16 Sep 2012

POST-DATED, UNDATED CHEQUES – A NECESSARY EVIL

Authored by: Tarek El-Khoury

POST-DATED, UNDATED CHEQUES – A NECESSARY EVIL

The economic boom of the UAE has resulted in huge developments and a considerable increase in trade. This in turn has led to a rise in transactions which require a fast debt recovery mechanism. According to common practice in the UAE, the most secure and quickest method is the post-dated – and in some cases undated – cheque. This is often requested by creditors (financial institutions) and sellers, mostly in real estate transactions and trade. The rationale is mostly economic to protect institutions providing credit facilities, but what are the implications for the individuals who are issuing the cheques? In this article, Tarek El Khoury discusses the post-dated cheque and the likelihood of any change in the law, whereby the issue of a dishonoured cheque could become a purely civil one.
 
In brief

  • Cheques are commonly used to secure repayment of debt in the UAE and in the region, for instance when individuals avail of real estate loans or personal loans in relation to funding of cars or home rental as well as to secure trading or investment transactions.
  • Article 401 requires that the issuer of a bounced cheque did so with "bad intention". The bad intention in issuing a bounced cheque is generally considered proven by the fact that the issuer was aware that at the date of issuance of the cheque, he/she had insufficient funds in his bank account.
  • In January 2011, the Court of Cassation in Abu Dhabi overruled precedents considering the cheque as a guarantee and set a new precedent in relation to the issuance of a bounced cheque.
  • Current UAE legislation does not provide for a civil mechanism that fully guarantees repayment or recovery of debts. Many borrowers and debtors are seeking alternative civil mechanisms of debt recovery, however any initiative to change the approach towards cheques in the UAE would need to be phased in gradually to enable businesses and the market to adapt applicable practices.

The Commercial Transactions Law defines the cheque as a payment instrument similar to a bank note and sets the cumulative conditions for its validity.  In practice, post-dated cheques have become a type of security underlying credit facilities or debts, whether for commercial or personal purposes, which is to some extent a move away from the classic definition of a cheque as a payment instrument.
 
An undesirable effect of the global economic recession on investors in various sectors across the UAE, was to increase the stress on creditors to recover their debts and enforce their rights. 
 
Many investors/borrowers faced financial difficulties and liquidity problems which resulted in them defaulting on their debts and subsequently dishonouring PDCs previously issued to their creditors. 
 
The most common cases are:

  1. cheques issued to secure the repayment of a debt contracted by an individual (borrowing money from banks for personal, car or housing loans/mortgages, or as a personal guarantee of debt contracted by a company owned in total or partially by such individuals, or to guarantee payment of purchase price instalments or future rent);
  2. cheques issued for repayment of amounts due in commercial transactions as a payment alternative to letters of credit, guaranteeing future payments.

The UAE Penal code criminalises the drafting of a cheque in instances where on the date of submission for collection, the issuer does not have sufficient funds to honour the cheque. A bounced cheque is a misdemeanour sanctioned under article 401 of the Penal Code by detention (one month to 3 years) or by application of a fine. The application of article 401 requires that the issuer of a bounced cheque issued the cheque with "bad intention".   Court precedents in the UAE until the early 90s were such that the court would assume the “bad intention” without looking into the individual circumstances of the case, or unless the issuer of the PDCs specifically proved otherwise.
 
Over the last decade (particularly and most commonly when individuals have purchased property in the UAE, and perhaps also financed such purchases by borrowing money from banks) developers often required PDCs and financial institutions required not only a mortgage over properties but also post-dated or undated cheques to guarantee repayment of the money borrowed. If a cheque bounced under such circumstances, the courts would not consider the issuance of the PDC as a misdemeanour. In some cases, the Judicial Committee that was established in Dubai to look into real estate disputes, repayment of debts and bounced cheques, still considers the circumstances of each dispute and reviews the performance of the parties to a transaction of their mutual obligations, namely the completion of a development project and the hand-over of a purchased property.
 
During the same period, the Courts of Abu Dhabi strictly applied the provisions of the Commercial Transactions Law and considered that an instrument which did not contain any of the mandatory provisions of a cheque would not be regarded as a cheque, and further considered undated cheques as a guarantee of a debt rather than a payment instrument. In other cases, the Courts would not recognise the validity of a PDC in any instance where the beneficiary bank was the same bank of which the cheque was drawn.
 
This continued to be the position of the Courts in Abu Dhabi until January 2011, when the Full Assembly of the Court of Cassation in Abu Dhabi overruled the precedents considering the cheque as a guarantee and set a precedent on the criminalisation of the issuance of a bounced cheque on the following guiding principles:

  • Signing a blank cheque without mentioning the amount, the date or the name of the beneficiary does not safeguard the issuer from being incriminated if at the time the cheque is submitted to the bank for clearance it contains all details.  The Courts consider that signing a cheque without mentioning details is regarded as an implicit mandate from the issuer to the beneficiary to fill in the blanks and complete the cheque. However, requesting a blank cheque is no longer possible under the recent restrictions set by the UAE Central Bank for financial institutions and this has been forbidden since late 2011.
  • The misdemeanour begins on the date the cheque is handed to the beneficiary if the issuer has, or would have, no sufficient funds in the account on which he/she drew the cheque.
  • Issuing various cheques without sufficient funds to the same beneficiary under one transaction is regarded as one misdemeanour and the sanction shall be unified for all the bounced cheques.
  • The bad intention in issuing a bounced cheque is proven by the fact that the issuer was aware that at the date of issuance of the cheque he/she had, or would have, no sufficient funds in his bank account. The Courts need not look into other circumstances of the case to rule on the bad intention of the issuer.

The current legislation in the UAE, following the recent amendments of the Penal Code in 2005 and 2006, maintains the criminality of dishonouring cheques and considers this act as a misdemeanour, as is also the case in many other countries in the region. The penalty applied tends to be the detention for between one year (although the minimum sanction is detention for 3 months) and three years, or the application of a fine to the issuer. Both sanctions should not be cumulative and are left to the discretion of the court.
 
Although there are no amendments to the Penal Code anticipated in the near future to decriminalise the issuance of PDCs, many creditors and debtors are now enquiring about alternative civil mechanisms to achieve debt recovery. Current UAE legislation does not provide for a civil mechanism that fully guarantees repayment or recovery of debts. The existing civil mechanisms are sometimes lengthy and do not provide sufficient guarantee of debt recovery. Therefore, creditors or beneficiaries of PDCs often seek recourse to the criminal system, which is generally regarded to provide a security mechanism that ensures people get paid and is also the easiest and fastest way to collect money.
 
Any alternative approach that suggests the decriminalisation of bounced cheques in the UAE cannot be applied overnight. Any initiative should be phased into the UAE legislative system gradually and the business community would need to be educated, and given time to adapt to any changes and alternative approaches. We have recently seen attention being focused on the importance of credit information and analysis by the UAE Central Bank and the newly created UAE Federal Credit Bureau. It is also expected that more stringent regulations will be applied to financial institutions requiring them to carry out more extensive ‘creditworthiness’ checks on borrowers prior to extending facilities.
 
Meantime, all persons (whether an individual, borrower, investor or trader) should continue to be very cautious when issuing PDCs, relating to the UAE, as they will potentially have to live by the sword.