how such issues in respect of Day One Sale Agreements are likely to be determined under UAE law.

Registration: form vs. substance

Registration of receivables sold under the UAE Factoring Law is regulated by the UAE Movables Security Law. While the UAE Movables Security Law permits advance registration of movables security interests prior to the security being taken, in the context of the registration of the sale of receivables under the UAE Factoring Law it appears only to permit registration following an actual transfer. So, whilst a Day One Sale Agreement would be registrable, the instrument transferring title under an Ad Hoc Sale Agreement should only be registrable at the point of sale.

This creates a tension between what can be registered in form and what has been transferred in substance – an area which remains untested. We are aware of a number of Ad Hoc Sale Agreements being registered under the UAE Movables Security Law. Where this is the case, there is an argument that the actual sale has not been properly registered and so, in order to take the correct priority against competing creditors, it would be advisable to register the actual sale (as opposed to the framework agreement) of the receivables at the time of the sale. From some of the registrations we have seen, it is not clear that this actually happens in practice.

Notices of transfer: timing matters

The UAE Factoring Law also includes provisions setting out when the sale of receivables is to be notified to the receivables debtor through a Notice of Transfer. There is no obligation to issue such a Notice of Transfer, but if one is sent to the receivables debtor and there are competing Notices of Transfer, the receivables debtor is required to pay the debts in the order in which the Notices of Transfer are received (even if that differs from the order or the registration on the UAE Movables Security Register) if it is to give a good discharge of its debt. In receiving a Notice of Transfer, a receivables debtor is entitled to receive evidence of the transfer.

However, the definition of a "Notice of Transfer" in the UAE Factoring Law assumes that a transfer has already occurred. Therefore, any Notice of Transfer issued before any transfer under an Ad Hoc Sale Agreement at the time such agreement is entered into (as opposed to the sale under it) may therefore be vulnerable to challenge, particularly where a receivables debtor requests evidence of transfer (which will not have happened at the time the Notice of Transfer is served, so it would not be possible to satisfy that UAE law evidence of transfer requirement). This runs the risk that the receivables debtor does not need to comply with the Notice of Transfer (although if it has acknowledged the Notice of Transfer, it may well give rise to other contractual rights in favour of the financier).

Why do all of these issues matter?

These issues are not merely technical, but structurally essential. They may affect:

• priority against competing creditors;
• enforceability against receivables debtors; and
• risk allocation between financiers and corporates.

As receivables financing volumes in the UAE increase and more participants enter the market, the likelihood of competing claims, debtor challenges and enforcement scenarios also increases. These are precisely the situations in which structural weaknesses are most likely to be challenged and exposed.

What should market participants be doing?

Market participants should actively review: (i) their receivables framework agreements against the UAE Factoring Law and the UAE Movables Security Law, rather than relying solely on prevailing market practice which, as our analysis has shown, may benefit from some tightening up in certain key respects; and (ii) any registrations they have made against any Ad Hoc Sale Agreement as opposed to the transfer of receivables under it. In particular, consideration should be given as to whether current approaches to transfers, registrations and notifications are fully aligned with what appears to be best practice under UAE law as currently drafted, bearing in mind the points above.

There are structuring approaches available which can significantly mitigate these risks and provide greater legal certainty. However, these are highly fact-specific and require careful design and implementation. If you would like to discuss how these issues may affect your programmes, or explore appropriate structuring options, please contact your usual Dentons adviser.