The UAE economy has historically relied more heavily on cheques for processing payments than electronic transfers. By way of illustration, the UAE Central Bank only introduced a Direct Debit System in October 2013, prior to which many banks insisted on a suite of pre-dated signed cheques in repayment of loans. Many UAE banks still require cheques to be provided as security for loans with those cheques being deposited (and often then bouncing) when the debtor fails to pay any loan installments.
The UAE Federal Penal Code (Federal Law No. 3 of 1987) provides for criminal sanctions for any issuer of a bounced cheque. This is widely regarded as an outdated approach, creating a hostile environment for the conduct of business, particularly for finance directors and others who sign company cheques as part of their daily routine. Faced with the threat of imprisonment for dishonored cheques, and prior to an effective insolvency regime being implemented in the UAE, it was not uncommon to hear of managers of SMEs fleeing the country rather than attempting to work through cash flow or insolvency issues. In many cases, businesses find themselves in this position through no fault of their own where they are themselves awaiting payment.
The new Federal Bankruptcy Law (Federal Decree Law No. 9 of 2016) provided some relief by providing a modernized restructuring and insolvency framework, and allowing for a stay of criminal proceedings relating to bounced cheques which were issued prior to the commencement of a scheme of composition or restructure.
With effect from December 2017, new rules applicable in the Emirate of Dubai mean fewer people will need to fear the threat of jail time for bounced cheques. The rules came into effect under a criminal order issued by the Dubai Attorney General Essam Al Humaidan which sets out a number of minor offenses to be recategorized as misdemeanors and subject to financial penalties of fines rather than incarceration.
This includes bounced cheques up to a value of AED200,000 with fines levied on a sliding scale:
- AED2,000 fine for dishonored cheques up to AED50,000
- AED5,000 fine for dishonoured cheques between AED50,000 and AED100,000
- AED10,000 fine for dishonoured cheques between AED100,000 and AED200,000
Rather than going through the court system, cases of bounced cheques falling within the scope of these new rules will instead be dealt with by the public prosecutor, relieving pressure on the Dubai court system and bringing about a speedier resolution for offenders. It is not clear how this might affect treatment of such offenses in other areas of the UAE or apply in cross-emirate situations.
While this is not a decriminalisation of bounced cheques in general and does not remove the threat of jail and criminal prosecution in the case of fraud or larger cheques, these new rules do represent another step forward in the modernisation of Dubai and the UAE as a business-friendly jurisdiction and are another debtor-friendly measure to be welcomed by SMEs and those handling cheques in their daily business. How this plays out in practice does remain to be seen, however, in particular, whether banks will be motivated to conduct more thorough credit checks before issuing loans and whether creditors will still look to pursue civil actions where criminal cases are not filed.