Debt Collection in UAE

• Although large domestic corporations payment conduct is generally good, working with small and medium-sized firms that pose a significant risk of non-payment. Because insolvent debtors may be subjected to a prison term, their propensity to vanish becomes important when things go wrong.

• The legal framework is complicated and, while administrative delays and expenses may be prohibitive, the courts tend to lack transparency and efficiency.

• Insolvency law does not provide any protection when it comes to debt recovery: a loan renegotiation process has been put in place, although in reality it remains largely untested to enable liquidation to occur, leaving borrowers with no chance of recovery.

1. Summary

1.1. General financial information

1.1.1 Overall, access to reliable financial information is a challenge facing the entire GCC (Gulf Cooperation Council) region, and it is very difficult to obtain such data in the UAE, as there is no legal requirement for companies to publish financial information. An exception for publicly listed firms would be this.

1.1.2. As a consequence, financial information is not readily available from independent sources on potential business associates, although documents provided by unofficial sources may not be completely reliable.

1.2. Key legal structures

1.2.1. Corporate debt obligation is defined by legal structures, which are listed as follows:

• Sole proprietorship is possible for independently operated small businesses. Nevertheless, since the proprietorship is not a limited liability corporate entity, the lender is responsible for all contractual debts.

• There are also different types of collaborations. A General Partnership consists of two or more partners who will be jointly liable to the extent of all the partnership's assets. Each partner shall be regarded as a merchant, and the insolvency of the partnership shall mean all partners ' bankruptcy.

• Instead, a Limited Partnership consists of one or more general partners equally responsible for the obligations of the partnership to the full extent of their properties, and one or more limited partners whose responsibility for the liabilities of the company does not exceed the value of its interest in the shares.

• Growing types of businesses operate in the UAE. Limited Liability Companies (LLC) is the most popular corporate structure used in the UAE for foreign firms doing business. A business must have a capital adequate to attain its function and be set by the investor, but at least 51% of the stock of a Corporation formed in the UAE must be purchased by a UAE citizen or a company 100% controlled by UAE citizens (or nationals of the GCC countries i.e. UAE, Saudi Arabia, Bahrain, Kuwait, Qatar, Oman). The' sponsor' gets a set yearly share of the income and an advertising fee in operation and unofficially, without any investment in the company. Liability is restricted to the commitment of the owners towards the LLC.

• The Public Joint Stock Partnership is a financial partnership composed of equivalent-value transferable securities. Each party shall be liable only to the sum of his share in the shares. The resources of the business must be adequate to meet the purposes for which the organization was founded, but such capital can not be less than 10 million AED. A Private Joint Stock Company is a company that is not selling its public subscription portion but its resources can not be less than two million AED.

• Foreign companies may also set up subsidiaries in the UAE, although they do not have a specific corporate entity and their responsibility is not restricted to their properties. Eventually, joint ventures may be formed through a partnership between two or more parties willing to share the gains or losses incurred by one or more commercial enterprises conducted on their own account by one of the partners. Third parties can only file lawsuits against the party they are doing business with.

1.3. Regulatory framework

1.3.1. The UAE has a Civil Law and Sharīah Sharia focused legal system. It is a federation of seven Emirates that share a common federal judiciary (except for Dubai and Ras Al Khaimah).

1.3.2. The judiciary is divided into courts of general jurisdiction, Courts of Appeal and Courts of Cassation. There are no specialty courts which means that non-specialized judges must consider all commercial disputes.

1.3.3. However, it is necessary to distinguish from the Freezone Authority (such as the Dubai International Financial Center) which enforce different rules (based on common law) and are competent for cases filed by companies registered in these Free Zones and local courts competent for all civil matters brought by companies registered in the UAE.

2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1. Compensation periods in the UAE have been for 30 days, but they appear to stretch up to 60 days, progressively. Among listed companies, the typical DSO is 62 days, which varies widely from one industry to another. In specific, major oil & gas, manufacturing or utility companies are likely to extend their conditions of payment but would usually pay their dues.

2.1.2. Smaller companies (e.g. retail trading) are likely to default on their loans, leaving their borrowers without redress. Nonetheless, since there is no successful regulation, insolvency or bankruptcy law in the UAE and provided that defaulting on a contract duty is a criminal offense, most small traders will choose the' escape' route to avoid winding up in prison.

