Mohamed El Hawawy Joint Managing Partner, Dubai
Digging deep: utilising available legal tools for effective debt recovery
The problem of debt recovery in the United Arab Emirates (“UAE”) remains of high interest to our clients both locally and abroad. In this article we want to highlight the tools that are available for debt recovery if you are prepared to put time and effort in it.
Any debt collection process should start with the asset investigation exercise where you identify the debtor’s assets. If you skip this step, the creditor risks wasting significant amount of time and costs in court or arbitration if the debtor does not have any assets which can be seized to satisfy the debt.
The easiest information to get hold of is that which is publicly available. Unfortunately, in the UAE very little information is open to the public. By far the most prudent approach is to obtain as much as information as possible about your counterparty at the time when you enter into contract with them or during performance of the contract.
Typically, the asset investigation exercise precedes the any judicial procedure for obtaining security over these assets. In the UAE, there is no mechanism for pre-action disclosure requests, but in some cases it may be possible to request the court to appoint an expert with a view to investigating status and details of the corporate debtor.
The case study below demonstrates that if a party is struggling with identifying assets for the purposes of starting attachment proceedings, it may be possible to utilize the attachment proceedings in court for the purposes of asset investigation.
To set the scene for the case study, the claimant contracted to carry out design and supply of certain modules and equipment to the defendant. Acting in breach of contract, the defendant sought to suspend work on the projects, and attempted to reduce the agreed work scope and price. The claimant has incurred significant expenses in performance of the contract. As a result, the claimant has a claim against the defendant in the amount of over USD 45 million. The defendant was a free zone company based in a small office in Sharjah. It did not have any obvious assets, but the claimant suspected that substantial amounts of funds go through the defendant’s bank account in Dubai.
A good place to start most of the recovery actions is to send a letter of demand attaching a statement of account. The defendant has not responded to this letter. The next step in this case was to send a legal notice, which is a duly signed and notarized document that demonstrates to the debtor that the creditor has initiated official means to collect the debt.
As a next step, the claimant applied for an order for precautionary seizure (attachment) of the defendant’s assets. This action can be taken before or after the first two steps outlined above. The claimant filed an application under Article 252 of the CPC in Sharjah Courts to attach five bank accounts with five different banks in the UAE, the physical office of the defendant and any real estates and cars owned by the defendant. The details of the bank accounts were sourced from the earlier payments made by the defendant. The claimant further applied for a court order to raid the defendant’s offices to record the contents of the attached office, which was granted by the Courts. The Court based its judgment on Article 252(1)(b) of the CPC, ruling that the defendant is effectively a foreign company, with foreign shareholders, and its difficult financial situation means that there is a real risk of asset dissipation.
As a result of the raid, a court expert attended at the defendant’s offices and recovered substantial amounts of documents. The documents have demonstrated that the defendant has assets which can be traced to the bank accounts outside the UAE and also holds shares in another local company. As a next step, the defendant was able to file a new application for attachment of the shares, profits and dividends of the defendant’s shares in that subsidiary and defendant’s parent company.
This case study demonstrates that the scope for obtaining attachment in the UAE courts is fairly wide, if used timely and strategically.
* This article was first published in Marasi News.