bounced cheques
It was early 2022 that the UAE 'de-criminalized' the issuing of bounced cheques. The latest ruling by the Court of Cassation sets clear markers on how offenders should be treated in the case of payment defaults, whether on loans, credit cards, etc. Image Credit: Supplied

Dubai: In what is seen as a landmark judgement, debtors – personal and business - in the UAE will no longer face the risk of arrest if they failed to meet their payment obligations. This applies to individuals as well as businesses.

This could, technically, apply to individual loans and those taken by a business owner, credit card dues, etc. Also, legal sources confirm, that individuals who stood in as ‘personal guarantors’ on loans taken by someone else - and who then defaults - will also not be hit under the criminal code.

Arrests can be made only when it is proven that the ‘debtor smuggled the funds’ or if found they had hidden those funds. Or in such cases, when they have completely stopped meeting their payment instalments.

The other scenario where arrests can be made is when the creditor can prove that the debtor has sufficient wealth to put the dues he/she owes. Even then, the concerned court must make a ‘brief investigation’ whether the debtor does have those funds.

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The ruling by the Dubai Court of Cassation should thus be seen as part of the reforms UAE brought in related to bounced cheque offences. Under the changes, issuing a cheque and then be found to have insufficient funds no longer constitutes a criminal offence.

‘Element of evasion’

Legal sources in the UAE say the latest court ruling has already been put into effect and helped people who had been impacted earlier for payment failure.” Up to 1,000 individuals have been released from prison last month following this decision,” said Waseem Khokhar, legal consultant in Reed Smith’s Global Commercial Disputes Group.

“The decision from the Higher Committee of the Court of Cassation has further delineated the imposition of custodial sentences in relation to civil debts.”

Individuals facing imprisonment upon failure to settle civil judgment debts will instead only face this sanction where there is an element of evasion, misrepresentation, fraud or upon default of payment by agreed instalments.

- Waseem Khokhar of Reed Smith’s Global Commercial Disputes Group

What the new ruling sets out:

  1. The judgment changes the criteria for imprisoning debtors.
  2. It clarifies that a debtor should not be imprisoned unless certain conditions are met.
  3. Specifically, the judgment states a debtor can only be jailed if the creditor proves the debtor's financial capability (richness).
  4. Or if it is proven the debtor has smuggled his funds or hidden them to avoid payment.
  5. Also, if the debtor has ceased repayment of debt installments - but only if this cessation is not due to new circumstances affecting the debtor's ability to pay.

What should creditors do?

To claim what they are owed, creditors must ‘apply to the relevant court for the appointment of a financial expert’, said Khokhar. The expert will then ‘opine on whether the debtor genuinely is unable to settle their debts or whether they have alienated funds instead.

“The latter may still attract a custodial sanction.”

Bounced cheques

It was early 2022 that the UAE removed bounced cheques from being treated as an outright criminal offence. It meant a complete change from the decades’ old system where a bounced cheque instantly opens up the individual to an arrest.

According to Shahrukh Zohaib, CEO of Ace Immigration law firm, the new judgment ‘does not seem to be limited to cases involving bounced cheques only’.

"It discusses the conditions under which a debtor can be imprisoned in a broader context, considering factors related to a debtor's financial situation, fund smuggling, and cessation of payment of instalments. It addresses the broader circumstances under which a debtor may be jailed."

The changes reflect the government’s clear commitment to manage all aspects of business to international standards, especially in regard to debt management.

- Shahrukh Zohaib
A change in keeping with the times
“As grounds for such defaults differ, it would be effective if the courts investigated the set of circumstances to qualify. If there was any kind of ‘bad faith’ of the debtor for the default and general inability to pay.

Due to the fact that imprisonment and arrest are considered severe punishments, the new judgement seems to be a reasonable mitigation of the general rules."

- Alexander Kukuev, Managing Partner, Uppercase Legal Advisory.

Moreover, the judgement imposes the burden of proof of ‘richness’ of the debtor on the creditor l, which is fair as the presumption of richness of the creditor would lead to abuse of right of the latter.

- Alexander Kukuev of Uppercase Legal Advisory