By way of quick recap of the ground covered in our earlier article on this topic, on 2 January 2023:

• Federal Law No. 50 of 2022 (the New Commercial Code) came into force, replacing Federal Law No. 18 of 1993 (the Old Commercial Code). Article 409(2) of the Old Commercial Code provided that "loans may be guaranteed with securities and according to such conditions as agreed" whereas Article 409(2) of the New Commercial Code now requires that "banks must have sufficient securities or guarantees against loans they provide".

• Federal Law No. 23 of 2022 (the Banking Law Amendment) came into force, bringing into effect a number of changes to Federal Law No 14. of 2018 (the Banking Law), in particular new Article 121 (bis) (Credit Facility Guarantees) which introduced the requirement for licensed financial institutions to obtain "sufficient guarantees for all types of facilities provided to natural clients and private sole proprietorships, in accordance with the client's income or the guarantee, if any, and the size of the required facilities, as determined by the Central Bank". It goes on to provide that "no application, action or plea filed to the competent authorities or the arbitral tribunals by any licensed financial institution in respect of a credit facility provided [to such an entity] shall be accepted if such financial institution fails to obtain [sufficient guarantees]" and furthermore that "the Central Bank may impose administrative and financial penalties which it deems appropriate on licensed financial institutions [that breach these requirements]".

As a result, we continue to receive various queries on these provisions from clients broadly revolving around a concern that, on plain reading of these provisions, one possible interpretation is that unsecured financing is now prohibited by UAE law. In the context of financing facilities provided to "natural persons and private sole proprietorships", that interpretation is supported further as a result of the Banking Law Amendment requiring that "all" (جميع) such facilities are to be backed by "sufficient guarantees" (الضمانات الكافية), noting that "guarantees" here seems to be used in the broader sense of referring to credit support generally (i.e. both guarantees and security, as opposed to strictly referring to guarantees only, or put another way “in-kind guarantees” as opposed to “purely personal guarantees”). Failure to satisfy this means a licensed financial institution could be running the dual risk under Article 121 (bis) of not only potentially being unable to file a claim against the relevant creditor to enforce that financier's debt claim, but also of receiving an administrative and/or financial penalty from the Central Bank. The combination of these provisions continues to cause unease in the UAE financing community. As at the time of publication of our first article, official guidance on this topic had not been published to give financiers comfort on what precisely the UAE legislators intended and (subject to the judgments and circulars referred to below, amongst other things) that largely remains the case. We concluded that ultimately, given the plain reading of these new laws, financial institutions would be well advised to tread carefully until clarifications are available. Although in our view, the information available at that time, on balance, did not support the conclusion that all unsecured financings would now be unenforceable under UAE law.

Has the UAE law position now been clarified?

Unfortunately not. The degree of uncertainty of the intended meaning of these new laws has arguably increased with the passage of time. In particular, not wholly consistent judgments and circulars issued in Abu Dhabi on the one hand and Dubai on the other have exacerbated unease around how the new laws will be applied by the various courts across the UAE. By way of reminder, the UAE has a federal court system, with Abu Dhabi and Dubai, like some other Emirates, each having its own courts for local matters, with constitutional and certain other federal matters reserved for determination by the federal courts of the UAE. This can result in competing interpretations of laws depending on the courts concerned.

For instance, touching upon the issues arising out of the new laws to varying degrees:

• In Abu Dhabi, Judicial Counsel Circulars No. 8 and No. 9 of 2022 and Explanatory Circular No. 3 of 2023 issued by the Head of Judiciary Counsel of the Judicial Department in Abu Dhabi (the Abu Dhabi Circulars) seem (i.e. it is not entirely clear from a plain reading of the translations) to have advised the judiciary of Abu Dhabi (amongst other things) that Article 121 (bis) should:
  • have retroactive effect, in the sense that it should be applied to all credit facilities regardless of the date of the credit facility; and
  • result in all credit facilities that only have the benefit of a “pure personal guarantee” (i.e. a guarantee from an individual (i.e. a natural person) or, it is submitted, possibly a guarantee from a sole trader company (i.e. a private sole proprietorship) which would likely be viewed as the same) not an “in-kind guarantee” (i.e. security rather than a “personal” guarantee) being unenforceable under UAE law. This interpretation is supported by a reference in the Explanatory Circular No. 3 of 2023 to “individual institutions and companies” (i.e. not just the narrower “natural clients and private sole proprietorships” as expressly referred to in Article 121 (bis)),

  (the Abu Dhabi Broad Interpretation).

