Dubai court voids Dh47 million debt waiver, orders payment to creditor

Dubai: A Dubai civil court has ruled that a debt waiver exchanged between two companies cannot be enforced, after finding it was designed to frustrate a third company’s efforts to recover money it was owed.

The court said the waiver was issued without consideration and at a moment when enforcement proceedings were already under way, a combination that pointed to a deliberate attempt to strip creditors of their legal protections.

The case centred on three companies. The claimant held a final, enforceable judgment ordering one company to pay it Dh1.87 million. That company, in turn, was owed more than Dh47 million by a second firm. Seeking to secure its position, the claimant moved to attach the debtor’s funds held by the third party, a step commonly used to prevent assets from being moved beyond reach.

The court initially approved the attachment and ordered the company holding the funds to declare what it owed. Instead, the company declined to do so.

What followed came as a surprise to the claimant. The original debtor issued a written declaration waiving, in full, its Dh47 million claim against the second company, without receiving anything in return. The waiver effectively shut down the claimant’s enforcement file.

Arguing that the move was a legal fiction designed to undermine creditors, the claimant returned to court, asking judges to declare the waiver unenforceable and to compel payment of the outstanding debt.

The second company challenged the case on procedural grounds, saying the dispute was an enforcement matter and therefore outside the civil court’s jurisdiction. Judges rejected that argument, finding the issue went to the substance of the transaction itself, not to the mechanics of enforcement.

After reviewing the evidence, the court found that the claimant’s debt predated the waiver, that the debtor had failed to show it possessed other visible assets sufficient to meet its obligations, and that the timing and nature of the waiver revealed a clear intent to cause harm.

The ruling noted that under the law, a debtor who is insolvent, or rendered so by its actions, cannot dispose of assets in a way that diminishes the collective guarantee owed to creditors, whether through gifts or ostensibly commercial arrangements, when bad faith is established.

Judges also pointed to contradictions in the record: the company holding the funds had first denied any outstanding amounts, only to later accept a waiver of a debt it claimed did not exist. That inconsistency, the court said, was evidence of coordination between the two companies and stripped the transaction of any legal protection.

Taken together, the court found, the circumstances met the legal threshold for declaring the waiver ineffective against the claimant. The debt was restored to the debtor’s asset pool, clearing the way for enforcement.

The court ordered the company holding the funds to pay Dh1.8 million, along with statutory interest at five per cent from the date of the judicial demand until full settlement, and to cover court costs and legal fees.