2.1.3. However, most UAE listed businesses are de facto controlled by outsiders who continue to vanish as problems arise (sponsors are barely active in the management of the company and are not responsible for the debts).

2.2. Late interests

2.2.1. According to Article 76 of the Commercial Conduct Code of the UAE, "A borrower shall be entitled to charge interest on a commercial loan at the amount provided for in the deal. If the interest rate is not stated in the contract, it shall be determined on the basis of the market rate existing at the time of the transaction, but in this situation it shall not surpass 12 per cent before payment is made. "Late payment interest: A borrower shall be allowed to charge interest on a commercial loan at the rate defined in the contract.

2.3. Costs of debt collection

2.3.1. Debt collection charges The claimant is not paid the expense of recovering debts.

2.4. Protecting ownership

2.4.1. Insolvency Legislation in the UAE recognizes the value of Retention of Title Agreements seeking to retain the seller's possession of products until the purchaser has paid the relevant invoice in full. However, in certain cases, the statute often acknowledges the prospect of retaining possession, given the debtor's selling of the product to a third party (Articles 118 to 119 of the Commercial Code).

2.4.2. Nevertheless, in fact implementation of such provisions remains extremely complicated and there is no assurance that the products will still be there once the time has come for repossession by the time hearings have taken place (if any).

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2.5. Payments

2.5.1. The most common methods of payment are as follows: bank transfers are among the most prominent means of payment for international transactions, as they are quick, safe and sponsored internationally and domestically by an increasingly integrated banking network. Export sales are usually guaranteed via an Export Credit Insurance policy, which tends to minimize the risk of immediate or accidental insolvency of customers.

2.5.2. Furthermore, Standby Letters of Credit (a bank guarantees the creditworthiness and repayment ability of the debtor) are often used in export shipping transactions because they provide secure assurances that can be enabled as a' payment of last resort' if the buyer fails to fulfill a contractual obligation. In addition, irrevocable and confirmed Documentary Letters of Credit (a debtor guarantees that a certain amount of money will be made available to a beneficiary via a bank once certain terms, specifically agreed by the parties, have been met) are increasingly being relied upon.

2.5.3. Local bank incentives are available but can take up to a week to complete the process. Checks are widely used as collection instruments, since they are valid debt identification names that may be administered immediately with the court if left unpaid. Therefore, a person may be disciplined by incarceration (one month to three years) and/or fined AED 100 to AED 30,000 if they produce a test in bad faith without care necessary. A notable phenomenon is the use of Post-Dated Checks which are also used as a payment pledge. Having said that, the possibility of bouncing checks in practice in the region is very high.

2.5.4. Credit cards, while diminishing in prevalence, tend to be an appealing means of payment for companies as they are a type of short-term funding by discounting or conversion. These are particularly suitable for installment payments. There are regular transfers in installments and down payments.

3. Collecting payments

3.1. Amicable action

3.1.1 Negotiating. Despite obvious progress over the past few years and a clear intention to speed up business-related investigations, the UAE's judiciary has considerable margins to boost. Although the 1971 Constitution respects the concept of judicial independence and the rule of law, in reality, domestic courts lack transparency and integrity, and securing favorable court rulings remains an unpredictable activity.

3.1.2. In reality, it is often not desirable to pursue legal action in domestic courts, unless the argument is serious and the chances for victory are high. Consequently, convenient mediation options should always be seen as a serious alternative to formal legal action. Until launching legal proceedings against a debtor, asset appraisal is critical as it requires assurance of whether the business is still successful and whether chances of recovery are at best. Therefore, it is important to be mindful of the solvency condition of the debtor: once insolvency proceedings have been started, payment of a loan will indeed become unlikely.

3.2. Legal proceedings

3.2.1. Ordinary proceedings. Legal dunning will commence with a recorded Demand Letter advising the defendant of their obligation to pay the principal along with interest on late payment.

3.2.2. Commercial conflicts can often be resolved before a Reconciliation and Resolution Commission (in Dubai, any conflict beyond AED 50,000 must be taken before the Centre for Amicable Dispute Settlement).