• In Abu Dhabi, on the other hand, two decisions of the Abu Dhabi Court of Cassation (Appeal No. 102/2023 and Appeal No. 111/2023) (the Abu Dhabi Appeal Decisions) appear to hold that Article 121 (bis) does not have retroactive affect and does not apply to credit facilities pre-dating 2 January 2023 (the Abu Dhabi Narrow Interpretation).
• In Dubai, however, Court of Cassation Appeal No. 995/2023 (the Dubai Appeal Decision) held that Article 121 (bis) does not extend to a limited liability company which borrows money (i.e. its remit is narrower) (the Dubai Narrow Interpretation).

Looking at the Abu Dhabi Broad Interpretation, this is particularly difficult to fathom even on a plain reading of things. In particular:

• There is no express reference to all companies in Article 121 (bis), it expressly only refers to the narrower “natural clients and private sole proprietorships”. Either the reference to “companies” was just a slip of the quill or intentionally was a broader interpretation of the protection intended to be afforded by Article 121 (bis), but there is no obvious ground for adopting such a broad interpretation. The Dubai Narrow interpretation aligns more closely with a plain reading of Article 121 (bis).
• The interpretation that Article 121 (bis) has retroactive effect does not sit easily with Article 112 of the Constitution of the UAE:

“No laws may be applied except on what occurs as from the date they become in force and no retroactive effect shall result in such laws. The law may, however, stipulate the contrary in matters other than criminal, if necessity so requires.”

In essence, retroactive effect is possible in non-criminal matters where it is necessary and statute so provides. Neither Article 121 (bis), nor any related statutes, expressly provides for retroactivity. The Abu Dhabi Narrow Interpretation sits more easily with the UAE Constitutional position on retroactivity.

• Article 121 (bis) sits in the section titled “Customer Protection” of the Banking Law (being Chapter 6 of Title 3). It is submitted that this possibly adds further weight to the interpretation that Article 121 (bis) is targeted at consumer, as opposed to corporate or commercial, lending (although it is hoped that Article 122 (Deposit Guarantee Scheme) which sits in the same Chapter 6 would not only apply to deposits of natural persons and sole trader companies, although this is yet to be tested so this is not clear).
• The Abu Dhabi Circulars are technically circulars of a “local” judiciary whereas Article 121 (bis) is a federal level law. As a simple matter of precedence under UAE law, local judiciary circulars are not capable of altering the interpretation of federal statutory provisions. The proper standing or the Abu Dhabi Circulars as a matter of federal UAE law is far from clear then. Although, in practice of course, it remains the case that other than the limited circumstances where the federal courts become involved, federal level laws need to be applied by the courts of each Emirate so the Abi Dhabi Circulars remain important, in particular for those operating in Abu Dhabi.

Notwithstanding the federal nature of the UAE court system and that the UAE judiciary does not operate a system of precedent and so the benefit of a judgment one way or the other in one court or another (other than arguably a decision of the Federal Supreme Court (the FSC)) is of limited use to market participants, ideally, a trend in one direction or other would have started to emerge by now on a “UAE” interpretation of what is intended by the new laws, whether assisted by the FSC or otherwise. Unfortunately, market participants will be left second guessing the precise meaning of these provisions pending official clarification. It is submitted that such clarifications will need to be prescribed at the federal level given the now competing interpretations across the various judiciary bodies of the UAE that have started to emerge. This is consistent with the federal level at which the Banking Law Amendment and New Commercial Code were issued. Given the diverging authorities and judgments alluded to above, amongst others, whilst a reasoned position can be taken on the proper interpretation of the new laws (and the High Court of England and Wales has now had a stab at this too, as referred to below in further detail), it is clear that any such conclusion reached will not be without doubt until such official UAE law guidance is available. In the meantime, UAE legal practitioners will be careful to qualify their legal opinions accordingly.

What does the High Court of England and Wales think about all this?

