Within an increasingly globalised marketplace, corporate credit is a key element of commercial transactions. Companies grant credit terms with the expectation of payment being made in full and on time. Defaults, however, occur in reality, and when this occurs, having a clear strategy for debt recovery is then vital.
The UAE’s legal system provides strong remedies for corporate creditors to recover debts by both amicable and judicial means. We have represented clients in various industries at Davidson & Co. and assisted them in going through complicated recovery procedures efficiently and effectively. In this article, we discuss the strategic enforcement remedies that can be employed for corporate creditors in the UAE and provide a practical guide to recovering what rightfully belongs.
Understanding the UAE Debt Recovery Framework
The UAE has built up a system of law that is organized and favors creditors but maintains procedural fairness. Some of the main features are:
- A civil law system in the mainland with common law systems in free zones like DIFC (Dubai International Financial Centre) and ADGM (Abu Dhabi Global Market).
- Enforcement of financial obligations under the Civil Procedures Code and Commercial Transactions Law.
- Signatory to the New York Convention for recognition and enforcement of foreign arbitral awards.
- Continuing criminal liability for cheques in default, although recent legislation has altered penalties.
This system offers domestic and foreign companies an array of instruments to recover commercial debts, depending on the character of the claim, the parties, and where the assets are located.
Step One: Internal Examination and Pre-Litigation Analysis
Prior to starting any recovery process, company creditors ought to have a proper internal examination. This entails:
- Contract Analysis: Check if the contract has clear payment terms, late payment penalties, or dispute resolution provisions (litigation or arbitration).
- Evidence Compilation: Gather all documents like invoices, delivery receipts, signed contracts, emails, and cheque copies. These documents will be crucial during court or arbitration proceedings.
- Debtor Profiling: Get to know the financial and legal position of the debtor. If the debtor is insolvent or dissolved, a different enforcement tactic may be required.
This initial due diligence enables companies to assess the viability of recovery and the most effective step.
Step Two: Amicable Resolution – The Preferred First Step
Suing amicably is often less time-consuming and expensive. In the UAE, this action not only follows the cultural protocol of local business operations but is also actively promoted by the courts.
Standard practice involves:
- Legal Demand Notices: Issued by legal representation formally, the notice details the sum due and the intention to pursue the case further if not paid within a stipulated time frame.
- Direct Negotiations or Mediation: In most instances, a formal dialogue can result in repayment schedules, partial settlements, or restructured terms.
Using legal counsel at this point illustrates seriousness and can encourage the debtor to settle prior to formal proceedings.
Step Three: Formal Legal Action – Litigation or Arbitration
If informal action is unsuccessful, corporate creditors are forced to move on to formal legal proceedings. The decision to pursue either litigation or arbitration usually hinges on the terms of the contract between the parties.
Litigation in UAE Civil Courts
Disputes are referred to the local courts where no arbitration clause exists:
- Payment Order Applications: A speedy remedy for undisputed claims upheld by documentary proof, well-suited for bounced cheques or outstanding invoices.
- Normal Civil Proceedings: More complicated or contentious cases are pursued through the normal process of litigation, involving written arguments, hearings, and expert appointments where necessary.
Proceedings before courts are in Arabic, and judgments are legally enforceable once made and finalized.
Arbitration in Recognised Centres
If there is an arbitration clause within the contract, the dispute is settled by institutions like:
- Dubai International Arbitration Centre (DIAC)
- Abu Dhabi Global Market Arbitration Centre (ADGMAC)
- Other international forums are subject to jurisdiction clauses
Arbitral awards are enforceable in UAE courts after ratification and, by virtue of the UAE’s membership in the New York Convention, also internationally.
Step Four: Enforcement of Judgments and Awards
Enforcement is the most critical stage of the debt collection process. A successful judgment or award has to yield actual payment, and the UAE courts offer various mechanisms to facilitate this:
Execution Proceedings
After obtaining a final judgment or arbitral award, it has to be referred to the Execution Court. The court will proceed to execute the award over the assets of the debtor and, if necessary, may take the following steps:
- Freezing Bank Accounts: Banks have to respond to judicial orders to freeze or debit amounts from the accounts of the debtor.
- Seizure of Movable and Immovable Properties: These consist of cars, lands, and stocks in domestic companies, which can be sold to pay back the debt.
- Wage Garnishment: The salary of the debtor can be partly deducted in some instances to fulfil the judgment.
- Seizure of Third-Party Debtor: If there is money due to the debtor from another party, the court will reroute such payments to the creditor.
Criminal Complaints for Dishonored Cheques
In addition to legal reforms, bouncing a cheque can still attract criminal prosecution. Although imprisonment is less prevalent under the new law, fines and travel bans remain effective tools for enforcement that tend to push the debtor into making payment.
Special Considerations: DIFC and ADGM Courts
Corporate creditors may want to include DIFC or ADGM jurisdiction provisions in their contracts, particularly when transacting with international counterparts. These courts provide:
- English-language proceedings
- Common law principles
- Modern procedural rules
- Speedier enforcement processes in their respective jurisdictions
A DIFC or ADGM judgment can also be ordered for enforcement on the mainland through mechanisms of reciprocal enforcement.
Best Corporate Creditor Practices
In order to improve their hand in recoveries in the future, companies should:
- Insert Clear Dispute Resolution Clauses: Indicate whether disputes are to be settled through court or arbitration, and select a convenient jurisdiction.
- Employ Post-Dated Cheques or Bank Guarantees: These tools offer leverage and increase enforcement potential.
- Keep Creditworthiness: Continuously monitor clients’ financial health, particularly before granting large credit lines.
Not Act:
Delay in recovering may lead to dissipation of assets or the running of time bars.
Not Engage:
Professional Legal Counsel Early: Proper legal professionals on board may result in quicker settlement and optimal results.
Conclusion: Strategic, Not Just Legal
UAE debt recovery is as much an art as it is a matter of legal process. With a blend of formalized court processes, state-of-the-art arbitration frameworks, and strong enforcement mechanisms, the UAE offers an excellent platform for corporate creditors looking to recover outstanding debt.
Here at Davidson & Co., we apply a commercially-savvy approach to all debt recovery cases, considering not just legal victory, but safeguarding your business interests during the process.
If your business is having debt recovery issues in the UAE, get in touch with our dispute resolution team for expert legal guidance and support.
