UAE Bankruptcy Law Proposals & the decriminalisation of bounced cheques. Will it happen and will
Prison sentences for bounced cheques have been a hot topic in the UAE media over the years. The practice of holding cheques as security is akin to holding a prison sentence over someone´s head.
David Haye, former heavyweight champion of the world, will fight next week in London after his bounced cheque related arrest in the UAE was resolved....
Landlords have requested post dated cheques for 12 months rent (or more) and so an unexpected loss of employment has lead to prison terms. In spite of the sanctions, most people need to write cheques for funds that they anticipate to have in their account in order to function normally in the UAE. It is practically impossible to avoid writing security cheques though we are increasing hearing stories from farsighted expats who have begun to fight back by only agreeing to contracts that do not require security cheques. We advise others to follow suit.
If culturally, there were changes to the popular practice of requesting “security cheques”, it would be rarer for a cheque to bounce because the author would be paying with funds he knows to be immediately available.
It seems that the law was originally enacted to prevent true fraud. One would hope that the Legislators did not envisage or anticipate that in practice, the system of “security cheques” would develop as a direct result of this law and its sanctions. Conceivably, they were simply foreseeing someone buying a table, writing a cheque and perhaps intentionally disappearing, thereby thieving.
People who sign company cheques are personally liable if the cheque bounces solely because their personal signature was on the cheque. Sometimes, the liability as fallen on an accountant, secretary or office manager who has been instructed by their superior. In some cases, the "boss" has deliberately added a subordinate as a signatory of the bank accounts to protect himself from liability.
In other cases, foreign business partners have been personally liable for a company´s bounced cheques even though the sponsor essentially embezzled funds from the bank account without his partner´s knowledge. This has resulted in only the partner of the company being charged while the other officers remain immune.
The other side effect of criminalising bounced cheques is that the passport will be confiscated, leading to loss of employment or the inability to gain new employment, thus causing further complication and potential criminal charges.
A very important practice that has been the instigating reason behind leaving the UAE for many workers in high paying positions, is for banks to request a cheque be written to the bank for the entire cost of the mortgage that they have been given for a property. This means that someone might write a cheque to a bank for US$1.5 million, even though they clearly do not have these funds. In the event that at any point over the next thirty years, they go into default, the bank will present the cheque and they will be jailed. Following the 2009 economy crash, expat pilots, directors and executives fled their negative equity properties.
The proposed bankruptcy laws and decriminalisation of bounced checks will have a tremendous impact on general operations in the UAE. The populace will need to establish new methods of operation where security needs to be provided and “find their feet”.
Mashreq bank´s CEO spoke to Arabian Business Magazine about his concerns that the number of bounced cheques will rise. He went on to say that the government should not be too concerned about the very few cheques that bounce, being approximately 4%. That 4% though amounts to approximately 1.28 million cheques and therefore 1.28 million potential inmates every year.
Radha Stirling, CEO at Detained in Dubai stated “As HSBC´s CEO famously said “jailing works for recouping debt”….. Banks enjoy having the ability to jail their customers, and debt collectors love to threaten it."
In the world of business, the Directors of a company would be jointly liable for business debts, although it does not eliminate the possibility of liability for one party as other crimes such as “breach of trust” or “fraud” may be applied instead.
Security cheques may still exist, though will likely be of less perceived value. Ultimately though, a bounced cheque still results in consequences including bankruptcy or impacting one´s credit profile and potential civil lawsuits. If there was any misconduct or fraudulence involved, the matter would still be dealt with criminally.
We expect to see:
Civil Courts becoming more popular to claim funds;
Financial crime convicted prison population to reduce substantially;
Potential release of previously convicted parties;
Police & prosecution workload to be reduced;
Charges related to breach of trust and fraud will increase;
Reduction in expats fleeing the UAE;
Increase in the return of expats that fled;
Increase in risk taking, entrepreneurial ventures, loan applications etc;
Reduction in bank risk taking, increased due diligence and use of credit databases;
Increased practice of repossession;
Increased use of International Collection Agencies, to claim overseas assets.
Although the new laws (if they are realised) will offer some protection, people should be aware that the culture of jailing for financial or business related disputes will not simply vanish, but the format will change. We have been intimately involved with resolving bounced cheque cases over the years. Where the charges have been in relation to business transactions, real estate, trader or commerce, without the bounced cheque laws, the applicant would have simply amended his report to claim breach of trust or fraud. New investors, business owners, workers and residents will still need to be cautious of this deep rooted cultural habit.
To be continued...