Perfection of Deposit Pledges in Bahrain
Banking and Finance / Bahrain
In this article we will consider the two positions pertaining to the perfection of a deposit pledge.
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Natalia KumarSenior Counsel,Banking & Finance
Gargi AgarwalAssociate,Banking & Finance
A deposit pledge is a common form of security in the Kingdom of Bahrain (“Bahrain”). The market is divided in its interpretation of the relevant provisions of Legislative Decree No.19 of the year 2001 with respect to promulgating the civil code, as amended (“Civil Code”) and the Decree No. 7 of 1987 promulgating the law of commerce, as amended (“Law of Commerce”) pertaining to the creation and perfection of deposit pledges. In this article we will consider the two positions pertaining to the perfection of a deposit pledge.
Bahrain law does not recognise the principle of a floating charge. A pledge may only be created over deposits that are ascertained and identifiable at the time of creating a pledge. It is not possible to create a pledge over future deposits that did not exist at the time the deposit pledge agreement was entered into. In the event additional monies are deposited into the account over which a pledge is subsisting the additional amounts will not be subjected to the pledge automatically. Therefore, should the pledgor and the pledgee wish to extend the pledge to the additional deposits this is usually done by the execution of an instrument (i.e. addendum) pursuant to the terms of the pledge agreement to the extend the pledge over the most recent deposits. Possession is also an important element in the creation of pledges.
A deposit pledge agreement must be in writing and made between the pledgor and the pledgee. If the pledgee and the account bank are the same entity, the deposit pledge agreement would be between the pledgor and the secured party (acting as the pledgee as well as the account bank). Notice of the pledge is provided to the account bank to, amongst other things, to establish possession, inform the account bank of the existence of the pledge and provide instructions pertaining to the operation of the account. If the secured party is both the pledgee and the account bank, then the notice provisions can be built into the deposit pledge agreement and no separate notice would need to be sent to the account bank.
If the secured party and the account bank are separate entities, then the pledgor and the secured party may agree to add the account bank as a party to the deposit pledge agreement and have a tri-party deposit pledge agreement. In this case, the deposit pledge agreement could include the notice provisions to the account bank and no separate notice would need to be sent to the account bank. However, if the parties decide not to have the account bank as a party to the deposit pledge agreement (for example, due to confidentiality), only the pledgor and the secured party may enter into the deposit pledge agreement. In this case, a separate notice would need to be served upon the account bank and an acknowledgement procured from the account bank in relation to the creation of the deposit pledge.
The deposit pledge agreement and any subsequent addendums do not need to be notarised or registered with any government ministry in Bahrain.
Article 1021 of the Civil Code provides “A pledge of a movable is only valid against third parties if, in addition to the delivery of the movable pledged, it is constituted by a written contract adequately setting out the amount of the secured debt and the object of the pledge and having an established date. The rank of the secured creditor will be fixed in accordance with such established date.” The Civil Code does not contain any further provisions on an established date.
One view is that ‘an established date’ (as stipulated in Article 1021 of the Civil Code) is a date that is certain and cannot be altered by the contracting parties or third parties. On this basis, some market participants take the view that in order to perfect a deposit pledge, a separate notice is required to be sent to the account bank (even if the account bank is a party to the deposit pledge agreement) by either having an “established date” notary stamp affixed to the acceptance by the account bank of the pledge or posting the notice to the account bank via registered post and obtaining a registered post acknowledgement slip.
In contrast, our view is that the ‘effective date’ can be the date the deposit pledge agreement is executed by the parties (where the notice provisions are built into the deposit pledge) and the date of the acknowledgement of the notice (where a separate notice is sent to the account bank where the account bank is not a party to the deposit pledge agreement). The same analysis would apply to addendums. Where the account bank is a party to the agreement, we are of the view that no separate notice is required to be sent to the account bank because by executing the deposit pledge agreement, the account bank is deemed to have read, understood and accepted the terms of the deposit pledge agreement (including the notice provisions). The same analysis applies to addendums.
Our view is further supported by a judgement by the Cassation Court in appeal number 19 of 2022, which held, amongst other things, that the applicable laws governing such pledges are the relevant articles in the Law of Commerce, rather than the Civil Code and that both civil and commercial possessory pledges are contracts that allow the creditor to retain the item until the debt is satisfied, but that a commercial pledge can be proven by all means of proof.
Perfection of a deposit pledge is essential in creating valid and enforceable security. Even though there are differing views in the market, all the market participants agree on the importance of having validly created and perfected security to protect the interests of secured parties.
For further information,please contact Natalia Kumar and Gargi Agarwal.
Published in October 2024
