Stock - Cheque
Worried about a cheque bounce? Then, ask for a bank guarantee. Image Credit: Agency

Dubai: More businesses in the UAE are asking for additional guarantees after changes to the law that made bounced cheques a non-criminal offense. In particular, they are asking for bank guarantees to be issued in their favour, where the bank involved has to step in and pay up the owed sums.

“Business managers are usually an adaptive lot, and they seek one or more ways to minimize their risks,” said Atik Munshi, Managing Partner at the consultancy FinExpertiza UAE. “Some of them have resorted to check the credit scores of the cheque issuer through the Etihad Credit Bureau app, while others have limited the credit exposure.

Credit scores, based on the credit history of the cheque drawer, does provide some comfort to the receiver. However, it does not guarantee that the cheque will be honored on the due date.

- Atik Munshi, Managing Partner at FinExpertiza UAE

This is where bank guarantees come in, which is seen as a fail-safe way to get the promised funds. But, as is to be expected, banks are reluctant to play the role of guarantor. And if they do want to act as guarantor, banks must have the provided necessary fixed deposits or blocked amounts which they can use to set off the guarantee.

Ensuring payment guarantee
With a bank guarantee, the beneficiary can encash such guarantee in case of a bounced cheque. The drawer can place a guarantee against an amount or fixed deposits with the bank.

The beneficiary, drawer and the bank would have an agreement to honor the cheque from such guarantee amount in case of default. Banks do charge fees for maintaining the guarantee.

It was at the start of this year that the UAE decriminalized most outcomes from a bounced cheque. It gave businesses and individual greater flexibility – and peace of mind – to act when confronted with such a situation. It meant finding alternate solutions where possible.

The issue is that delays often crop in with options, and delays in getting promised funds can be critical for businesses and their cashflows. So, what are ways that businesses at the receiving end of a bounced cheque get their funds?

“Although we can’t comment on a specific timeframe, one can approach the court’s execution judge directly for an order of full or partial payment (if applicable),” said Nazar Musa, CEO at PRO Partner Group. “This can be done by filling out and submitting a Cheque Execution Regulations Form available on the Dubai Court, or Ministry of Interior or Happiness Centre website.

Once the matter is taken to court, the Judge may, at his discretion, order to settle the amount within 15 days.

- Nazar Musa, CEO at PRO Partner Group

“The process to file a complaint has become more streamlined and less time consuming.”

All UAE courts have started receiving the registration of execution files for bounced cheques, whether the bounced is partial or complete. The judicial procedures proceed to the fullest

- Hesham ElSamra, Associate at Taylor Wessing

Out of court deals?

Or they can take a less taxing option of finding a way to recover the funds, but through out of court settlements. Musa says that all parties involved should seek ‘alternate dispute resolution’ before moving to a court proceeding. “This usually means payment or some sort of arrangement is agreed between the parties fairly quickly after the complaint has been raised,” Musa added.

Should banks be more proactive?

There is a provision in the revised UAE rules that allow banks the discretion to release whatever funds are there in the cheque issuer’s account. But this is a process few banks have been willing to take on, according to market sources, instead option for the traditional way of bouncing the cheque for the full amount.

“If only banks were willing to release partial funds, businesses would have something to work on rather than wait for the entire legal proceedings to get completed,” said a business owner who has been hit by a couple of bounced cheques on fairly large amounts.

Jeet Gianchandani, who heads the consultancy JCG, says this is where delays creep in further.

Usually, banks don't report bounced cheque immediately. After 30 days, the banks do inform the credit rating agency.

- Jeet Gianchandani

A further tightening up of the process would mean that businesses get their monies earlier...

How to handle a bounced cheque

To start the legal process after receiving a bounced cheque, take these steps:

  1. Attach a copy of the double sides of the cheque.
  2. Attach a letter from the drawee bank confirming that the cheque was not cashed or part of it was paid.
  3. Attach proof of identity of both parties and the Enforcee's exact address or e-mail and phone number.
  4. Draft a petition/statment for the bounced cheque execution.
  5. Attach a copy of the cheque and bank letter.
  6. A request can be made for a travel ban against the cheque issuer.
  7. The enforcee (cheque issuer) is then notified to pay within 15 days from the announcement date.
  8. The enforcee must produce or submit an installment settlement or has to offer serious reasons about the entitlement of the cheque. If not,
  9. The enforcee's property will be investigated, seized, and sold by public auction. (It will take a long time, especially for the investigation of the properties and assets and auction process)
  10. The timeframe could between a month or two to two years.

Credit: Taylor Wessing