Introduction
Pledging of shares is a very important topic for financial institutions and banks all around the world. It also has significance importance for foreign investors in United Arab Emirates (UAE). Until recently, the pledge over shares of onshore Limited Liability companies of UAE have been a very debatable topic during the application of Commercial Companies Law prior to enactment of Commercial Companies Law, 2015. New Pledge law was also enacted in UAE on 12th December, 2016 and shall come into force from 15th March, 2017. This article aims to discuss the major amendments bought in Commercial Companies Law, 2015 regarding share pledge and executions against partners. It shall also touch some relevant changes brought in by Pledge Law.
Regulations for Share Pledge
Article 79 of Commercial Companies Law, 2015 deals with pledging of shares by a commercial company in UAE. It is a substitute of Article 230 of previous law. Article 230 of previous company law dealt with assignment of shares only whereas Article 79 deals with pledge of shares as well as assignment of shares. It explicitly provides that shares can be pledged to third parties.
Process for Pledging the shares
The process of pledge of shares can be divided into following steps:
- Drafting the agreement for pledge of shares, in accordance with the provisions of law and memorandum and articles of association of the company.
- Notarization of Share pledge agreement
- Registration of the agreement with Department of Economic Development (DED) of respective emirate.
Provisions for Execution against Pledged shares
As the new law allow companies to pledge their shares as security against the debt and if the pledger fails to repay the debt within the specified time, the pledgee shall be entitled to enforce the pledge. We shall discuss the provisions related to execution against partners’ share in LLC and the procedure for the same in the coming paragraphs.
Article 20 of the Commercial Companies Law, 2015 deals with provisions related to execution and majorly have the same content as Article 17 of previous law. It allows creditor to satisfy his debts from profit of debtors’ shares which was not provided for in the former law.
Further, Article 81 of the new law bring significant amendments and provides for execution against partner’s share in the company.
Procedure for Execution against Partner’s Share in company
The procedure for execution against partner’s share in company can be divided into following steps:
- The creditor should initiate the execution proceedings against the pledged shares, including the profits thereto.
- If the creditor is unable to satisfy his debt through the profits of the shares, he may target the sale of the share.
- Actual sale shall be carried only after negotiating and reaching on an agreement with the debtor and company about the method and terms of sale of shares.
- If the parties fail to reach on an agreement, the creditor must apply to the competent court seeking public auction for sale of shares.
- The proceeds of sale shall be used to satisfy the debts.
The Bottom Line
The Commercial Companies Law, 2015 has effectively resolved major issues related to pledging of shares of companies registered in UAE but there are still many loose ends that needs to be tightened. Like, right to pledge shares are still not available to Limited partnerships and Joint Liability companies. Also, the law does not allow pledging of shares to banks and financial institutions, which is bottleneck in getting access to more competitive option for financial leverage for modern day companies.
