Security creation in Bahrain
Banking & Finance / Bahrain
In this article we will provide an overview on the most common types of security that is created under the laws of the Kingdom of Bahrain (“Bahrain”).
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Natalia KumarSenior Counsel,Banking & Finance
Faizan ToorAssociate,Banking & Finance
From a financier’s perspective, taking security from a prospective borrower is important in the event a borrower defaults or becomes insolvent because the secured creditor should obtain priority over unsecured creditors in respect of the secured asset(s). In this article we will provide an overview on the most common types of security that is created under the laws of the Kingdom of Bahrain (“Bahrain”).
The mortgage would secure the commercial business of the borrower. Law No. 7 of 1987 promulgating the Law of Commerce, as amended (“Law of Commerce”) defines a place of business as “a collection of tangible and intangible elements, which vary according to the circumstances; and include in particular: goods, business furniture, industrial machinery, contacts with customers, goodwill, trade name, lease right, trademarks and statements, patents, licenses, drawings and designs.” The assets being mortgaged must be clearly stated and identified in the mortgage agreement. If the assets are not clearly stated and identified in the mortgage agreement, then arguably security will only be created over the trade name, lease right, contacts with customers and goodwill. The mortgage agreement must be notarised and registered with the Ministry of Industry and Commerce (“MOIC”).
Assignments of rights and debts are governed by Law No. 19 of 2001 promulgating the Civil Code, as amended (“Civil Code”).
To create a valid assignment of rights:
the receivables must be identifiable and validly existing at the time of assignment - assignment of a future receivable or any asset that is not identifiable or where the identification is uncertain, will not be recognised under the laws of Bahrain;
there must be no restriction/encumbrance to assign - the receivables should be free from encumbrances and other restrictions or conditions on transfer by virtue of an agreement or under Bahrain law. If an agreement contains such restrictions or conditions, such restrictions or conditions must be waived; and
notice or acknowledgement – a notice of assignment is required to be provided by the assignor to the counterparty. It is not vital for an acknowledgement of the assignment to obtained from the counterparty for the assignment to take effect against the counterparty. If an acknowledgement cannot be obtained, then we recommend that the notice is served on the counterparty by registered post or by courier. Obtaining an acknowledgement is strongly recommended to minimize any issues in enforcement.
The assignment agreement does not have to be notarised or registered with any government ministry in Bahrain.
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 and that 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 addendum to the deposit pledge agreement pursuant to the terms of the pledge agreement to the extend the pledge over the additional deposits.
The deposit pledge agreement does not have to be notarised or registered with any government ministry in Bahrain. The agreement can be between the financier and the borrower with a notice sent to the account bank or a tri-party agreement where the account bank is a party to the agreement.
Security over movable assets (including shares) is created by way of a pledge. Article 1021 of the Civil Code states that for a pledge “to be valid against third parties, the contract must, in addition to the transfer of possession, be constituted in a written document of an established date, adequately setting out the amount of the secured debt and the pledged property and such established date shall fix the rank of the pledge.” Therefore, under the laws of Bahrain, it is essential that the shares being pledged are identifiable and in existence and the amount of the secured debt is clearly set out in the pledge agreement.
The share pledge agreement would need to be notarised and registered with the MOIC in case of unlisted shares or the Bahrain Bourse/Bahrain Clear in case of listed shares.
Any shares acquired by the pledgor after the date of the share pledge agreement would need to be pledged separately.
Article 742 to 768 of the Civil Code governs guarantees. A guarantee must be in writing, although there is no requirement for the guarantee to be notarised or registered with any government department in Bahrain. Guarantees are secondary obligations. Accordingly, if the primary obligor is discharged from the guaranteed obligations, so shall the guarantor. A guarantee must be in relation to a specific debt (such as a loan under a loan agreement). If the amount of the underlying loan is increased or the term of facility is extended, it is recommended that a new guarantee or a guarantee confirmation is obtained from the guarantor – ideally when the amendment documents pertaining to the loan are being executed. A guarantee cannot be for a larger amount than that owed by the debtor or subject to more onerous conditions. A guarantor may guarantee future and unspecified obligations of a debtor provided that the maximum amount being guaranteed and the maximum duration of the guarantee are specified in the guarantee document. Where a future obligation is being guaranteed and an upper limit on the quantum of the guarantor’s exposure and a time limit on the duration of the guarantee are not specified, the guarantor may withdraw the guarantee. With respect to enforcement procedures, the creditor must first exhaust its remedies against the primary obligor prior to taking enforcement measures against the guarantor unless the primary obligor and the debtor are said to be jointly liable for the debt. The guarantor is not discharged of liability only by the lender’s failure to take measures against the debtor on the maturity date of the debt or by reason of his/her/its delay in taking such measures. However, if the guarantor serves a notice to the lender by registered post to take action against the debtor, the guarantor may demand to be discharged if the creditor fails to take such measures within three (3) months from the date of the notice.
The general rule in relation to security interests is that security interest should be governed by the law of the place in which the asset is located. It is prudent therefore for a lender to obtain and perfect the security over assets located in Bahrain under the laws of Bahrain.
For further information,please contact Natalia Kumar and Faizan Toor.
Published in October 2023
