Recent court service suspensions announced in the UAE – albeit temporary – as part of the government's response to COVID-19 will undoubtedly have an impact on efficacy of debt recovery options available to creditors, at least in the near short term. These measures come at a time when payment default rates are only expected to increase rapidly and creditors will be looking at what actions they can and should take to protect their position, including short and medium term strategies. Knowing the current practical options and applying careful thought around recovery approaches is now more important than ever before, and these circumstances may well prevail for some time. In this article, we summarise the operating status of the UAE Court system and share some thoughts on the impact and considerations for creditors in their approach to debt recovery.
The ability for creditors to seek and progress timely legal recourse for non-payment of debts through the UAE Courts has taken a knock in recent days as both emirate-level and federal courts variously announced temporary procedural and operational suspensions, including significantly the suspension of civil court hearings for initial periods of a few weeks. It is not a complete shutdown of the court systems, with various core functions still able to be serviced electronically and/or remotely, but the primary implication for creditors is the impact on the practical utility of the legal process to procure recovery of debts by keeping legal pressure on debtors, and execution measures in particular, which have been diminished, at least for the near short term, and possibly longer until the landscape leans back towards being more 'normal'.
One insurance industry publication has recently labelled the present global economic shock around COVID-19 as a "black swan" event for the trade credit insurance market, in reference to the glut of payment defaults and insolvencies anticipated in the coming weeks and months. Non-payment notifications to credit insurers are already accelerating. There is inevitability that many businesses will slip into bankruptcy as a result of current events, and others that are able to survive (at least in the short term) may do so only by deferring or defaulting on payment of debts. The risks for creditor and debtor are acutely heightened. Uninsured creditors may feel the pain of these events even more directly.
Creditors will face immediate challenging decisions as to whether, when and how to approach debtors for payment. Do you press early and hard for payment, expending energies and cost where it may not yield results, or let the dust settle and employ active recovery measures when the landscape is clearer but others may have acted earlier to your prejudice? There is a difficult (and likely different) balance to find in each case depending on circumstances; what is going far enough in the short term to protect and enforce your interest, while not going so far as to harm your own prospects of recovery in the medium-to-long term if, as will be the case for many debtors, short term payment solutions may not be practicable.
Formal legal enforcement actions are typically a last resort for creditors for a variety of reasons, including the cost and uncertainty of legal process and time to a final outcome, but demonstrating the real prospect or such action being taken can be a powerful deterrent employed as leverage with debtors. We have written previously (in 2019) on various enhancements made to the UAE legal landscape which benefit creditors through availability of fast track judicial remedies, such as without notice payment orders combined with the ability to execute sooner, and we have achieved a number of successes for creditors using these procedures over the past 12 months. With legal remedies that can produce prompt and cost-effective results, creditors have become much more ready and willing to sue for their money, or petition for a debtor's bankruptcy, taking advantage of these more sophisticated remedies.
What thought process and strategies might a creditor (or credit insurer) now be considering? We suggest there are two broad schools of thought:
While each case must be considered on its own facts, the best approach currently may be a balance between the two; the creditor needs to show the debtor that they care and they are prepared to support it to a reasonable extent through this difficult economic period, but at the same time the debtor needs to feel sufficient pressure being exerted to appreciate that the creditor is treating the debt seriously and with the full expectation it must be paid. The legal recourse route remains a valid pressure point, albeit presently having lost some of its immediacy through the operational delays in the system.
A suggested methodology for creditors to determine their action is:
Of note in an insolvency context, and perhaps a sign of what may be to come in other countries, is a development from Australia this week, where the Australian Federal Government announced temporary amendments, effective 24 March 2020, to insolvency and corporations laws in response to the challenges that businesses are facing as a result of the COVID-19 crisis. These amendments provide a safety net to businesses in challenging times to foster survival for those businesses once the crisis has passed.
In particular, the government intends to reduce the risk of businesses being unnecessarily pushed into insolvency and reduce the risk of personal liability for insolvent trading as a result of debts incurred in the ordinary course of business. The amendments are particularly relevant in an environment where many measures of a business’ solvency are fluid as the broader COVID-19 circumstances evolve.
While we are not aware (at the date of publication) of any similar measures being announced for the UAE bankruptcy regime, it is reasonable to assume something like this is within the government's contemplation as a temporary relief measure for businesses. The response of the relevant authorities in relation to the courts and suspension of certain execution remedies shows that legislative intervention to protect businesses for wider longer-term economic benefit is part of the state response package being deployed. It will also be recalled that following the GFC there were various special tribunals established in Dubai to deal with claims relating to and restructuring of certain organisations, so there is some precedent for such measures in Dubai at least.
Here in short is what has currently been announced by each of the emirate-level and federal courts in the UAE (although note the position is developing on a daily basis and therefore is subject to change post-publication):