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Amendments to UAE banking law pose challenges for both investors and banks

  • Asset recovery
March 6, 2024
Daniel Hall


In an article originally published in the Khaleej Times, Burford's Daniel Hall explains why new law changes are posing challenges for investors and banks.

In January 2023, the UAE implemented new Federal consumer protection laws, with the aim of enhancing responsible lending practices and reduce "name-only" lending in the banking sector. However, one element of these laws – referred to as Article 121 bis – has been causing problems for lenders.

The amendments require that banks lending to individuals and sole proprietors now take "sufficient" security instead of relying solely on personal guarantees for the loans they provide. This shift marks a departure from the historical practice of using personal guarantees as the primary means of securing loans in the UAE. 

The motivation behind these amendments is twofold. First, the UAE banking sector aims to emphasize responsible lending by ensuring that banks take appropriate measures to secure their loans. This move is intended to prevent situations in which loans are granted based solely on the borrower's reputation or name, without adequate security. Second, the amendments seek to address the issue of undisclosed debts and personal guarantees, which have been prevalent in the region.

However, the application and interpretation of the new rule vary among different Emirates. The Abu Dhabi judiciary has taken a particularly wide approach by applying Article 121 bis both retrospectively and extending its scope to corporate loans, not just personal loans. As a result of this aggressive interpretation, Abu Dhabi-based consumers with debts backed by personal guarantees can now be largely relieved of their debt obligations, regardless of when the loans were issued. This has significant implications for financial institutions in the UAE.

The implications of Article 121 for enforcement

Under Article 121 bis, the execution court in Abu Dhabi has elected to cancel the enforcement of final judgments against customers, even if the judgments are already two or three years old. This means that banks may no longer be able to collect on UAE based assets on judgments that were previously considered enforceable. This development has raised concerns among financial institutions and creditors that rely on these judgments to recover outstanding debts.

Banks or investors that have acquired a significant portion of non-performing loans based on the expectation of making recoveries from personal guarantees may face challenges due to Article 121 bis for Abu Dhabi based customers. The execution file normally has to be open where the customer is based; this interpretation of the Federal law is not affecting execution procedures in Dubai and other Emirates. The provision's limitations on enforceability could potentially undermine the recovery prospects for these investors, leading to financial losses.

However, it remains to be seen how courts in other parts of the world apply Article 121 bis. A recent decision by the High Court of England and Wales sheds light on the enforceability of Abu Dhabi judgments in other jurisdictions. In the case of Invest Bank PSC v El-Husseini [2023] EWHC 2302 (Comm), the court ruled that Abu Dhabi judgments for amounts due under two guarantees remained enforceable in England, despite the cancelling of the execution procedures underway in Abu Dhabi due to the retrospective application of Article 121 bis in the UAE. The UK court emphasized that the key requirement for enforceability at common law is that the foreign judgment must be final and conclusive in its jurisdiction of origin. This decision provides some reassurance to parties seeking to enforce Abu Dhabi judgments outside the UAE, but significant expertise and experience will still be required to navigate these complex issues effectively.

Banks will need asset recovery expertise to pursue UAE judgments internationally

Article 121 bis has made recovery more difficult for financial institutions seeking to enforce judgments against Abu Dhabi based debtors. However, this should not deter banks with final judgments from pursuing their debts internationally. By working with asset recovery specialists, banks can leverage their expertise in navigating the legal and regulatory hurdles that may arise in cross-border enforcement efforts.

When dealing with debtors or personal guarantors in the Middle East who have fled or refuse to pay, banks and financial institutions need to identify hidden assets globally and build a compelling case for enforcement. Half the battle in judgment and award enforcement is finding hidden assets and overcoming the legal and regulatory hurdles that may have emerged since the initial claim was brought. Asset recovery specialists, such as those offered by legal finance providers such as Burford, can assist in locating assets and gathering the necessary evidence to support enforcement actions. Their expertise in the region enables them to navigate local laws and customs effectively.

Legal finance providers have the resources and experience to conduct thorough asset searches and employ innovative strategies to overcome these challenges. By partnering with them, banks can increase their chances of successful recovery.

This article originally appeared in the Khaleej Times here.