Draft Secured Transactions Law

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Draft Secured Transactions Law (2017)

We, Hamad bin Isa Al Khalifa, King of the Kingdom of Bahrain, Having reviewed the Constitution, The Civil and Commercial Procedure Law issued by Royal Decree No. (12) of 1971 and its amendments, The Commercial Law issued by Royal Decree No. (7) of 1987 and its amendments, The Bankruptcy and Protective Composition Law issued by Royal Decree No. (11) of 1987, The Civil Code issued by Royal Decree No. (19) of 2001, The Commercial Companies Law issued by Royal Decree No. (21) of 2001 and its amendments, The Nationality Law No. (46) of 2006 regarding the Identity Card, The Central Bank of Bahrain and Financial Institutions Law issued by Law No. (64) of 2006 and its amendments, The Consumer Protection Law No. (35) of 2012, The Real Estate Registration Law issued by Law No. (13) of 2013, The Conflict of Laws in Civil and Commercial Matters with a Foreign Element Law No. (6) of 2015, The Commercial Register Royal Decree No. (27) of 2015, The Pledge Royal Decree No. (23) of 2016, Have approved and we have ratified and issued the following Law:

Chapter One: General Provisions

Article (1): Definitions Unless the context otherwise requires, for the purposes of this Law:

1. Acquisition secured creditor: means a secured creditor who holds an acquisition security right.
2. Acquisition security right: means a security right over property, tangible or intangible rights, or licensed intellectual property rights under a license agreement, securing the payment of an unpaid purchase price for goods, or another credit extended to enable the grantor to acquire rights in such goods using that credit for the stated purpose.
3. Address: means a physical address, postal box address, or electronic address.
4. Amendment Notice: means a notice submitted to the Registry in writing using the designated form to amend information contained in a filed notice.
5. Bank Account: means an account held at a deposit-taking institution into which funds are deposited or from which they are withdrawn.
6. Business Day: means any day of the week except Friday, Saturday, and official holidays in the Kingdom.
7. Cancellation Notice: means a notice submitted to the Registry in writing using the designated form to cancel the effect of filing all related notices.
8. Certificated Non-Intermediated Securities: means securities not deposited with an intermediary and for which a certificate has been issued, confirming either: a. The holder of the certificate is entitled to the rights in the securities; or b. The person named in the certificate is entitled to the rights in the securities.
9. Competent Authority: means the Minister or head of the relevant administrative department, depending on the circumstances.
10. Competent Administrative Department: means the administrative department designated by a Royal Decree.
11. Competing Claimant: means another creditor of the grantor or another person who holds rights in the same encumbered asset as an acquisition secured creditor, including: a. Another secured creditor of the grantor holding a security right in the same encumbered asset; b. Another creditor of the grantor holding a right in the same encumbered asset; c. The bankruptcy trustee in proceedings against the grantor's assets; d. The buyer of the encumbered asset, a successor or assignee thereto, or a lessee or licensee entitled to use it.
12. Consumer Goods: means goods used by the grantor primarily for personal, family, or household purposes.
13. Control Agreement: means either of the following: a. Regarding uncertificated non-intermediated securities, a written agreement between the grantor and the secured creditor specifying that the secured creditor will follow instructions regarding the securities without requiring the grantor's consent; or b. Regarding rights to collect funds deposited in a bank account, a written agreement between the deposit-taking institution, the grantor, and the secured creditor specifying that the deposit-taking institution will follow instructions from the secured creditor regarding collecting deposited funds without requiring the grantor's consent.
14. Debtor: means a person owing an obligation secured by another security right, whether they are the grantor securing the performance of that obligation or a third party guaranteeing it. This includes secondary obligors (e.g., guarantors of secured obligations).
15. Debtor of the Receivable: means a person owing an obligation to which a security right attaches, including guarantors or other persons liable in a secondary capacity for the payment of monetary obligations.
16. Default: means the debtor's failure to perform a secured obligation or guarantee, or an event constituting default under the contract between the grantor and the secured creditor.
17. Deposit Taking Institution: means a licensed financial institution authorized to accept deposits.
18. Designated Field: means the specific field in the notice form designated for entering a specified type of information.
19. Encumbered Asset: means: a. Movable property subject to a security right; or b. Equipment subject to a lease agreement.
20. Equipment: means goods, excluding inventory and consumer goods, used by the grantor primarily in business or intended for use in conducting its operations.
21. Financial Contract: means a financial instrument (spot, forward, future, option, or swap) relating to interest rates, commodities, currencies, equities, bonds, indices, or other financial instruments, and transactions involving the purchase of securities or loans, and similar transactions conducted in financial markets, or a combination thereof.
22. Future Asset: means movable property not yet existing or over which the grantor does not yet hold rights or the power to encumber at the time of creating the security agreement.
23. Grantor: means: a. A person who creates a security right to secure their own obligation or that of another; b. A buyer of encumbered property, or a successor/assignee thereof, who acquires rights subject to the attached security right; c. A party to a lease agreement with respect to leased property subject to the debtor's rights.
