By Gemma Kennedy, Head of Sales at Virtuzone
The UAE is one of the most challenging places in the world for collecting debt, according to the 2018 Global Ranking on Debt Collection. It’s not getting any easier over time, and it’s time consuming, stressful and costly for business owners.
Still, debt collection needn’t be so burdensome if you know what to look out for, and how to respond effectively when your debtor doesn’t pay on time.
Unique challenges in the UAE
In the UAE, debt can be in the form of an express contract or implied through extrinsic evidence (meaning it may or may not be contained in a written document). But collecting debt is a more complicated process here than in most other countries.
In the above-mentioned study, the UAE is next to bottom in a table of debt collection in 50 countries, with a ‘collection complexity’ score of 81 out of 100, based on local payment practices, court proceedings and insolvency proceedings. Only Saudi Arabia fares worse, with a score of 94 out of 100. The difficulty of collecting debt in the UAE is described as ‘severe’ and is almost three times as complex as ‘best in class’ countries Sweden and Germany, which each score 30.
Certainly, the UAE is known for having a complex legal framework – against this background, let’s look at a handy guide to dealing with the most important aspects of debt collection here in the UAE.
Invoices and security cheques: It is always advisable for any business to obtain signed terms and conditions (T&C) from its customers; and to issue formal invoices which detail the nature of work carried out, its cost, how to pay and in what timeframe.
Post-dated or undated cheques have traditionally been used in the UAE to secure repayment of debt for services rendered or goods supplied. This allows a business owner to raise a legal case if a client hasn’t paid within the specified timeframe.
Charging interest: It’s important to be aware that interest can be charged on monies due. When pursuing a debt, it is common to add a claim for interest. But the right to claim interest is often an area of confusion for contracting parties in the UAE, due to Sharia Law prohibitions. Fortunately, the confusion is cleared up by Article 76 of the UAE Commercial Code of Practice, which clarifies that creditors have the right to demand interest on a commercial loan in accordance with the rate stipulated in the contract.
Bounced cheques: You can activate a criminal case or file a police case on a bounced cheque, against both the defaulting client and the authorised signatory on the cheque.
For every cheque you receive, you should have all documents necessary to file a legal action, including a copy of the signatory’s passport or electronic ID. If you are dealing with a company you should have its trade licence number.
If a different individual signed your T&C you should also evidence an NOC (no objection certificate) signed by the cheque provider, a copy of their electronic ID/passport and additional contact details (residence, phone numbers and email addresses). Any police case will result in the person being unable to exit the country, renew visas or open bank accounts.
Following-up on payment defaults
A payment default should be followed up first with a phone call outlining the requirements and timeframes to pay, then with an email confirming acceptable methods of payment. Should no payment be made, you can approach a law firm to issue a legal or ‘demand’ letter on your behalf and/or proceed with a police case against the client.
Here are some key considerations:
Amicable negotiation: Amicable settlement opportunities are a serious alternative to formal legal proceedings, except where the claim is substantial and the chances of a favourable decision are good. Attempting collection amicably improves the likelihood of successful recovery and reduces legal costs and delays.
Solvency status: Before starting legal proceedings against a debtor in the UAE, try to establish whether the company is still active, the chances of recovery, and the company’s solvency status. It is impossible to enforce a debt once insolvency proceedings have been initiated.
Legal proceedings: If things do move forward, the first step is a registered demand letter requesting the debtor to pay the principal amount outstanding plus any late payment interest. Business disputes can be settled before a Reconciliation and Settlement committee. In Dubai, every dispute below AED 50,000 must be brought before the Centre for Amicable Settlement of Disputes. If this negotiation stage fails, a summary judgment procedure is required under the Civil Procedure Code.
Understanding your options
So there we have it. Clearly, any client who defaults is risking a lot. It can ruin their chances of remaining in the UAE and damage their reputation and ability to borrow. If they do default, however, it is critical that you know what options are open to you.
Take professional advice if you are unsure: it could save you time, hassle and money.
About the author: Gemma Kennedy, Head of Sales, Virtuzone.
As Head of Sales at Virtuzone, Gemma oversees the Company Formation Specialist team, which is responsible for consulting prospective clients interested in setting up a UAE free zone company. Gemma and her team provide all necessary and accurate guidance on the best path to UAE company setup, always delivered on a case-by-case basis for UAE entrepreneurs who are ready to launch their startup businesses. Gemma has extensive sales experience, having worked as a product representative for brands such as Tefal and Vidal Sassoon across New South Wales, Australia. She graduated with a Bachelor of Arts Employment Relations, History and (Hons) Politics at the University of Wollongong Australia, a unique educational mix which empowers her with a socio-political outlook in dealing with a multicultural workforce and client base.