In a timely development, the High Court of England and Wales has been called upon to give its opinion. The enforceability of two personal guarantees, granted in 2016 in respect of unsecured (i.e. with no “in-kind security”) loans given to two UAE incorporated limited liability companies, called Commodore Contracting Co. LLC (Commodore) and Tadamun Glass & Aluminum Co, LLC (Tadamun), respectively, was one of two preliminary issues to be decided by the High Court of England and Wales in Invest Bank v. El Husseini & Others [2023] EWHC 2302 (InvestBank), on which the court gave its judgment on 23 September 2023. After an insightful exegesis of the UAE law landscape, including consideration of, amongst other things, the Abu Dhabi Circulars (including some of the points outlined above on their apparent shortcomings), the Abu Dhabi Appeal Decision, the Dubai Appeal Decisions and the Constitution of the UAE, the court reached the following conclusion:

“I conclude, therefore, that the proper meaning of [Article 121 (bis)] as a matter of UAE law is that it does not cover corporate borrowing, or therefore, personal guarantees in respect of such corporate borrowing. By this I mean borrowing by a limited liability company as distinct from a sole enterprise or joint stock institution* [Noting that elsewhere the judgment refers to “unsecured lending to private individuals and their private joint stock companies” i.e. not public joint stock companies but companies owned by one natural person, which we refer to as “sole trader companies” throughout this article for ease]. If this particular point were to fall for determination by the highest court in the UAE, it is more probable than not that the plain wording of [Article 121 (bis)] – when considered by reference to its impetus and purpose as consumer protection – would be construed to mean what it says. That is my finding of fact as to foreign law. In light of such finding, I conclude that the [guarantees] are valid and enforceable as a matter of UAE law.”

In reaching this conclusion, the court’s considered view was that it was not intended for Article 121 (bis) to apply retroactivity given the Constitution of the UAE. The socio-economic driver of the law as a part of an enhanced consumer protection regime supported the conclusion that its intended focus is on loans made specifically to individuals and sole trader companies only (as per a plain reading of the law) as opposed to corporate or commercial lending. As for the problematic Abu Dhabi Circulars, as decisions of local courts as opposed to the federal courts, these were given relatively short thrift in light of the order of precedence, although the practical point above remains. It will be interesting to see how the UAE courts interpret the InvestBank judgment as no doubt this will soon be raised for the UAE courts to consider.

Although, officially, the courts of England and Wales have no formal jurisdiction in the UAE to rule on matters of UAE law, such a case will be especially interesting given the recent trend, although still very much in its infancy, of increasing reciprocity between the courts of England and Wales and the courts of the UAE, as exemplified by InvestBank itself (on which, please see below for further details).

What next?

This is not intended to be an exhaustive list but, in light of all the conflicting views, some key points that now really need to be clarified, as touched on above, include the following (with some thoughts from us on each one):

• Do the new laws apply retroactively? They should not if the Constitution of the UAE is to be adhered to. On first principles, retroactivity would also be an inequitable outcome, undermining banks’ legitimate expectations to be repaid for lending which, when provided, was done so legally. If the new laws are deemed to apply retroactively, this may have material implications for those financial institutions with a large amount of legacy unsecured personal lending on their books who would suddenly be looking at potentially huge write-offs, purely as a result of this legislative change. Also, the moral hazard implications of this for all existing borrowers who become aware that their repayment obligations are effectively now unenforceable under UAE law and the additional litigation both in the UAE courts and beyond that this is likely to result in are obvious.
• Are only guarantees issued by natural persons captured or are guarantees issued by sole trader companies captured too? Consistency would dictate that both should be treated the same. Are guarantees issued by other types of companies for facilities to natural persons and sole trader companies also captured? This is less clear, although it is submitted that if the key principle is to make unsecured lending to natural persons and sole trader companies unenforceable, as it seems is the intention, then a guarantee from a non-sole trader corporate entity should, as a secondary obligation, also be held to be unenforceable in that context.
• Do the new laws apply to unsecured financings provided to all companies or only those provided to natural persons and sole trader companies? If the goal is to bolster consumer protection laws specifically, as it seems is the case, and given the alternative interpretation would completely remove the ability to legally provide unsecured corporate lending facilities altogether and so take the UAE completely out of kilter with standard international financial practice, the expectation is that it will be clarified that the new laws apply to natural persons and sole trader companies only, and not all companies (for instance, public joint stock companies and limited liability companies). It is essential that this be clarified without doubt.
• Will all unsecured credit facilities given to natural persons and sole trader companies automatically be unenforceable after the new laws are deemed to apply? The current decisions on the matter suggest this will be the case but if so, this will effectively bring an end to the practice of unsecured personal lending in the UAE. Maybe that is the intention.
• What’s sufficient – can no security be sufficient in certain circumstance even when lending to a natural person or sole trader company? If yes, what conditions need to be adhered to? Will taking such security save the enforceability of a related guarantee or will both the personal loans themselves and any related guarantees be unenforceable nonetheless?