24. Independent Guarantee: means an independent undertaking, known internationally as a standby letter of credit or guarantee, issued by a bank, institution, or person who undertakes to pay a specified or determinable amount to the beneficiary upon default or as requested, accompanied by other documents stipulated in the guarantee terms. It covers obligations arising from loans, advances, or debts due upon presentation by the debtor or another person.
25. Initial Notice: means a notice submitted to the Registry on the prescribed form to perfect a security right against third parties.
26. Intangible Asset: means movable property other than tangible goods.
27. Intermediary: means a person who, in the course of commercial activity or regular business, maintains securities accounts for others (or for themselves and others) and acts in that capacity.
28. Intermediated Securities: means securities deposited in a securities account, or rights arising from depositing securities into a securities account.
29. Inventory: means goods held by the grantor for sale, lease, or in the ordinary course of business, including raw materials and goods entering the production process.
30. Kingdom: means the Kingdom of Bahrain.
31. Knowledge: means actual knowledge.
32. Mass: means tangible goods resulting from the commingling of two or more goods of the same kind to such an extent that they lose their individual identity.
33. Money: means currency authorized by a state as legal tender.
34. Movable Asset: means tangible or intangible property, excluding immovable real estate.
35. Negotiable Document: means a document of title or bill of lading, establishing the right to delivery of tangible goods and recognized by law as transferable.
36. Negotiable Instrument: means a document, such as a cheque or promissory note or order paper, establishing the right to payment and recognized by law as transferable.
37. Netting Agreement: means an agreement between two or more parties providing for one or more of the following: a. Netting of monetary obligations due under the same contract on the same date, whether through set-off or otherwise; b. Converting the value of outstanding transactions to a single currency amount upon an event of default or other occurrence, and settling that net amount in one payment by one party to the other; c. Netting of amounts held as described in paragraph (2) under one or more netting agreements.
38. Non-Acquisition Security Right: means a security right other than an acquisition security right.
39. Non-Intermediated Securities: means securities other than intermediated securities deposited in a securities account or rights arising from depositing securities into such an account.
40. Notice: means a written notice, including initial, amendment, and cancellation notices.
41. Notification of a Security Right in a Receivable: means a communication by the grantor or secured creditor notifying the debtor of the receivable that a security right has been created over that receivable.
42. Outright Transfer of Receivable: means a transfer of a receivable not intended to secure repayment.
43. Possession: means actual physical possession of tangible goods by a person, their agent, or an independent third party who acknowledges holding the goods for that person.
44. Priority: means the precedence of a security right over other competing claims in the encumbered asset.
45. Proceeds: means whatever is collected concerning the encumbered asset, including proceeds from its sale, conversion, lease, license, collection, or harvesting of natural and commercial fruits, insurance proceeds, claims arising from defects, damage, or destruction, and proceeds of such proceeds.
46. Product: means tangible goods resulting from the combination, assembly, or processing of one or more goods with other goods of a different kind to such an extent that they lose their individual identity.
47. Receivable: means the right to collect monetary payments, excluding rights to collect amounts under a negotiable instrument and rights to collect funds deposited in a bank account or under non-intermediated securities.
48. Registered Notice: means a notice in which the information has been filed/registered in the Registry.
49. Registrant: means the person who submits a notice to the Registry.
50. Registration: means filing information, accompanied by a notice, into the Registry.
51. Registration Number: means the unique number assigned by the Registry to that notice, permanently linked to the initial notice and any subsequent related notices.
52. Registry: means the office for registering security rights over movable assets, designated by the competent administrative department under paragraph (1) of Article 28.
53. Register: means the information contained in all filed notices stored at the Registry, consisting of publicly accessible entries (public register) and archived entries removed from the public register (archive).
54. Secured Creditor: means: -1 A person holding a security right; or -2 A successor in interest under a lease agreement with respect to the debtor's rights.
55. Secured Obligation: means an obligation secured by a security right.
56. Securities Account: means an account held with a securities intermediary into which securities are deposited or from which they are withdrawn.
57. Security Agreement: means: -1 An agreement between the grantor and secured creditor creating a security right, regardless of whether the parties label it as such; or -2 An agreement creating a lease with respect to the debtor's rights.
58. Security Right: means: a. A real right over movable property arising from a security agreement to secure the performance of an obligation or guarantee, regardless of its name, type of asset, nature of grantor/creditor, or nature of the secured obligation; b. The rights of a successor in interest under a lease agreement with respect to the debtor's rights.
59. Tangible Asset: means movable tangible property, except for the purposes of paragraphs (2) and (20), Article 11, Articles 29, 32, 46, and Articles 38 to 42, which excludes money, negotiable instruments, negotiable securities, and uncertificated non-intermediated securities.
60. Uncertificated Non-Intermediated Securities: means securities not deposited with an intermediary and not represented by a certificate.
61. Writing: includes electronic writing, provided the information contained is enforceable and accessible at any relevant time.

