Relevant Document:
Invest Bank English Judgment
New federal laws in the United Arab Emirates have created confusion among market participants as to whether unsecured lending by financial institutions to natural persons, or even corporates, is now prohibited. Ambiguous drafting, followed by inconsistent judgments and guidance from the Dubai and Abu Dhabi judiciary, has left the matter uncertain. It appears that only a decision from the UAE Federal Courts on the matter will be able to clarify the position and provide certainty.
Federal Laws No. 23 and No. 50 of 2022 (the New Federal Laws) have been interpreted by UAE courts to provide that unsecured financing is now prohibited by UAE law where provided to natural persons and private sole proprietorships. Subsequent circulars from various UAE judiciaries appear to suggest that the New Federal Laws apply to both natural persons and corporate entities, and, further, that they have retroactive effect.
This, of course, is a worrying outcome for lenders in the UAE, particularly as: i) the New Federal Laws provide that such unsecured financing cannot be enforced; and ii) banks could be penalized for providing such unsecured loans.
The English court in the
Invest Bank case was asked to opine on the matter, against the backdrop of the enforcement of judgment in respect of two unsecured loans taken out in the UAE. The judgment provided by the English court (explained in more detail below) provided helpful guidance, concluding that the New Federal Laws, as a matter of UAE law (in particular Article 121, set out below):
- Did not have retroactive effect; and
- Did not apply to corporate borrowers.
The English court’s decision, of course, is not binding in the UAE. However, it provides a compelling interpretation of Article 121, which could be applied in other jurisdictions.
The key aspects of the situation are as follows:
- Confusion has been created under UAE banking and commercial law by the enactment of the New Federal Laws, particularly a certain Article 121 set out below. Article 121, on a plain reading, purports to prohibit unsecured lending to natural persons and sole proprietors, and to further prevent enforcement on such prohibited lending by financial institutions in the UAE.
- Subsequent decisions in the Dubai and Abu Dubai Courts of Cassation as well as circulars published by the UAE Judiciary further muddy the waters. It is now uncertain if the New Federal Laws both: i) apply retroactively; and ii) apply to corporate borrowers.
- Lenders operating in the UAE should tread carefully when making unsecured loans to individuals or sole proprietors. The lack of a precedent system in the UAE (explained below) makes it very difficult to predict the outcome of an enforcement action against an unsecured borrower.
- There is a moral hazard position whereby, if the New Federal Laws are interpreted to apply retroactively, borrowers of unsecured loans may be able to decide not to repay their borrowings, having entered into arrangements in good faith relying on the New Federal Laws.
- The English court has provided a useful precedent in its interpretation of the New Federal Laws as a matter of UAE Law. The English court in Invest Bank (set out below) took the view that the New Federal Laws do not apply retroactively and do not apply to corporate borrowing.
- The English court guidance is not binding on the UAE courts or any other jurisdiction’s courts. However, it does provide a useful starting point and roadmap for other jurisdictions applying the UAE law.
- In terms of outstanding matters and questions, there are a few issues that need to be clarified by the UAE legislature - in terms of process, only a decision from the UAE Federal Court would clear the waters with certainty.
We would question:
- Was the New Federal Law designed to apply only to natural persons and sole proprietors?
- Does the New Federal Law apply retroactively?
- Does this mean the end of unsecured personal lending as a business in the UAE?
- Where security is required, what sort of security is adequate?
UAE Court System
Before we delve into the specific details of Article 121, a brief explanation of the UAE court system is required.
The UAE does not have a common law system like England and Wales. Instead, the UAE has a federal court system, with each of the seven Emirates (such as Dubai or Abu Dhabi for example) having their own courts that deal with local matters.
As well as delivering judgments on disputes, the judiciaries of each Emirate can issue circulars to attempt to clarify interpretation of legislation. However, these circulars are not capable of altering the interpretation of federal statutory provisions, somewhat limiting their use. Constitutional matters or more important federal matters are reserved for determination by the more senior Federal Courts of the UAE.
