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Abu Dhabi Courts Take Strong Stance Against Personal Guarantors as Central Bank Implements Security Requirements


In a significant move, the Central Bank of the United Arab Emirates has issued circular no. /3/ of 2023 ("Circular"), in pursuance of the Federal Decree-Law no. /23/ of 2022 amending Federal Decree-Law no. /14/ of 2018, whereby article 121 bis mandates that banks take the necessary securities from personal individuals or sole proprietorship before providing banking facilities to consumers. Pursuant to the Circular, the Central Bank confirmed that the personal guarantees are no longer enough for the banks to provide banking facilities and grant loans to borrowers, if not accompanied with securities.

Prior to the issuance of this circular, banks in the UAE used to accept personal guarantees as a form of security when providing loans. A personal guarantee under UAE law is a legal obligation where an individual, usually a shareholder or director of a company, agrees to be responsible for the debts or liabilities of the company in the event of default or insolvency. However, security offers a higher level of protection for the bank, as it provides a tangible asset that can be sold to recover the outstanding amount in the event of a default.

The Circular and its related texts have changed the status quo by making it mandatory for banks to take securities before granting banking facilities.

This requirement is a game-changer for the banking industry and had direct implication on the decisions issued by Abu Dhabi Courts.

The Abu Dhabi Courts have recently adopted a new approach in favor of personal guarantors who did not provide security under banking facilities provided to borrowers. In several cases, the Abu Dhabi Courts have suspended litigation proceedings as well as execution measures initiated by the banks against personal guarantors, who did not provide securities. Furthermore, the provisions of the Circular and related texts have been deemed of public order. Consequently, the parties will not be able to waive the security requirements under any banking facility or credit agreement.

A recent court judgment in Abu Dhabi raises questions about the validity and enforceability of personal guarantees provided in the absence of sufficient security. It entails that banks may no longer be able to rely solely on personal guarantees to recover credit facilities from individuals or private enterprise owners who do not provide adequate security.

In the event a bank fails to obtain the abovementioned securities, no claim, or lawsuit may be accepted before the competent judicial body or arbitration bodies with respect to any credit facility provided to a physical person or private individual enterprise without obtaining sufficient security.

In addition, this requirement represents a significant change in the banking industry and lending practices, as banks will now be required to take securities before issuing loans seeing as they will likely have no recourse against personal guarantors.

It is important to note that this development demonstrates the Central Bank of the UAE's commitment to ensuring the stability and security of the banking industry. Banks will need to adjust their lending practices to ensure that their loans are adequately secured.

Written by: 

Nadia El Tannir – Senior Associate.

Maroun Abou Harb – Associate.

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