Article (2): Scope of Application -1 This Law applies to security rights over movable assets. -2 Except for Articles 72 to 82, the provisions of this Law apply to leases with respect to the debtor's rights concluded under an agreement. -3 Subject to paragraph (1), this Law does not apply to security rights over the following: a. Rights to collect monetary obligations or receive proceeds under an independent guarantee; b. Intellectual property rights within limits consistent with domestic laws or international treaties to which the Kingdom is a party; c. Intermediated securities; d. Rights to collect monetary obligations arising from financial contracts governed by netting agreements, excluding rights arising from the termination of existing transactions; e. Ships, yachts, and yacht equipment; f. Rights over real estate sold on installment until completion and delivery to the owner subject to a security right. -4 The provisions of this Law do not apply to security rights over proceeds if those proceeds are of a type excluded from this Law. -5 The provisions of this Law do not affect the rights and obligations of grantors and debtors under other laws governing transactions for personal, family, or household purposes. -6 The provisions of this Law do not affect other laws restricting the creation or enforceability of security rights over specific asset types or their transferability, except for restrictions based solely on the asset being a future asset or an undivided interest in property.

Article (3): Freedom of Contract -1 Except for Articles 4, 6, 9, 53, 54, and paragraph (3) of Article 72, Articles 85 to 107, parties may agree to exclude any provision of this Law or vary it, provided such agreement does not contravene public order in the Kingdom. -2 The agreement referred to in paragraph (1) does not affect the rights or obligations of third parties who are not bound by it. -3 The provisions of this Law do not affect the right to agree on alternative dispute resolution methods, including arbitration, mediation, notarization, and online dispute resolution.

Article (4): General Standards of Conduct Every person must exercise their rights and perform their obligations under this Law in accordance with the principles of good faith and reasonable commercial standards.

Article (5): Interpretation For the purposes of interpreting this Law, account shall be taken, where appropriate, of publications by the United Nations Commission on International Trade Law (UNCITRAL) regarding the Model Law on Secured Transactions adopted by the UN General Assembly in 2016.

Chapter Two: Creation of Security Rights Section One: General Provisions Article (6): Creation of Security Agreement -1 A security right is created by a security agreement, provided the grantor holds rights in or has the power to encumber the asset. -2 A security agreement may provide for a future asset, but the security right over such asset does not attach until the grantor acquires rights in or the power to encumber it. -3 A security agreement must be in writing and signed by the grantor and secured creditor, and must contain: a. Details of the grantor and secured creditor; b. Description of the secured obligations per Article 9; c. Description of the encumbered asset per Article 9; d. The maximum amount for which the security right is enforceable.

Article (7): Obligations That May Be Secured A security right may secure one or more types of obligations, which may be existing or future, fixed or determinable, conditional or unconditional, constant or variable.

Article (8): Assets That May Be Encumbered -1 Subject to paragraph (2), a security right may encumber any of the following: a. Movable property of any kind; b. Proceeds or an undivided interest in movable property; c. A category (generic) of movable assets; d. All movable assets of the grantor. -2 A security right may not encumber any of the following: a. Future assets that are proceeds from inheritance, wills, pensions, life insurance proceeds, compensation, maintenance, wages, labor claims, or salaries; b. Movable property owned by the State, its agencies, public entities, diplomatic/consular missions, or international organizations enjoying privileges in the Kingdom; c. Rights arising from concessions and licenses granted by the State, its agencies, public entities, or public legal persons; d. Movable property owned in co-ownership, unless all partners agree to the creation of a security right; e. Movable property owned by an endowment (waqf) established under a formal deed; f. Consumer goods used by the natural person for personal, family, or household purposes, unless the security right secures their purchase price.

Article (9): Description of Encumbered Assets and Secured Obligations -1 A security agreement must describe the encumbered assets and secured obligations in a manner reasonably allowing their identification. -2 The requirement of paragraph (1) regarding asset description is satisfied by: a. Specific identification; or b. Description by type, including stating that the assets are all movable assets of the grantor or all movable assets of a specific type. -3 The requirement of paragraph (1) regarding obligation description is satisfied by: a. Specific identification; or b. Description by type, including stating that the obligations are all obligations for which the secured creditor is a creditor at any time.