A further complication is that the UAE judiciary does not operate a system of precedent, so the benefit of a judgment can be of limited use to market participants (unless it were a judgment from the Federal Courts). There are also numerous free zones within the UAE, such as the Dubai International Finance Centre and Abu Dhabi Global Market, which operate their own legal systems. Some of these draw strong influence from English law.
New Federal Laws No. 23 and No. 50 of 2022
- Federal Law No. 50 of 2022 (the New Commercial Code) replaced a previous law from 1993. The salient amendment from the new law was that the previous code provided that "loans may be guaranteed with securities and according to such conditions as agreed" whereas the new requirement appears to be more stringent: "banks must have sufficient securities or guarantees against loans they provide."
- It is the new Article 121 that has caused confusion as it has 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."
- This requirement is further bolstered by explaining 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]."
- There is also an introduction of penalties for noncompliance by financial institutions, explaining that "the Central Bank may impose administrative and financial penalties, which it deems appropriate on licensed financial institutions [that breach these requirements]."
Interpretation of New Federal Laws
It is in the interpretation of the New Federal Laws that some confusion could arise. A plain reading of the provisions of Article 121 would suggest that unsecured financing is now prohibited by UAE law when provided to natural persons and private sole proprietorships. The position immediately after the enactment of the New Federal Laws was not clear at all.
Since the enactment of the New Federal Laws, various circulars and judgments have been issued in the courts of Dubai and Abu Dhabi. These sources, however, have not been entirely consistent with each other. Most recently, the English High Court has given an opinion on the matter in
Invest Bank.
- UAE Courts’ Interpretation
Noting the above salient points regarding the UAE Courts system and how it operates, Abu Dhabi’s judiciary has published two circulars on the issue and two judgments, according to law firm
Dentons. The judiciary of Dubai has published just one judgment.
Rather unnervingly for the market participant seeking comfort and certainty, these circulars and judgments are all wholly inconsistent in their interpretation of the New Federal Laws.
Circulars from the Abu Dhabi Judicial Council (Circulars No. 8 and No. 9 of 2022 and Explanatory Circular No. 3 of 2023) appear to guide that:
- Article 121 has retroactive effect, in the sense that it should be applied to all credit facilities regardless of the date of the credit facility; and
- All credit facilities that do not have security (that is, merely benefit from guarantees from a natural person) should be unenforceable under UAE law.
Further, from the Abu Dhabi Judiciary, two decisions of the Abu Dhabi Court of Cassation (Appeal No. 102/2023 and Appeal No. 111/2023) appear to hold that Article 121 does not have retroactive effect and does not apply to credit facilities predating Jan. 2, 2023.
In Dubai, the Dubai Court of Cassation in Appeal No. 995/2023 held that Article 121
does not extend to a limited liability company that borrows money.
One can see the confusion created by these circulars and decisions. While it is noted that the UAE does not operate a system of precedent, there appears to be no trend in either direction as to the operation of Article 121. Arguably the only reasonable solution for the issue, would be a final decision from the UAE Federal Courts on the matter.
- English High Court Interpretation
In early September, the English High Court was asked to opine on the interpretation of Article 121 in
Invest Bank v. El Husseini & Others [2023] (
Invest Bank).
By way of a very short background, (full facts can be found in the useful
judgment of Stephen Houseman KC), the English court was asked to decide on the enforceability of loans made to two UAE incorporated LLCs. Specifically, it was asked whether the loan arrangement borrowers under such loans were unenforceable as they fell foul of the new Federal Laws.
The English court’s view was that:
- Article 121, as a matter of UAE law, does not cover corporate borrowing or therefore personal guarantees of such corporate borrowers;
- If the UAE Federal Court were to rule on whether Article 121 applied to corporate borrowing, it would be more than probable that it would decide that the regulation did not apply given its purpose as consumer protection;
- There are deeper constitutional concerns with the appropriateness of retroactive legislation, particularly when it amends claims to property (such as lent funds); and
- It was not intended for Article 121 to have retroactive effect.
The final interpretation of UAE law could influence decisions in other third jurisdictions and the steps taken by the English courts in
Invest Bank could provide a roadmap for future hearings.
– Shan Qureshi