14 Mar 2021

What you need to know about the New UAE Federal Decree on Bounced Cheques

Authored by: Karim Mahmoud

In Brief:

  1. Changes to legislation affects the prosecution of issuers of bounced cheques.

  2. This addresses the use of cheques as payment instruments in a positive manner.

  3. This enhances the use of cheques as security for obligations.

A significant change to the criminal aspects of bounced cheques is on the horizon. The UAE cabinet has amended certain provisions of Federal Law No. 18 of 1993, the Commercial Transactions Law related to bounced cheques, in a Decree expected to come into force in 2022. The Decree further enhances the force of cheques as a payment instrument. Karim Mahmoud, Partner, Dispute Resolution discusses these changes and how they will help overcome challenges with commercial dealings  and with securing payments.

Why are the amended provisions significant?

In the UAE, some market commentators hold the view that laws criminally penalising issuance of dishonored cheques are necessary, whereas others believe that the criminal penalty should be removed. The recent legalisation amendments recognise both sides of the argument, and specify criminal offences for specific bounced cheque events, while also redefining what constitutes a criminal offence.

What are the criminal offences of a bounced cheque?

The amended provisions outline the offences that constitute a criminal penalty as the following events:

  1. Cheque falsification;

  2. Forgery of cheques;

  3. Fraudulent use of cheques by ordering the Bank not to pay the cheque amount; and

  4. Withdrawing the account balance prior the date of the cheque to prevent encashment.

In an effort to improve the mechanics of collection of payments through cheques, banks are now obliged to make partial payment of the cheque amount to the beneficiaries when a cheque is presented for payment and an account balance is available to partly (but not fully) satisfy the beneficiary’s claim.

The amendments aim to ease enforcement options. A bounced cheque is now viewed as an executive document that could be enforced and executed directly by a judge in the UAE court. As a result, the Civil court can demand the issuer of a bounced cheque to pay a sum equal to the value of the cheque or its outstanding balance. If the convicted person fails to pay, his assets may be subject to enforcement to satisfy the balance and the convicted person must serve another jail term for failing to comply with the civil court decision.

What other penalties apply to a bounced cheque offence?

According to the Decree, the convicted person will have their cheque book withdrawn and will be prevented from obtaining new cheque books for a maximum of 5 years. The person could also face a suspension in relation to their ability to conduct professional or commercial activities.

Legal persons (except banks and financial institutions) can potentially face fines, suspension of commercial licenses for 6 months, cancellation of licenses or liquidation in case of repeated offences.

How are joint bank account holders affected by bounced cheques?

The amended provisions directly address this question. In the case of death or legal incapacity of one of the joint account holders, the remaining holder shall notify the bank no later than 10 days from the date of death or incapacity. The bank shall immediately suspend withdrawal from the joint account up to the limits of the share of the demised or legally incapacitated person in the account balance as of the date of death or designation of a successor.

Conclusion/Recommendation:

In summary, a significant shift is anticipated in the treatment of cheques in the UAE. Further, the Decree is expected to come into force in 2022 and the business community should plan accordingly. We will monitor developments closely.

To further understand the implications of the Decree on your business, please contact Karim Mahmoud, Partner, Dispute Resolution K.Mahmoud@hadefpartners.com