Khaled Asfour, Managing Partner, Ali Sharif Zu’bi Advocates and Legal Consultants, on new laws protecting lenders

Khaled Asfour, Managing Partner, Ali Sharif Zu’bi Advocates and Legal Consultants, on new laws protecting lenders


As a lawyer practising in Jordan and involved in project finance transactions, I often advise on structuring security packages to protect lenders’ interests. Lenders are also interested in understanding what happens when the business they are financing faces insolvency risks. The laws governing these issues in Jordan have been problematic and have delayed, or even prevented, financing decisions by lenders. Two pieces of legislation, one enacted and the other pending before parliament, are meant to ameliorate the situation.

The most problematic of security interests to be obtained is security over moveable assets (those that do not have a title registry), such as office equipment, machinery and inventory. According to the civil code, a creditor can get security over assets that cannot be registered through a possessive mortgage, which involves transfer of asset possession to the creditor or a third-party trustee, called the adel. To allow the borrower to continue using the assets, the adel is allowed to “lend” the assets to the borrower. To address the impossibility of handing possession to a large number of assets that are often too large to be handled, an “adel appointment agreement” is made to confirm the assets have been given to the adel and back to the borrower.

This creates many problems for lenders. First, there is no central registry to record such security interest, and hence the lender is not protected against bona fide asset purchasers who buy the assets from the borrower thinking they are unencumbered. Second, it is difficult for the lenders to find a trustworthy person to be the adel. Traditionally, banks have appointed employees, facing problems when the employee leaves the bank without a replacement. Third, the security cannot cover “undefined”, “floating” or future assets such as inventory and bank accounts, since Jordanian law requires that a mortgage be placed over a defined asset that is in existence at the time of creation of the mortgage.

The Law for Placing Moveable Assets as Security for Debt was recently enacted and will take effect once implementing regulations are issued. This law has created a central registry, kept with the Controller of Companies, for securities over moveable assets, and allows the placement of a security interest over all the moveable assets of the borrower. This addresses, under the previous legal framework, the inability to have security over bank accounts, inventory and future assets. Yet, the law has several shortcomings. First, it is meant to work in conjunction with existing laws and states that mortgages placed pursuant to the civil code or any other law would have priority over a security interest registered under the law. Second, it applies to assets that have a clear and reliable security structure such as assets that can be registered (other than land). Third, it requires the asset owner to place signs at the entrance of his facilities indicating that the assets are subject to the security interest, which is burdensome and defeats the purpose of a registry. Finally, it does not resolve the purchaser and adel problems, which could have been solved by eliminating the adel and allowing a fixed mortgage over moveables to be in the same registry.

Another set of problems for lenders are Jordan’s insolvency laws. The two main bodies of legislation that deal with these sorts of issues are the Commercial Code, which handles bankruptcy, and the Companies Law, which works on involuntary liquidation due to insolvency. These laws provide for two distinct procedures to be followed in the case of insolvency and they can run concurrently (a bankruptcy court runs one procedure and a liquidator runs the other). Each has different rules of priority, time periods and suspect periods. There are other laws that affect priorities. For example, the civil code has one set of rules and the labour law has another, and they can differ from rules in the Commercial Code and the Companies Law.

Fortunately, Jordan’s government has drafted an insolvency law and considers it a priority as parliament is expected to discuss it shortly. We are all hoping for an expedient enactment of this law and that it will be comprehensive enough to resolve the inconsistencies of the other legislation that touches on the subject.

Anchor text: 
Khaled Asfour

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The Report: Jordan 2012

Legal Framework chapter from The Report: Jordan 2012

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