banking law

|

November 02, 2014

|

3203 views


| Your comment matters, please click here to rate article!


In the UAE, the risk management activities inherent in running a corporate or investment banking business remain of crucial importance, not least because of the strong local characteristic of “name lending”, by which is meant lending or providing other banking facilities to family or other private businesses, primarily on the strength of the “name” or “names” of the proprietors standing behind the business, rather than on the strength of the asset quality and underlying credit of the particular business. Of course, in practice, there is commercial overlap between the proprietors and the companies which they own, but the credit analyses can break down where poor banking practices and procedures result in poorly constructed legal documentation and gaps in guarantee and security support documents.

Many business organizations and institution have an option of entering into corporate guarantee agreement for obtaining funds, or the capital. The implications of corporate guarantee are far-reaching, and its execution requires a tedious examination of facts of each case.

We have attempted to analyze the law on this subject and have provided an overview on laws governing corporate guarantee.

Contractual Undertaking

The Guarantee agreement should be unequivocal in its terms and should clearly define the rights and obligations of the Principal debtor and Guarantor, as per the laws of UAE. Law No. 5 of Civil Procedure Code, Article 1078 (the Law).

According to its provision, a bank can claim against both parties (one who guarantees and one who is a beneficiary in the guarantee agreement) provided one of the parties defaults on any payment. This provision encourages banks to lend based on corporate guarantee and ensures that the debt is recoverable from either of the parties involved in the transaction – principal debtor and corporate guarantor.

UAE legislation contemplated guarantee by way of suretyship only. There is a time period for enforcement. The common practice by banks in UAE is to take undated Guarantee Cheques from Guarantor and ensure that their risk is fully covered. The lack of sufficient funds in bank account could ensure criminal proceedings against the drawer of cheques and criminal proceedings are relatively straightforward to pursue.

Guarantee Agreement should be correctly executed and dated. The Agreement should clearly define the execution period, length of Agreement and conditions that will kick in expiry of Guarantee Agreement. This should be taken into consideration during the time of execution of Agreement.

Commercial Guarantee and Court precedents

The UAE courts’ precedents are also not uniform in defining a “commercial guarantee” as distinguished from a “civil guarantee” for the purpose of Article 1092. In cassation petition 201/1992 and another 1997 precedent (Dubai Cassation petition 85/1990), Dubai courts held that a guarantee may only be regarded as commercial if it’s offered for a consideration or in connection with the guarantor’s trade. However, in a more recent precedent the court adopted a more flexible criterion regarding a guarantee as commercial if the guaranteed debt is a commercial one i.e. a debt which arose in the course of the original debtor’s trade, or where the guarantor is a trader or derives some benefit from providing the guarantee. Most reported cases in fact hold the position that the legal description of a guarantee i.e. whether it is civil or commercial, follows that of the guaranteed debt.

In the light of above and other reported cases, the current position in brief seems to be as follows:

1 – A guarantee is regarded as commercial if the underlying debt is commercial.

The provision of Article 1092 may be contracted out in situations in which they would otherwise be applicable, on the grounds that the rule is therein is not a matter pertaining to public order and is not accordingly mandatory.

Debt Originating from Guarantee and Termination

A debt becomes mature upon its Due Date.

The issue under consideration here is the confusion created by conflicting judgements relating to the effects and implications of Article 1092 of the Code of Civil Transactions (Civil Code).

Expiration of Guarantee is elaborated in Article 1099 of the Law:

A guarantee shall expire in the following cases:

  1. Upon payment of the debt.
  2. Upon deterioration of the real property in the hands of the guaranteed by a force majeure before a claim is made.
  3. Upon termination of the contract under which the right becomes binding upon the guaranteed.
  4. Upon discharging a liability creditor of the guaranty or a debtor of the debt.
  5. Upon death of the guaranteed.

Termination may also kick in due to Article 1101, it states:

“If the guarantor or the debtor compounded the creditor of amount of the debt, they shall be acquitted from the rest. If the quittance was provided only for the guarantor, the creditor may choose between taking compounded amount of the rest from the principal or leaving the guarantor and claiming the principal by all debt”.