Article (10): Right to Proceeds and Mixed Payments -1 A security right over an encumbered asset extends to identifiable proceeds. -2 If proceeds are in the form of money or funds deposited in a mixed bank account with other funds of the same kind, it is deemed that: a. The security right extends to the mixture of money or funds, regardless of the difficulty of distinguishing them individually; b. The security right over the mixture is limited to the amount of money or funds immediately before commingling; c. If, at any time after commingling, the amount of money or funds exceeds the pre-commingling amount, the security right is limited to the lower amount during the period between commingling and the claim for the security right.

Article (11): Mixed Tangible Assets in a Mass or Converted to Product -1 A security right over tangible assets extends to those commingled in a mass and to products resulting from their conversion. -2 The security right extending to a mass is limited to the quantity of the encumbered asset in the mass immediately after commingling, relative to the total mass quantity. -3 The security right extending to a product is limited to the value of the encumbered asset immediately before becoming a product.

Article (12): Extinguishment of Security Rights A security right is extinguished upon the performance of all secured obligations and the absence of any outstanding commitments to extend credit secured by that right.

Section Two: Special Provisions for Certain Asset Types Article (13): Contractual Restrictions on Creating Security Rights over Receivables -1 Unless otherwise agreed between the original grantor (or right holder) and the debtor of the receivable or another secured creditor, a security right over a receivable is subject to contractual restrictions on the grantor's power to create such a right. -2 The provisions of this article do not affect the grantor's liability or obligations for breaching the agreement in paragraph (1). However, neither party to the agreement may terminate the contract with respect to the debtor of the receivable or the security agreement solely due to such breach, provided that the other party's claim against the secured creditor arises from that breach. -3 A person not bound by the agreement in paragraph (1) is not liable to the grantor merely for being aware of it. -4 The provisions of this article apply only to receivables arising from: a. Supply or lease contracts for goods, financial services, non-movable property sales/leases; b. Sales, leases, or licenses of intellectual property or trade secrets; c. Contracts securing obligations related to credit transactions; d. Settlement of due monetary obligations under netting agreements between multiple parties.

Article (14): Personal or Real Rights Securing Payments or Obligations over Receivables, Intangible Assets, or Negotiable Instruments A secured creditor holding a security right over a receivable, intangible asset, or negotiable instrument may utilize any personal or real right that secures or supports the payment of obligations concerning the encumbered asset, without requiring a new assignment procedure. The security right applies to such rights according to the governing law, and the grantor must assign the benefit of that right to the secured creditor.

Article (15): Right to Collect Funds Deposited in a Bank Account A security right over the right to collect funds deposited in a bank account is enforceable against third parties regardless of any agreement between the grantor and the deposit-taking institution restricting the grantor's power to create such a right.

Article (16): Negotiable Instruments and Tangible Assets Represented by Them A security right over a negotiable instrument extends to the tangible asset it represents, provided that at the time of creation, the issuer holds a security right over that instrument.

Article (17): Tangible Assets Incorporating Intellectual Property A security right over tangible assets incorporating intellectual property does not extend to the intellectual property, and a security right over intellectual property does not extend to the tangible assets.

Chapter Three: Enforceability of Security Rights Against Third Parties Section One: General Provisions Article (18): Two Main Methods to Achieve Enforceability Against Third Parties -1 A security right over an encumbered asset is enforceable against third parties if a notice has been filed in the Register. -2 A security right over tangible assets is also enforceable against third parties if the asset is in the possession of the secured creditor.

Article (19): Proceeds -1 If a security right over an asset is enforceable against third parties, the security right over its proceeds is also enforceable against third parties without requiring a new filing under Article 10, provided the proceeds are money, receivables, negotiable instruments, or rights to collect funds deposited in a bank account. -2 If a security right over an asset under Article 10 is enforceable against third parties, the security right extending to proceeds not of the types mentioned in paragraph (1) is enforceable against third parties: a. For ten business days from the creation of the proceeds; and b. Thereafter, if perfected against third parties through one or more filings applicable to that asset type under this Chapter before the expiration of the period in paragraph (a).

Article (20): Mixed Tangible Assets in a Mass or Converted to Product If a security right over tangible assets is enforceable against third parties, the security rights extending to the mass or product are also enforceable against third parties without requiring new filings under Article 11.

Article (21): Change of Method for Achieving Enforceability Against Third Parties The enforceability of a security right against third parties continues despite a change in the method achieving such enforceability, provided no event has occurred that would cause loss of enforceability against third parties.

Article (22): Interruptions in Enforceability Against Third Parties If enforceability against third parties is interrupted, it resumes from the time of interruption, but the security right is not enforceable against third parties during the interruption period.

Article (23): Continuation of Enforceability Against Third Parties When the Applicable Law Changes to this Law If a security right was enforceable against third parties under a foreign law and this Law becomes the applicable law, its enforceability continues.