3.2.3. If the amicable settlement process fails, a summary judgment method is required by the Civil Procedure Code, providing that the liability is for a particular or liquidated amount and is certain and undisputed (i.e. verified in writing through a transaction document). In this scenario, the claimant is punished and must compensate within 15 days (or carry a defence). If an appeal is lodged, the case must be resolved before the court of first instance through a regular litigation.

3.2.4. Ordinary legal action should be stopped however, if pursued, litigation will typically begin if pleasant selection failed. The borrower must lodge with the judge a petition that would then deliver the debtor's summons. The latter would have to submit an answer, and the parties would then trade written arguments: all court proceedings in the UAE are in writing, there is practically no oral testimony in civil cases. Both hearings are, of course, held in Arabic and all records have to be translated.

3.2.5. The courts will usually grant compensation in the form of clear services and compensatory damages, but injunctive relief is typically impossible in the UAE and attachment orders are difficult to obtain; there has to be a prima facie case against the claimant and a real risk that the seeking party may not be able to enforce the judgment. In practice, it is difficult to obtain such an attachment against the assets of a UAE national or a UAE company, as the risk of dissipation of such assets is difficult to establish. Only in rare cases a litigant in the UAE would be able to recover substantial injuries and/or punitive damages.

3.2.6. Required documents. A properly notarized power of attorney allowing an attorney to act on behalf of the defendant. It must be bilingual if notarized in the UAE, and thus written in English and Arabic. If it originates outside the UAE, it must be notarized by a competent authority in the home country of the client and then approved and certified by the UAE Embassy and the UAE Ministry of Foreign Affairs. The paper must be sent to the prosecutor prior to or at the time the case is submitted. In fact, all relevant and evidentiary records must be translated into Arabic by a qualified legal interpreter and sent with originals.

3.2.7. Time limits. Article 473 of the Civil Code places the standard time period at 15 years in civil law matters. In many instances, though, the timeframe available will be a lot shorter. Contract violations, for example, would have to be taken in within 15 years, although skipped tests would have to be brought in within one or three years.

3.2.8. Provisional measures. There is no principle of temporary or injunctive relief available from UAE courts for an attachment of assets however, if a lawsuit has been filed with the court, the judge may issue an interim attachment of assets if there is a danger that the defendant will not make payment or a risk of dissipation of assets.

3.2.9. In practice, however, these proceedings are rarely awarded and the claimant would be required to demonstrate that the claim has a good chance of success and that, in the absence of precautionary measures, damages alone would not suffice. The court may take its decision ex parte (i.e. without the debtor being present) on the same day in emergency situations, but the court would usually request that the claimant provide security on costs to protect the respondent from irresponsible action.

3.2.10. The filing of an appellate case made in the first place by civil courts may be taken before the Court of Appeal within 30 days, where the judgment is checked in the context of substantive and legal issues. The Court of Appeal may either uphold or reverse the Court's judgment and replace the judgment with its own determination of the matter. The Court of Appeal may refer the matter back to the Court of First Instance in certain situations.

3.2.11. Except in Ras Al Khaimah, the second instance decision may be appealed to the Cassation Court, which only reviews legal issues (incorrect interpretation of the law, failure to state reasons, non-compliance with procedural requirements, etc.). It is not until several weeks and sometimes months later that the oral trial is held, however, appeal hearings before the Court of Cassation do not usually preclude the Court of Appeal from applying or implementing the judgment

3.2.12. Enforcing court decisions: A verdict can be followed as long as it becomes definitive (i.e. when all the areas of appeal are exhausted). If the debtor fails to comply with the judgment within 15 days, and so long as the debtor's funds can be found, an attachment order can be issued from the Execution Court and, under extreme circumstances, the debtor's incarceration.

3.2.13. The execution procedure may seem straightforward but depending on the existence of the debtor's assets it can become time consuming and complicated. Arbitral awards that prove difficult to enforce because of the absence of a clear regulatory framework.

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3.2.14. Duration of a legal action.  It could take between nine months and two years to reach a decision at first instance, depending on the complexity of the situation. Furthermore, to impede compliance, it is common for a criminal to petition for appellate hearings. Enforcement can be challenging though, particularly if, as explained previously, the debtor has chosen the' escape' path.

