Taking Security over POS Receivables in the UAE

5 min 56 sec

Written by

Dina Al Wahabi

Senior Associate

d.alwahabi@tamimi.com View LinkedIn Profile

Point-of-sale (POS) receivables is a common form of collateral for secured lending transactions in the UAE. However, the unique characteristics of POS receivables, their short settlement cycles, the involvement of acquiring banks and payment networks, and the absence of identifiable end-customer debtors raise an interesting legal dynamic for lenders seeking to perfect and enforce security over this asset class.

This article examines the particular considerations for taking security over POS receivables under UAE law, including the applicable statutory framework, registration requirements and practical considerations.

Applicable statutory framework

Receivables can generally be secured under the applicable statutory framework, comprising:

• Federal Law No. 4 of 2020 on Securing the Rights in Movables (the Movables Law);
• Cabinet Resolution No. 29 of 2021 on Issuing the Executive Regulations of the Movables Law (the Movables Regulations); and
• Federal Law No. 16 of 2021 on Factoring and Transfer of Accounts Receivable (the Receivables Law).

Accounts receivables and an assignee’s rights can be secured under the Movables Law. The Receivables Law defines “accounts receivable” as the contractual right to collect sums of money owed to the assignor by the debtor. An assignment of receivables is effective, provided the receivables are described in a general or specific manner to allow their identification.

The priority of a security right (including an assignment of receivables by way of security) in the same collateral as between competing secured parties is determined by the date and time of perfection, typically implemented by registration in the Emirates Integrated Registries Company (EIRC).

The statutory framework therefore establishes a strict first-in-time, first-in-right priority system. The date and time of registration on the register maintained by the EIRC is the sole determinative measure by which priority amongst competing EIRC registrations on the same collateral is assessed.

Nature and structure of POS receivables

A key question for lenders is how to secure an assignment of receivables where the income and receivables in question are payments generated from POS transactions, particularly in circumstances where there is no underlying contract that can be specifically identified and there are no identifiable third-party debtors to whom notices can be sent. The most robust approach applied in the market is to have:

1. A security agreement and EIRC registration over all elements of the pool of POS receivables and their proceeds,e. the receivables themselves and the right to receive them from the acquiring banks.
2. Notification to the acquiring bank of security/assignment of rights to receive receivables routed through the bank under the POS merchant agreement.
3. A security agreement and EIRC registration over the account into which proceeds of receivables are deposited.

The rationale for each of these elements is explained in more detail below.

Settled proceeds and in-transit proceeds

POS receivables differ from traditional trade receivables. Unlike amounts owed under supply contracts with identifiable debtors and defined credit periods, POS receivables arise from a fundamentally different payment mechanism with distinct characteristics.

When a customer makes a POS payment, funds are routed through the card network and acquiring bank before being settled into the merchant’s account within a short settlement cycle. POS receivables therefore consist of a continuously revolving short-duration payment stream administered by the acquiring bank and payment network. This is why POS payments are commonly classified as “cash and cash equivalents” rather than “receivables” from an accounting perspective.

For security purposes, the lender is taking an assignment over a category or class of receivables routed through an acquiring bank rather than individual debts owed by named counterparties. This raises the question of how a lender can create effective security over “in-transit” proceeds, i.e. proceeds that have been authorised but not yet settled.

The Receivables Law excludes certain categories of receivables, including rights to payments deposited into bank accounts, interbank payments, and netting systems. These exclusions are directly relevant to in-transit POS proceeds, as once a cardholder’s payment enters the clearing and settlement cycle, such in-transit proceeds may fall within one or both of these carve-outs. This means that, whilst a merchant can assign its contractual right to receive POS proceeds from the acquiring bank, the Receivables Law may not govern the assignment at certain stages of the payment life-cycle. Namely, in-transit POS proceeds may fall outside the Receivables Law due to the interbank payment systems exclusion or being deposited proceeds (funds already credited to the merchant’s account) are expressly excluded.

Once POS proceeds have been credited to the merchant’s bank account, the merchant’s right is no longer a contractual right to collect sums of money owed by a debtor, but rather a credit balance held at a financial institution, which is governed by the Movables Law and the Movables Regulations.

Notwithstanding this potential gap, during the brief window between authorisation and settlement, the merchant’s contractual right to receive settlement from the acquiring bank under the merchant services agreement is capable of constituting an “account receivable” within the meaning of the Receivables Law. That contractual right is transferable, and such assignment should be registered on the EIRC to be effective against third parties.

Accordingly, the relevant security agreement should capture all elements of the pool of POS receivables and their proceeds.

Notification to the debtor or acquiring bank

Under the Receivables Law, an assignment is valid even without notification to the debtor, and is effective provided the receivables are described in a manner allowing their identification. The Movables Regulations similarly permit descriptions by reference to a class or type of assets, whether current or future. Enforceability against third parties is achieved through EIRC registration, not notification.

Nevertheless, given that there is no recourse to individual transaction debtors, there are practical advantages to notifying the acquiring bank, because it would provide a clear instruction (and ideally acknowledgment) to route in-transit proceeds to the lender in an enforcement scenario.

It is also best practice to ensure receivables are deposited into an account secured in the lender’s favour. Where the lender is the account-holding bank, it benefits from both the registered assignment and a statutory priority over the credit account into which proceeds are settled. The lender may exercise set-off rights over the credited funds and should also consider entering into an account pledge registered on the EIRC.

Where POS settlement proceeds are deposited with a third-party bank, the lender would not benefit from this priority position. In such cases, a “control agreement” may be entered into under which the third-party bank agrees to follow the lender’s instructions regarding the deposited amounts without requiring the merchant’s consent. This gives the lender effective control over the proceeds without relying on the merchant’s cooperation.

Conclusion

Taking security over POS receivables in the UAE requires structuring reflecting the unique characteristics of this asset class and the applicable statutory framework under the Movables Law and Receivables Law. This can be easily done by ensuring security agreements and EIRC registrations are drafted broadly enough to capture the full lifecycle of POS proceeds, from in-transit receivables through to deposited funds.

The additional protection of account security, notification to the acquiring bank, and a control agreement where proceeds are held with third-party banks, enhances and protects the secured party’s rights to the receivables.