March 26, 2020

COVID-19 UAE: Debt recoveries impact from Coronavirus

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.

Court slow-down and suspension of execution

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.

Which way to go?

What thought process and strategies might a creditor (or credit insurer) now be considering? We suggest there are two broad schools of thought:

  • Take a tough approach and start debt recovery steps immediately – this could put you towards the forefront of creditors seeking for payment and acting early could yield an early result where otherwise recovery prospects could diminish over time; especially where there is huge uncertainty over the long term economic impact. On the other hand, a tough approach might damage the commercial relationship without resulting in payment, and could affect the creditor's reputation as a supplier in the market at a time when buyers will be looking for support through a difficult period (good faith debtors who want to pay would usually expect their suppliers to deal with them as partners during crisis rather turn their back on them)
  • Take a softer / waiting approach – this approach assumes that things will improve for recovery given some time, as there is more certainty around the virus response and true economic impact and related government support, and therefore saving your recovery actions until such time may yield better results. It also considers the possible dilution of the pressure that might ordinarily be applied by the prospect of more robust steps, such as legal action, the progress and effect of which are currently significantly affected. This approach might benefit a creditor who has strong commercial relations with the debtor and good visibility of its financial position (which likely will require transparency from the debtor) as well as a strong understanding of its market and sector and how this is likely to fare in the wake of current events. On the other hand, others may gain ahead of you from taking 'early mover' advantage. Delay in acting on or escalating recovery measures may be seen by some debtors as weakness or unwillingness to act on the part of the creditor, which leads them to delay payment even further, putting you at the bottom of their payment list.

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:

  • Evaluate a debtor's financial situation and trying to understand the cause of the default, and whether the reason(s) given are genuine or mere delay tactics veiled by the present crisis.
  • Based on that evaluation, decide (possibly with the benefit of external advisers) the best approach to follow for the circumstances based on what specific options are available, including the formal legal options, e.g. finalise a repayment plan on acceptable terms, provide short deferments where appropriate to give the debtor the chance to pay, or commence litigation to legally enforce the payment obligation bearing in mind what that entails and what might be the result.

Some reprieve from bankruptcy actions?

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.

Summary of UAE Court operating status

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):

Dubai Courts:

  • Civil: All judicial hearings before the Dubai Courts of First Instance, Appeal and Cassation, that are listed during the period 22 March 2020 to 16 April 2020 (inclusive) have been suspended and will be listed for later dates. Judgments that were due to be issued during this period will still be issued. New claims and requests can still be submitted electronically. Court-appointed experts are required to postpone expert meetings for two weeks.
  • Criminal: All criminal cases before the Criminal Court of First Instance administratively postponed until after 16 April 2020. Hearings of criminal appeals concerning detainees / prisoners and hearings of urgent matters are expressly excluded.

DIFC Courts:

  • Operating on a remote basis since 17 March 2020. Hearings to be conducted via teleconference. Hearings in the Small Claims Tribunal will be either through video-conference (for overseas litigants) or teleconference (for those situated in the UAE). Claim filing and payment of filing fees can be done entirely electronically (as normal).

Abu Dhabi Courts:

  • All proceedings not ready for final judgment are suspended for not less than 30 days. For hearings scheduled to take place in the coming 30 days, local advocates will be notified on (or shortly after) the date of the scheduled hearing to advise of the new (re-scheduled) hearing date. Registration of all types of new claims, appeals and cassations will continue electronically as normal, with urgency given to claims affected by time limits (i.e. to protect an expiring limitation period).
  • Cases ready for final judgment must be booked for final judgment and the final judgments must be issued in the absence of the parties.
  • Rent evictions and any executory proceedings related thereto, and the enforcing of any new civil and commercial judgments, will be suspended for a period of two months (commencement date still tbc):
  • All executory procedures related to civil cases are halted, including the capture, seizure and arrest of people, the blocking of bank accounts, and the garnishment of vehicles, stocks and properties. However, cases related to alimony and labour disputes are exempt.
  • While presently unconfirmed, applications for precautionary attachments (i.e. not for execution) and other precautionary measures (which are summary measures), may still possible, though could be materially impacted by other suspended procedures.

Ras Al Khaimah Courts:

  • Executing eviction of residential units is postponed. Arrests and bringing into custody of debtors is postponed. Attachment procedures on movables, bonds, stocks and real estate are suspended (unclear if relates to execution only).

Federal Courts (Sharjah, Umm Al Quwain, Fujairah, Ajman):

  • While presently unconfirmed, it is believed that all Federal Court hearings are postponed for a period of one month from 24 March 2020. Immediately prior to publication, a UAE Cabinet directive was issued making provisions for measures in the Federal Courts over the next one month period. Further details are to be advised. 

 

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