3.2.15. Costs of a legal action.  As a general rule, the successful party should assume only part of its legal costs to be paid (AED 2,000 on average), although court fees (4 percent to 7.5 percent of the lawsuit, set at AED 30,000/USD 8,000) can be fully recovered. Court fees will vary depending on the proposed settlement and the legal where the ruling is being pursued.

3.3. Alternatives to legal action

3.3.1. Alternative Dispute Resolution Methods (ADR). Arbitration is an increasingly popular alternative dispute resolution method although it may be culturally challenging to reach an acceptable compromise. Having said that, there is a certain legal framework missing in action. Award compliance can also prove to be challenging.

3.3.2. International platforms It should be remembered that although the law allows business partners to settle their conflicts in an international venue (i.e. under foreign law or before a foreign court), UAE courts are hesitant to enforce foreign law and would usually disregard the requirements of foreign jurisdiction if they are able to cope with a conflict.

3.3.3. Furthermore, while domestic courts may decide to enforce foreign law, they can view it without taking into account the jurisdiction of origin applicable to the case law. Furthermore, UAE courts would most commonly hold sole authority over specific areas of law (such as government contracts, travel, insurance law, employment law, property law, etc.) and any other issues considered to be of public order in the UAE.

3.3.4. Enforcing foreign awards. This continues to be impossible for domestic courts to impose global awards given against citizens. Before international decisions to be deemed enforceable, they must first be accepted as domestic judgments. When there are mutual bilateral or multilateral acknowledgement and compliance arrangements (such as the Riyadh Convention), the provision is typically a formality.

3.3.5. Nevertheless, in the absence of such arrangements, the purpose of the exequatur litigation is to guarantee that the compliance tribunal does not have sole authority to rule on the dispute, to check that the ruling was made by a qualified court and that it is definitive and enforceable in the originating region, and that both parties benefited from a proper legal procedure. Ultimately, the courts would also guarantee that the international verdict does not contradict prior UAE court rulings, and that compliance in the UAE does not violate public morality and public order.

3.3.6. The UAE became a party to the 1958 New York Convention on the Recognition and Compliance of International Arbitral Awards in 2006; therefore the domestic courts will enforce international arbitral awards. Nonetheless, recent case law dated 2013 challenges previous decisions on' pro-foreign awards' and indicates that even awards coming under the Convention would in fact be subject to the rules laid down in the Code of Civil Procedure. Several clinicians find this news a significant and troubling reversal, since it means that current international arbitration systems will theoretically be rendered ineffective.

4. Managing insolvent debtors

4.1. Insolvency in UAE

4.1.1. On 29 September 2016 a revised UAE bankruptcy law (Federal Law No. 9 of 2016)–the Revised Bankruptcy Law–was issued which came into force on 29 December 2016. Although evaluating the practical effects of the new law is still too early, there is a general consensus among industry professionals that the new law is a welcome development and is expected to have far-reaching effects on the way business is done in the UAE.

4.1.2. The Revised Bankruptcy Law repeals and updates the rules on bankruptcy and recovery laid down in Chapter V of the Commercial Code (Federal Law No. 18 of 1993)–the Commercial Code–and incorporates a range of substantial changes from previous law.

4.2. Insolvency proceedings

4.2.1. Out-of-Court proceedings. A debtor may petition for a preventive composition action "if they face financial hardship involving assistance in negotiating a settlement with their creditors" and are not in default of their payment duties for more than 30 consecutive days.

4.2.2. According to Article 5 of the Bankruptcy Law, "the object of the preventive composition process is to assist the debtor in finding agreements with their creditors under a preventive composition arrangement, under court supervision," and by a trustee's assistance.

4.2.3. The protective actions was conducted by a judge, with the debtor's support and trial oversight. Those proceedings shall end with the drawing up of a Preventive Composition System comprising the terms and conditions of debt settlement authorised by the creditors.

4.2.4. For the reason of this action to secure the debtor's properties, the debtor is prohibited from disposing of their estate and the creditors shall have their claims against the debtor stopped, unless the court decides otherwise.

