KSA – The New Movable Assets Security Law and Amendments to the Commercial Pledges Law
The Kingdom of Saudi Arabia (“KSA”) has recently issued two laws that significantly widen the options available for creation of security. These are the Movable Assets Security Law and the Amendment to the Commercial Pledge Law both issued by Royal Decree No. (M/94) dated 15/08/1441H (corresponding to 08/04/2020G).
Movable Assets Security Law
- Under the Movable Assets Security Law, the options to create security have now been expanded to cover the following:
- Commercial pledges (under the provisions of the Commercial Pledge Law);
- A repurchase arrangement, being a sale of movables including with a condition for recovering or repurchasing the such movables;
- Transfer of ownership of movables as security;
- Sale of movables (on an instalment sale basis) on the condition that the transfer of its ownership is postponed until the price is fully paid;
- Assignment or rights by way of security; and
- Sale of rights in receivables.
- Under Article 3 of the Movable Assets Security Law, security can be created over movables whether tangible or intangible, current or future, or current or future rights including the following:
- Rights of third parties, whether immediately due or deferred, including receivables;
- Credit balances with banks and other financial institutions, including deposit accounts and current accounts;
- Written instruments transferable by delivery or endorsement, including commercial papers such as promissory notes, bank certificates of deposit and bills of lading;
- Animals and animal products;
- Agricultural crops;
- Immovable by Attachment; and
- Trees, even before they are cut down, and minerals, even before they are extracted.
- However, Article 4 excludes (a) transfer of rights for the purposes debt collection (i.e. sale of receivables under a factoring arrangement); and (b) purchasing a debt that is part of a project acquisition agreement. Further, Article 5 states that the Movable Assets Security Law does not apply to the following asset classes:
- Ships and Airplanes;
- Securities listed in the capital markets;
- Goods deposited in public warehouses unless the Security Interest has been created before they are deposited;
- Investment Accounts; and
- Properties with ownership records in which the Security Interests are recorded.
- Article 6 states that the ‘Secured Obligations’ are required to be generally or specifically described. The definition of ‘Secured Obligations’ includes all current and future obligations of the debtor/borrower. This is a significant change whereby there is no requirement to specify an upper limit of the amount secured. In order for the Security Interest to be perfected, the Security should be registered or in the actual or constructive possession of the secured party. Under Article 20, a Security Interest would be enforceable against third parties and shall have priority over other debts, including employees’ dues and government fees. Article 19 sets out the order of priority, in summary, a registered Security Interest will have priority over an unregistered Security Interest (e.g. possessory pledge) and the first in time Security Interest that is registered will have priority over other registered Security Interest.
- A new registration system called the Unified Register for Rights Over Movable Assets (the “Register”) is to be established within six months from the publication of this law.
- Under Article 23, the Security Provider and Secured Party can agree to enforce the Security without using court procedures. In other words, using self-help remedies. This includes selling by way of public auction or direct sale. The Regulations to be issued will set out the requirements relating to enforcement
Amendments to the Commercial Pledge Law
The amendments that have been issued are far-reaching and will require financial institutions to quickly adapt to these changes. The following are the significant changes introduced:
- The concept of a floating charge has been removed. Accordingly, there will be a requirement to identify all assets that are the subject of a pledge under the amended Commercial Pledge Law.
- The scope of the Commercial Pledge Law has been expanded by deleting the definition of “economic debt”. Prior to the amendment, the Commercial Pledge Law only applied to commercial debts, that is, debts arising as a result of a commercial transaction. Consumer financing including financing provided to an individual for various purposes was excluded. By deleting the requirement for the debt to be an “economic debt”, the Commercial Pledge Law now extends to consumer finance transactions as well as other secured financing provided to individuals.
- A pledge contract shall be effective against third parties by registration (i.e. the new register to be established under the Movables Asset Security Law) or transfer of possession of the pledged property to the pledgee or trustee, in accordance with the provisions of the Movable Assets Security Law. Issues relating to priority are dealt with under the Movable Assets Security Law.
- All ancillary components of a movable asset that is being pledged and proceeds arising from the movable asset are required to be specifically pledged. Prior to the amendment the pledge by default included such ancillary components and proceeds.
- Under the amended Article 14(2) of the Commercial Pledge Law, the proceeds arising from the pledged movable asset shall not be automatically be transferred to the pledgee. If the intention of the parties is to require such proceeds to be under the control of the pledgee, a specific reference would need be included in the pledge agreement. In the absence of such a provision, pledger would be entitled to receive such proceeds.
- The enforcement process previously covered under the Commercial Pledge Law will now be covered under the Movable Assets Security Law.
- While the amended Commercial Pledge Law retains the concept of a pledge over an economic entity, there is no longer a requirement for this security to be recorded on the Commercial Register maintained by the Ministry of Commerce.
- Article 35 of the Commercial Pledge Law relating to “future rights” has been deleted. However, the definition of the term “future rights” (which related to debts payable by an underlying debtor, i.e receivables) has been retained and forms part of the definition of “movable property”. In addition, the Movable Asset Security Law also permits the creation over future movable assets.
- Article 36 (1) of the Commercial Pledge Law relating to pledge over bank accounts and investment accounts has been deleted. However, Security Interest can now be created under the Movable Assets Security Law (excluding Investment Accounts).
- Article 37(1) has been deleted. This provision clearly permitted the creation of a share pledge over shares of an un-listed company (e.g. the shares of a Limited Liability Company). It is not clear at this point how this would impact this type of security going forward.
- The provisions relating to self-help remedies and enforcement is now to be covered under the Movable Assets Security Law.
Lobna Al Reshaid
Trainee Lawyer, Banking & Finance