Federal Decree Law No (16) of 2021 (Factoring Law) was issued on 29 August 2021 and came into effect on 7 December 2021. The Factoring Law, whilst laying a legislative framework for a rapidly expanding trade finance industry in the United Arab Emirates (UAE), also provided much needed clarity from, and an update to, Federal Law No (4) of 2020 (Moveables Law) and Federal Law No (1) 1987 (Civil Code).
New entrants to the trade finance market
There is a burgeoning trade and invoice finance market in the UAE and trade financiers are entering the market at pace. Backed by strong sponsors these financiers are able to unlock cash flow problems suffered by businesses as a result of notoriously stretched payment terms and supply chain delays which have only been exacerbated by the COVID-19 pandemic. Businesses who may otherwise be facing cash flow insolvency appear to be attracted by these trade finance or factoring arrangements. On the face of it, they are able to secure credit terms without lengthy credit processes and unlock cash immediately. This should, as a result, improve delays in the entire supply chain and sustain business confidence in the UAE.
The problem with receivables
The trade finance industry, whilst growing, has traditionally encountered difficulties when seeking to properly secure receivables (especially future receivables). Whilst the Moveables Law represented an advance from the Civil Code, providing the ability to more easily capture receivables (including specified future receivables) and saw the creation of the EMCR (now the Emirates Integrated Registries Company (EIRC)), there remained key areas, such as in relation to unspecified future receivables, where greater clarity was required. The Factoring Law has hopefully helped to provide that clarity.
The Factoring Law specifically provides that future receivables, being those which "come into existence after the transfer is concluded" , are capable of being fully secured with no requirement to engage any new transfer "on a case by case basis."  The nature of such assignment also appears to have evolved, with an assignment created under the Factoring Law either representing an assignment in security or a full transfer of the receivables.  The definition of "assignment" in the Factoring Law supports this two-pronged assessment, characterising the assignment as both the agreement under which the transferor's contractual rights are transferred to the transferee and the agreement by which a security right is created over the debt, transferred as security and then sold in a final sale. This is also reflected in Article 20 of the Factoring Law which provides that the transferee can collect the receivables at any time after such receivables fall due  (as would be the case if the transferee had title to the receivables in question) while also being able to collect the receivables at any time after there has been a default by the transferor  (as would be expected in a scenario where the transferor had a right in security over the receivables).
Potential for wide application
The changes introduced by the Factoring Law have made a significant impact on the market. Not only have trade financiers taken steps to formalise their operations by obtaining a license  but traditional licence-holding financial institutions and UAE clearing banks are now starting to assess whether the Factoring Law can support a wider set of consumer transactions. The definitions of "Factoring", "Assignment" and "Accounts Receivable" appear, for example, to be sufficiently wide to support an array of transactions where the objective is to access or secure the underlying receivables generated by counterparties or their customers. There are also additional features of the Factoring Law which support this assessment. For example:
- The ability of financial institutions to, on the face of it, take a complete transfer of the ownership of the receivables would seem to be an attractive incentive to funders who have historically found it difficult to properly access these in an enforcement scenario.
- The ability for "Additional/Ancillary Rights" to be transferred is helpful, meaning that secondary rights of the transferor which support the primary right to the receivables are transferred without further action on the part of the transferor or transferee.  This potentially opens up a broad spectrum of ancillary rights on different transactions that could be transferred.
One anomaly in relation to the Factoring Law is the position regarding recourse to the underlying transferor. Article 2 of the Factoring Law provides that such arrangements can be effected "whether it is with a right of recourse to the Transferor or without a right of recourse." This is helpful and allows market participants to assess, as part of their credit process, whether recourse to the transferor is required in addition to recourse to the receivables themselves. However, Article 10(2) provides that "The Transferor shall not guarantee the ability of the Debtor to pay." This is potentially problematic and throws into question whether recourse to the underlying transferor is actually permitted. One interpretation is that the restriction on the transferor guaranteeing the debtor's ability to pay only triggers where the trade financier has taken a complete transfer of the receivables in its favour (i.e. such a guarantee may still be available when if the receivables are being transferred in security only). However, this remains untested in the market and trade financiers will have to assess this anomaly and its impact on any applicable transactions on a case by case basis.