This means that if there is an agreement between guarantor, debtor and creditor on the part of debt and if that debt is settled, then remaining debt will be waived automatically. The agreement should specify in clear terms if parties which to waive guarantor’s liability. If it is stated that Guarantor will not be liable, then this agreement will close the deal and termination will kick in. This means that Guarantor’s liability can be excluded with the help of this Agreement, Therefore the creditor may choose to claim the debt (either partially or in full) from the original debtor.

Conclusion

To put it simply, UAE laws provide for enforcement of corporate guarantees ion the courts. The laws are strictly defined and courts practice suggests that there might be a few discrepancies in its enforcement, however, but the broader idea remains clear and focused. If the Guarantee Agreement clearly defines the rights and obligations of Guarantor, principal debtor and beneficiary then such Agreement remains valid and enforceable at law. It might be suitable for the lending institution to take security cheques from the guarantor or debtor, and if any of those cheques bounces due to the lack of sufficient fund, then lending institution will have recourse to criminal proceedings against signatory authority in the Guarantor’s company to claim the outstanding amount. Lending institution should also consider about debt maturity and should claim any amount within six months, as per the Article 1092 of the Law.

Related Links


Copyright © of this article is retained by the author and/or other copyright owners. We explicitly grant you permission to download a copy, without any alteration, of this article for personal non-commercial research or study, without prior permission or any charge. This article can be utilized on your website or for marketing, however, we grant you permission to host this article on your website and no other rights. This content should not be altered in any way or sold commercially in any format without prior permission of the copyright holder. During reference of this article, full biographic details entailing the name of the author, his designation, the institute and the publishing date of the article shall be provided.


Client Testimonials

I owe the success of my case to Dr. Hassan's diligent approach. He remained focused, put me at ease and always went the extra mile. Dr. Hassan tirelessly put my case in the best possible light and I cannot thank him enough. I would highly recommend Dr. Hassan - I am grateful to him from the bottom of my heart.

Raphael Lauria
Manager, FME General Trading

Dr. Hassan Elhais is among the best legal consultants I have ever worked with. He has an amazing ability to reduce complex issues into a simple concept that non-legal people can understand. He consistently develops innovative litigation strategies that help us to achieve our ultimate legal goals.

Zhuo Liu
Client

...the extraordinary effort that has been exerted by the staff, and we specially thank Dr. Hassan Mohsen Alhais. Wishing your continues success & excellence...

H.H. Sheikh Saeed Bin
Mohammed Hashir Al Maktoum

I believe everyone should recognize what a difference Dr. Hassan Elhais work has made to people's lives; and especially to our family's life, because we will remain forever grateful to each and every one of his team.

Luis Pozueco
Client

Dr. Hassan Elhais never fears cases that involve exposure and he always gives me his honest assessment of our chances of success, which is invaluable to me.

Bassam Yamout
Director, JM Metal Trading LCC

He aided us not only in providing legal advice but also in all legal issues that required a long term strategic approach to achieve most favorable and optimum outcomes he provided us with high level of professional service.

Philippe Delbecq
Client

Dr. Hassan Elhais is a responsible, reputable counsel who operates to high levels of service.

Anil Relwani
Manager, Luxury Real Estate

Dr Hassan Elhais is responsive, thorough and creative with his advice, and is a valued advisor and legal consultant.

Asma Mattar
Manager, Italian Style

Regardless of the complexity of the matter I know Dr. Hassan Elhais will consider not only legal strategy but also business practicalities in providing advice and litigation options.

Dr. Massimo Hakim
Chairman, Italian Style

I recommend Dr. Hassan Elhais to anyone who says 'I'm in legal trouble'. I was extremely satisfied with the high standard of his work. He has always been there when I have needed him and I refer all my clients, family and friends to him/his firm.

Manish Gupta
Marketing Manager, Express Digital System

Dr. Hassan Elhais was very professional and he listened to my needs. He was very prompt, efficient and always kept me informed. Dr. Hassan Elhais's service was excellent and I would definitely recommend him to friends and colleagues.

James Horsley
British Client

Comments

No comments found.

Leave a Comment

Your email address will not be published. Required fields are marked *

Want to know more?
Then talk to us.


Main Menu

Contact Me