4.2.5. Debt restructuring. The UAE Council of Ministers, recognized as the Cabinet, shall issue a decree establishing the so-called Financial Restructuring Committee according to Article 3.1 of the UAE Bankruptcy Law. The position of the committee is yet to be established in depth through such resolution; however, some of the roles of the committee have been outlined by the Bankruptcy Law. Hence, the committee is expected to deal specifically with two things. Next, the committee shall supervise the administration of the financial rehabilitation processes of the undertakings through the assistance of consultants to promote negotiated arrangements between creditors and debtors.

4.2.6. In turn, the committee must create and control a register for ineligible individuals and representatives against whom judgments have been given imposing restrictions and directions on bankruptcy. Companies operating in the UAE who were unable to uncover the financial health of the enterprises they were supporting have long sought this kind of list.

4.2.7. Winding-up proceedings. The bankruptcy proceedings may be initiated by: (a) the debtor if they stop repaying their debt on maturity dates for more than 30 consecutive business days; (b) the creditor(s) possessing an ordinary debt of at least AED 100,000 if the debtor refuses to repay the debt due within 30 consecutive business days from the date of notification; and (c) the trial, upon request from the debtor, repaying the debt due within 30 consecutive business days;

4.2.8. Such proceedings regulated by the Bankruptcy Law prescribe two situations, based on the company's financial health: (i) the debtor's recovery, if necessary, by assisting in the implementation of the corporate turnaround scheme; and (ii) the debtor's declaration of bankruptcy, by assisting in the course of just liquidation of property to discharge its obligations.

4.2.9. Like the Preventive Composition Cases, the debtor's settlement plan is conducted by a trustee, with the debtor's support and judicial oversight. These hearings shall end with the drawing up, within three months, of a repayment scheme comprising the terms and conditions of debt settlement to be voted on by the creditors.

4.2.10. The debtor's bankruptcy declaration shall take effect by judgement where debt resolution could not be achieved, no matter the reason. After receipt of the order, the creditors shall file or otherwise dismiss their petition within 10 business days. The bankruptcy process will also be conducted by a court-appointed administrator, who will investigate and liquidate the debtor's properties which are not protected by the asset protection clauses found in Section 132 of the Bankruptcy Law.

4.2.11. Priority Rules. The trustee must, having liquidated the estate, divide the liquidation proceeds between shareholders on the basis of preferences as provided for in the statute. Pursuant to Chapter 6 of Section 5 of the Bankruptcy Law, priority payments shall be as follows: (i) costs of the trustee in the process of selling the assured property; (ii) creditors carrying guaranteed debts; (iii) compensation or expenditures of the courts, consultant or trustee; (iv) labour entitlements of employees; and (v) rehabilitation debts charged by the claimant according to the decision of the competent court.

4.2.12. Cancelation of suspicious transactions. Clawbacks and shareholders: I the trustee may infer that past dividend payments were made from fake earnings–permanent retroactive liability according to Article 30 of the Commercial Companies Law; (ii) the trustee shall cancel any loans made by the debtor to shareholders;

4.2.13. Clawbacks and banks: wide-ranging clawback clauses of New Law, Section 168(i) gifts / gifts; (b) debt prepayment; and (c) fresh loan collateral protections for past debts may be revoked if the borrower becomes aware of the negative financial situation.

4.2.14. Banks are often vulnerable because they are aware of the difficulties of their clients, therefore: I loan agreements require notice to the bank of the company; (ii) loan arrangements usually allow banks to call facilities instantly if informal insolvency proceedings are initiated; and (iii) UAE banks are likely to set up monitoring systems to track bankruptcy proceedings in a timely manner;

4.2.15. Duration of insolvency process. Despite numerous calls for the elimination of the criminal sanctions from the insolvency proceedings, it is still a form of sanctioning mechanism that UAE courts may enforce. Accordingly, Section 6 of Chapter 7 of the Bankruptcy Law lays out a series of circumstances in which a jail sentence can be levied on the board of directors, administrators, liquidators, trustees or consultants should their actions cause harm to the debtor's properties to the detriment of the creditors. The duration of these terms can vary from one to five years in prison.