The Challenges Of Debt Collection In Dubai

In any country around the world, there is always an issue with debts, particularly in business to business (B2B) transactions. In a rapidly growing part of the world like Dubai and throughout the United Arab Emirates, this problem can be more challenging as there is a continual stream of businesses moving into the area, many establishing themselves in the free trade zones.

As a general statement, established companies that are owned by nationals and that have a history of entering into purchasing agreements and sales contracts are highly reliable for payment. The new companies, which tend to open as smaller to mid-sized businesses, often have a higher rate of default on payments.

In many cases, debt collection through the courts becomes a very complex and lengthy process. Working with a legal firm with experience in debt collection in Dubai can be very helpful in negotiating a satisfactory resolution to the debt that avoids the need to go through litigation.

Typical Problems

In action against a non-payment of debt, it is very common for the company owned the money to attempt to negotiate directly with the entities that owe the money.

While typical terms in a sales or service contract are 30 days, it is not unlikely that the company would extend those terms to up to 60 days or more in an attempt to address the debt without having to involve the courts.

Unfortunately, with free zone companies or for companies where there is a national sponsor, this also allows the business in debt time to liquidate, sell off assets and have the company owners leave the country. As these individuals are not UAE nationals, simply leaving the debt behind may be a very tempting option.

To compound the problems, the UAE sponsor is typically not responsible for the management of the business, so they have no liability for the debt. This poses a very real challenge for the UAE or other free zone business as the costs of trying to follow the fleeing debtor to another country can be prohibitive.

One other problem that is an issue in Dubai that is not an issue in other countries is that owning money is a criminal offense. It is also not possible for an expatriate to file for personal bankruptcy, but a company can claim bankruptcy.

In order to have a declaration of bankruptcy in the UAE, according to the Commercial Transactions Law, Article 645, the trader has to stop paying on some or all of the business debts. However, this non-payment cannot be a result of a dispute, but the non-payment has to be shown to arise from credit problems and financial insolvency of the business.

With all the complexities of the law, bankruptcies for businesses are extremely unusual in Dubai. Even with those that are filed, the granting of the declaration of bankruptcy is up to the courts and can take an extensive amount of time and money to see the case through.

Court Considerations

With this being said, there are limited protections through the court system for those businesses or individuals owed money. Even with contracts in place, the courts are not always fully prepared to deal with the issue.

The big concern for any business attempting debt collection through the courts is the lack of precedent at the court level. Unlike in other countries, the courts in Dubai are of general jurisdiction as well as Appeal courts and Cassation Courts.

To further complicate trying to collect debts, these courts are not specialized. It is possible to have a judge presiding over the court with no experience in commercial disputes or with debt collection. Finally, one more issue to consider is that business in the free zones operates under common law rather than Civil Law as practiced in Dubai domestic courts.

Pre-Litigation Settlement

In Dubai, there is a structure that has to be followed before going before the court. This starts with a Demand Letter that is registered and sent to the debtor. This letter will outline to the scope of the debt owed as well as information about the late payment interest that has accrued on the debt.

If the outstanding debt is less that AED 50,000, the case will be heard by a Reconciliation and Settlement Committee. In Dubai, this is at the Centre for Amicable Settlement of Disputes.

This is a negotiation phase, which allows the creditor and the debtor to attempt to resolve the outstanding debt. Often attorneys are brought in to act as settlement consultants and to assist with the negotiation. Despite the best efforts of these attempts, this can often be a lengthy process that is both costly as well as time-consuming.

Working with a settlement consultant will be critical for the creditor to understand options, consider what is in the best interests and also to understand the challenges of moving forward into the Civil summary judgment procedure. In many cases, upon consideration of these factors, the creditor is able to obtain some or most of the debt paid out over time or by accepting a reduced amount to clear the debt.

This can be a very positive outcome for the creditor. It prevents the need for a summary judgment, the attempt to collect and then possibility of having the debtor file a defense which brings the case into a lawsuit. There are several options under local laws including:

  • Order of payment – this is an application by the creditor to the court to force the debtor to pay. These can be a challenge to enforce and has to be based on specific documentation provided with the application.

  • Precautionary attachment order – this will allow the court to seize the assets of the debtor during the arbitration or judgment hearings. This is effective in preventing the debtor from liquidating or moving assets. This order can also seize bank accounts in the UAE.

  • Order for sale – it is possible for the court also to order that the debtor sells some or all property or assets to repay the debt. This can only be granted if the debt is a result of material or equipment that is on that property.

Keep in mind, most court hearings in Dubai as well as in the UAE are done through writing, with a set period of time for each party to the case to respond. This is very different than an in-person court hearing, so the process is much slower than what it may appear at first glance.

During this time, there is always the risk of the debtor, particularly if not a UAE national, fleeing the country. Unless the creditor then wants to consider tracking down the individual and filing a lawsuit outside of the UAE, it can result in a complete loss.

The Solution

In situations where debt collection is an issue for a company or an individual, working with a legal firm experienced in the practices in Dubai as well as the challenges of going through the courts will be essential.

These professionals will have the expertise and understanding to be able to provide insight, understanding and to look for creative ways to resolve the debt and allow their client to achieve at least some recourse on the debt they are owed.

It will be important to attempt to work to a mutually agreeable solution to prevent issues such as the debtors simply leaving the country if they fear jail or criminal proceedings. While there are routes to track and file suits on debtors outside of the country, this can also be a costly process that should be completely understood, including the time and the money involved to pursue this option. Visit the website www.stalawfirm.com for more information.

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