Update on Bankruptcy Law Project in the United Arab Emirates
As attractive and financially lucrative operating a business in Dubai may seem, uncertainty still plagues the business environment which is so heavily reliant on global trade and commerce. Today, Small and medium-sized enterprises (SMEs) are under pressure amid weak oil prices and slowing global economic growth.
As a result, some businesses choose to close shop and head for the border, leaving behind unresolved debt. The problem for those who decide to bail and leave behind their debts, is that it eventually catches up to them. The UAE is a signatory to several conventions and treaties with other countries, such as the Riyadh Convention which permits local UAE banks the right to enforce UAE judgments in Saudi Arabia, and pursue legal proceedings against the defaulter.
Even in countries like the UK, debts from Dubai can be sold to UK debt agencies, which will pursue legal proceedings from the debtors.
Many banks in the UAE, such as Emirates NBD, are now increasing their recovery efforts and employing international debt collectors. As Dubai’s largest bank, Emirates NBD is one of several UAE banks who have hired American and British debt collection agencies, to pursue expatriate defaulters who have fled the UAE back to their home countries without first settling their debts.
In November, a senior banking official said lenders in the emirate are working together to try to stem the number of small business owners fleeing the country with unpaid debt, a trend which had allegedly reached around AED5 billion ($1.4 billion) by that point.
Current laws in the country mean a bounced cheque can land the issuer in jail, which prompts many business owners to flee the country with unpaid debts.
Article 401 of Federal Law No. 3 of 1987 on issuance of Penal Code (the “Criminal Law’) of UAE states: “Detention or a fine shall be imposed on anyone who, in bad faith, gives a draft (cheque) without a sufficient and drawable balance or who, after giving a cheque, withdraws all or part of the balance, making the balance insufficient for settlement of the cheque, or if he orders a drawee not a cash a cheque or makes or signs the cheque in a manner that prevents it from being cashed.
Article 644 of Federal Law No. 18 of 1993 on the issuance of The Commercial Transactions Law, states: “If a penal action in any of the cheque-related crimes provided for in the law of penalties have been filed against the drawer, the holder of the cheque who claims the civil right may sue the court for obtaining an amount equivalent to that of the cheque or to the extent of the unpaid amount of its value, apart from the compensation when necessary.”
Amendments to the country’s insolvency law, passed by the UAE cabinet in July 2015, are expected to decriminalize issuers of bounced cheques and facilitate the introduction to corporate bankruptcies. However, the legislation is yet to be ratified. The cabinet approved a draft law in July but it still needs the support of the Federal National Council, the country’s legislative body, and the president.
In the meantime, small businesses owners are continuing to flee the country with unpaid debts and the severity of the problem has forced the country’s banks to halt prosecution of those who issue bounced cheques for SMEs under a rescue initiative. However, The UAE’s new bankruptcy law will not offer protection from jail for individuals unable to repay their debts, according to a top government official.
The final draft of the law will offer protection for company employees, shareholders and directors who are undergoing court-led insolvencies, but private individuals facing insolvency will not be able to benefit from this law to avoid criminal prosecution.
Apart from the DIFC and ADGM jurisdictions, whom both have their own independent insolvency regulations, the new legislation will apply to all onshore and free-zone companies throughout the UAE,
According to Obaid Humaid al-Tayer, Minister of State for Financial Affairs. Although, the new law means that a bounced cheque is no longer a criminal offence in the UAE, however, businessmen will still face a prison sentence of up to five years and a fine of up to Dhs1m ($272,000) if their companies fail to pay debts and deliberately avoid filing for bankruptcy.
Importantly to note, the new law will not apply retroactively to businessmen who are already facing criminal cases over unpaid debt. The UAE is also working on a new personal insolvency law that would apply to individuals and would take 12 months to draft, according to Al Tayer.
Bertrand Dumon, Partner at BSA Ahmad Bin Hezeem & Associates LLP