Securing your assets - the proposed Bahrain Secured Transactions Law

On 18 July 2017 the Central Bank of Bahrain issued a draft of the proposed Secured Transactions Law for consultation (the “Draft Law”). The Draft Law has been developed in conjunction with the Bahrain Economic Development Board and is based upon the UNCITRAL Secured Transaction Model Law of 2016.

The Draft Law will update the Kingdom of Bahrain’s current legislation governing security interests in tangible and intangible property including, but not limited to, goods, receivables, inventory, equipment, rights to funds credited to accounts and negotiable instruments.

Whilst security rights can also be created over shares, real property sold off-plan, intellectual property rights, ships, aircraft and aircraft equipment, these rights are subject to separate legislation and fall outside the scope of the Draft Law.

In addition, the Draft Law does not permit a security right to be created over the following:

• assets resulting from a will
• pension or life insurance proceeds
• wages, employment claims or salaries
• consumer goods used by a natural person for personal use
• undivided, jointly owned moveable assets
• moveable assets owned by the state or its ministries

The Draft Law will repeal Articles 1021-1032 of the Bahrain Civil Code (Decree No. 19 of 2001) and Articles 136-147 of the Law of Commerce (Decree No. 7 of 1987), which currently regulate how security is granted for commercial debts.

Following the implementation of the Draft Law, a security right will only be effective against third party claims if it is registered in accordance with the proposed legislation.

The most significant change is the introduction of a registry of security rights over moveable assets, requiring all creditors to register their security over moveable property or assets except where a creditor is in possession of the assets.

Any security right in existence at the implementation date of the Draft Law will need to be registered within 90 days following implementation, unless the security right is due to expire before the end of that time period. If the security right is registered within 90 days, the security will be effective from the date of its creation. If the security right is not registered within the 90 day period, it will only be effective from the date that the security is registered.

The introduction of the security register provides certainty and security to creditors and third parties when taking security over moveable assets as part of commercial transactions and will remove the requirement for a mortgagee under a commercial mortgage to hold title to the mortgaged asset in order to be protected against the claims of a third party.

We recommend that all commercial parties review their portfolio of secured assets and then ensure that they comply with the registration requirements within the requisite time period following implementation of the Draft Law to ensure that they are adequately protected against third party claims.

The Draft Law, once implemented, will enhance the Kingdom of Bahrain’s laws relating to the taking and giving of security, providing creditors with greater certainty and protection against third party rights.

This article was first published by Lexis Nexis in the MENA Business Law Review in the 3rd quarter of 2017.

This article was written by Benjamin O'Brien-McQueenie. For more information please contact Benjamin on +973 1713 3207 or at benjamin.o'brian-mcqueenie@crsblaw.com.