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Federal Decree-Law No. 16 of 2021 on Factoring and Transfer of Receivables
In August 2021, the UAE government enacted the Federal Decree-Law No. 16 on Factoring and Transfer of Receivables (hereinafter the “Law“, which came into effect ninety (90) days after its publication. This Law provides a comprehensive legal framework for the factoring and transfer of receivables within the UAE, impacting various stakeholders in commercial and financial transactions, particularly in terms of how receivables are handled and rights transferred.
1. Applicability:
The Law applies to transactions involving the transfer of current and/or future receivables, where such transfers may be for securing a debt or outright sale.
It includes personal, family, or household transactions, certain financial instruments, and payments related to securities or documentary credits.
2. Validity and Effect of Transfer:
Transfers of receivables become binding and effective between the transferor and transferee even without the debtor’s notice. This simplifies the transfer process and reduces the administrative burden on the transferor.
The law enforces the identification of receivables either generally in the transfer agreements.
3. Rights and Obligations:
The transfer automatically includes any ancillary rights related to the receivables unless otherwise required by law. This ensures that all related security interests are also transferred, providing comprehensive coverage to the transferee, which is generally the bank or a financial institution. Restrictions in the original contract affecting the right to transfer receivables do not invalidate the transfer, protecting the interests of the transferee against potential contractual limitations.
4. Enforceability and Priority:
The transfer of receivables is enforceable against third parties only after registration, which aligns with the UAE’s emphasis on documented and registered financial transactions.
Priority among competing claims is determined based on the registration, safeguarding the rights of the transferee against other potential creditors.
5. Debtor’s Rights and Obligations:
Debtors are required to comply with the transfer once notifies but are protected from amendments that could adversely affect their obligations without their consent. This balances the interests of the debtor with the rights of the transferee.
Debtors can still invoke defenses related to the original contract unless specifically waived, maintaining their rights against unfair practices.
• Specific Articles and their Implications:
1. Article 4.2 – Validity of Transfer Without Debtor Notification:
This article states that a transfer of receivables becomes effective between the transferor and transferee even if the debtor (Receivable’s Debtor) receives no notice of the transfer.
2. Article 11 – Rights to Notify and Instruct the Debtor:
According to this Article, both the transferor and transferee have the right to serve notices and instructions to the debtor. Importantly, once the debtor receives such a notice, their obligation shifts to comply with the payment instructions directed towards the transferee.
3. Article 14.1 – Effective Communication of Transfer or Payment Instructions:
This Article specifies that notices of transfer or payment instructions become effective once received by the debtor, provided they are issued in the language of the original contract or another language the debtor is expected to understand. It ensures that the transfer notice is comprehensible to the debtor, facilitating compliance and reducing disputes related to language barriers.
•Contractual Implications:
Traditionally, contracts often include clauses that restrict the assignment of the agreement without the consent of both parties involved. However, under the Law, specifically in the context of receivables, these conventional clauses are overridden. This Law enables the transfer of receivables to a third party without the need for the debtor’s consent.
• The Law allows for the transfer of rights and receivables without requiring the explicit consent of the debtor, contrary to what is often stipulated in commercial contracts. This legislative provision supports greater fluidity and flexibility in financial transactions, particularly beneficial in scenarios involving factoring and receivables financing.
• These provisions provide legal certainty to transferees and transferors by clearly delineating rights and obligations upon the transfer of receivables, thus managing risks associated with debtor objections or delays.
• Conclusion:
This Law does not introduce entirely new concepts but formalizes and clarifies the legal framework for financial transactions involving receivables, ensuring that rights and obligations are clearly defined. By providing clear definitions, simplifying the transfer process, and protecting the rights of involved parties, this Law facilitates a more efficient and secure environment for such transactions. As the UAE continues to enhance its financial services regulations, this Law is a critical step forward in aligning with international financial practices.
Attached is the supporting document in this regard
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