Other practical points
There are a number of additional practical points that market participants should be aware of:
- Any restriction regarding assignment in the underlying contract does not affect the validity or enforceability of the assignment which is, again, helpful from a trade financier's perspective.  However, it should be noted that any defences codified under the original contract shall be valid and retained by the debtor notwithstanding this provision. Therefore, it may be prudent for interested trade financiers to request that these rights be waived in accordance with the provisions contained in Article 17 of the Factoring Law.
- The Factoring Law contains a general restriction on changing aspects of the underlying contract once notification of the assignment has been served . This is helpful for trade financiers as certainty in respect of the underlying contract generating the receivables is retained. An amendment will also be effective if it is entered into prior to notice being served.  Market participants should therefore ensure that notices are validly served and done so timeously. It would also be prudent to consider a restriction on amendments to the underlying contract (where the assignment relates to future receivables) to ensure the transferee's consent is required for any such amendment.
- Depending on when the debtor receives the notification of assignment will have an impact on whether they have validly discharged their payment obligations under the original contract. If the debtor pays in line with the underlying contract (i.e. to the transferor), before receiving notice, then it will have validly discharged its obligations.  However, if the debtor was to pay the transferor after receiving the notice, then it would not have validly discharged its obligations as it is required to comply with the payment instructions in the notice.  In this scenario, the transferee has the right to collect the amounts paid or any returned receivables from the transferor.  Should the debtor incorrectly pay an amounts or return any receivables to a separate third party then the transferee has the right to collect the amounts paid or receivables retuned from this third party.  If no payment is made then the self-help remedies available to the transferee under Chapters 7 and 8 of the Moveables Law can be used under the Factoring Law. 
- The Factoring Law dispenses with the requirement for financial institutions to obtain an acknowledgement of the notice of assignment from the debtor which is, again, helpful from a trade financier's perspective.  However, most institutions in the UAE will recognise the evidential and practical reasons for procuring an acknowledgement, including instances where it needs to be proved in a court that the debtor had prior knowledge of the assignment or to ensure a smooth transition in payment from the transferor to the transferee. It may therefore remain good practice to be engaged with the debtor.
- Whilst not specifically listed by UAE Federal Decree Law 14/2018 as a "Licenced Financial Activity" which would require a licence from the UAE Central Bank, in order to forfeit or factor receivables, it would be reasonable to assume that financing in this way would require market participants such as trade financing firms to require a licence form the UAE central bank.
Overall the introduction of the Factoring Law is a significant step forward for the burgeoning trade finance industry in the UAE and should help to support and grow business activity. Factoring historically helps new companies and start-ups gain access to funding that would otherwise be unavailable to them while also assisting larger companies improve any issues with cash flow which can be brought on by slow paying clients. However, given the infancy of the law, a note of caution must be present in any analysis in this respect. The boundaries of the Factoring Law have not been tested judicially and, until such time as they are, there will be an element of risk that trade financiers will have to assess.
 Article 1 of the Factoring Law.
 Article 4(5) of the Factoring Law.
 In the latter scenario the trade financier would, in our view, legally own the receivables post transfer – an obvious advantage for creditors and proposed step up from the position under the Moveables Law.
 Article 20(2) of the Factoring Law.
 Article 20(1) of the Factoring Law.
 Article 25 of the Factoring Law requires any provider to obtain a license in advance.
 Article 6(1) of the Factoring Law, unless such additional rights require new procedures to transfer.
 Article 5(2) of the Factoring Law.
 Article 18(2) of the Factoring Law, save for situation where the transferee consents to the amendment or if it relates to future receivables.
 Article 18(1) of the Factoring Law.
 Article 15(1) of the Factoring Law.
 Article 15(2) of the Factoring Law.
 Article 12(1)(b) of the Factoring Law.
 Article 12(1)(c) of the Factoring Law.
 Article 21 of the Factoring Law.
 Article 11(2) of the Factoring Law.