Loan defaults are considered as serious legal issue in the UAE. In accordance with the law, debtors must repay their debts, and the law allows creditors with many of different alternatives to recover loans. In the UAE, the consequences of not repaying a loan can range from financial penalties to legal actions, which can have an influence on both an individual’s economic and social standing.
In accordance with Article 409 of the commercial transactions law, a bank loan is an agreement between the creditor and the borrower. According to the loan agreement, the bank lends money to a borrower or transfers funds to the borrower’s bank account based on the agreed conditions and time limitations. The banks shall obtain sufficient securities or guarantees for the granted loans. The borrower is liable to repay the loan along with the interest to the bank within the time limits and according to the conditions agreed upon. As per Article 410, a bank loan is considered an act of commerce, regardless of the capacity of the borrower or the purpose for which the loan is allocated. The defaults on bank loans in the UAE are regulated by Federal Decree-Law No. 42/2022 on the civil procedure law and Federal Decree-Law No. 50/2022 on the commercial transactions law.
Regulation No. (29) of 2011 regulates bank loans and other services provided to individual customers. Furthermore, the central bank of the UAE issued Notice No. 3692/2012, stating the general terms and conditions for loan agreements for both lenders and borrowers.
If the debtor defaults on a bank loan, they may face legal consequences under UAE law. When a borrower defaults on a loan, banks pursue a civil lawsuit against them as per Article 233 of the civil procedure law. When a bank enforces its security, such as producing a cheque for encashment, and that security cheque bounces due to insufficient funds, it can file a civil execution. The bank must notify the debtor to settle the debt, and the bank must issue the writ of execution.
The debtor must settle the amount due within seven days after receiving this notice. Furthermore, Article 234 allows the bank to request the court for the provisional seizure of debtor funds or impose additional fines if court orders are not complied with. In addition to this, the bank can request the court to issue a travel ban against the debtor as per Article 324. The court may issue the travel ban if there is a fear of the debtor escaping the country, provided the debt is not less than AED 10,000. Written evidence is required to support the right claim. To issue travel bans, there should be specific conditions that must be satisfied, such as requirements for written evidence and guarantees to protect the debtor’s interests in the event that the creditor’s claims are deemed unfounded, and the judge may conduct investigations before issuing the ban.
Previously, a bounced cheque was considered a serious criminal offense in the UAE. However, according to the new amendments to commercial transactions law, decriminalised cases of bounced cheques are now handled in civil courts instead of criminal courts. Banks are required to make partial payments if there are insufficient funds for the full cheque amount. Cheques are now considered enforceable documents, enabling recipients to recover debts directly through bailiffs. The new amended law states that criminal liability shall remain to apply to certain cases of bounced cheques, such as the cases of cheque fraud, forgery, and other unlawful activities. These cases may lead to fines or imprisonment.