The guidance that is available from the various UAE authorities to date suggests that the risk of unenforceability of an unsecured facility and related guarantee is particularly high when dealing with a loan to a natural person or sole trader company, but perhaps less so when dealing with a different type of company, such as a limited liability company or public joint stock company but, bearing in mind the Abu Dhabi Circulars, among other things, the risk of a challenge to both the enforceability of the underlying loan and any related guarantee remains nonetheless.

Conclusion

Unfortunately, there is still not a definitive answer to the question posed above. The High Court of England and Wales has had a stab at some of the key points of concern and provided an insightful analysis and its view on how Article 121 (bis) is likely to be construed. We have used that to provide further analysis and guidance in this article. What is clear is that there remain many points of detail to be ironed out, and this should ideally be done at a federal level. Until these matters have be unequivocally determined, financial institutions would be well advised to tread very carefully and to ensure they structure their financings (and their unsecured financings to individuals and sole trader companies in particular) in the UAE in line with considered advice, taking the requirements summarised above into account. Until such time as federal level clarifications are available, UAE and foreign courts alike are likely to continue to be called upon to adjudicate issues arising from these laws.

Bonus material

Further green shoots for reciprocity between the court of England and Wales and the courts of the UAE?

It is beyond the scope of this article but encouraging to note that the second of the two preliminary issues decided upon in InvestBank concerned the enforceability of UAE monetary judgments in England and Wales and the High Court of England and Wales decided that the UAE monetary judgments were enforceable in England and Wales. In summary, the court drew a clear distinction between determination of a dispute on the one hand / “proving the right” (i.e. establishing a final and binding liability to pay a specific amount), and execution of a judgment once entered on the other hand / “receiving the right” (i.e. enforcing or executing such a debt) and noted that this distinction is reflected in particular sections of the UAE Civil Procedure Law No. 42 of 2022 and reflects the two distinct roles of a court in a civil claim. Bearing that distinction in mind, judgment had already been entered into against the guarantor in respect of the guarantees he had granted in respect of the Commodore and Tadama credit facilities (the UAE Monetary Judgments) and the file had subsequently moved to the execution jurisdiction of the civil courts of Abu Dhabi for execution. Subsequent to which, Article 121 (bis) came into effect. As Stephen Houseman KC put it:

“[the guarantor] took advantage of the [Ab Dhabi Circulars] … The Execution Department of the [Abu Dhabi courts] … held, in effect, that execution of the UAE Monetary Judgments was prevented by Article 121 (bis) as confirmed by the [Abu Dhabi Circulars]”

The High Court of England and Wales, noting that the UAE Monetary Judgments pre-dated the coming into force of Article 121 (bis) and on the considered view that Article 121 (bis) was not intended to have retroactive effect (as among other things, this would appear to be contrary to the Constitution of the UAE) so did not affect the standing of the UAE Monetary Judgments, concluded that the UAE Monetary Judgments still had final and conclusive effect in the UAE but just happened not to be enforceable against the guarantor in Abu Dhabi. However, the fact that they were unenforceable in Abu Dhabi did not, as a matter of law, prevent their enforceability in England and Wales and that there was therefore no impediment to enforcement of the UAE Monetary Judgments in the jurisdiction of England and Wales. This is particularly interesting as once the UAE Monetary Judgments had been established as final and conclusive, that was it, no further deliberation on matters of reciprocity were entered into. This lends welcomed additional support to multiple recent examples of the increasing trend of reciprocity between the courts of England and Wales and those of the UAE.

If you have any queries on the above or require assistance from our Banking and Finance team, please contact us.

This article is also available in Arabic, click here to download.