Monday, February 19, 2024

The U.A.E implemented key reforms in banking laws which are likely to affect guarantees

The UAE's recent law reforms for its financial sector aim to boost its appeal while safeguarding both lenders and borrowers. However, some key changes leave room for uncertainty and potential challenges. For nearly three decades, the UAE's commercial landscape relied on the Commercial Transactions Law (CTL) of 1993. However, on January 2nd, 2023, a new era began with the introduction of Federal Decree Law No. 50 of 2022, also known as the Updated CTL. This modernized law aims to invigorate the UAE's business environment while retaining the core principles of its predecessor. While many familiar provisions remain, some key additions and clarifications directly impact financing transactions.

The UAE has implemented two key banking law reforms in recent months that have implications for guarantees 

Seeking Security: 

To address rising defaults among individuals and sole proprietors, Article 121 of the amended Banking Law mandates banks and financial institutions to secure "sufficient" guarantees from them for loans. The New Commercial Law's Article 409(2) similarly requires "sufficient" securities against loans.

Ambiguity Bites:

While these measures aim to protect lenders, the lack of a clear definition for "sufficient" creates ambiguity.

This has led to inconsistent interpretations in court cases, with some guarantees deemed insufficient and enforcement actions blocked.

1. UAE Banking Law (as amended): 

Came into effect: January 2, 2023

Key change: Article 121 now requires "sufficient guarantees" when lending to natural persons and sole proprietorships.

Implications for guarantees:

Banks must be more vigilant in obtaining guarantees for loans to individuals and sole proprietors.

The law doesn't define "sufficient," leading to uncertainty and potential disputes.

Some court cases have challenged the enforcement of guarantees due to unclear "sufficiency."

2. New Commercial Law: 

Came into effect: January 2, 2023

Key change: Article 409(2) states banks "shall have sufficient securities or guarantees" against loans.

Implications for guarantees:

Strengthens the obligation for banks to obtain guarantees compared to the previous law.

Guarantees become mandatory, not just optional, for most loan agreements.

Similar ambiguity exists regarding the definition of "sufficient."

Overall implications: 

Increased use of guarantees: Expect banks to require guarantees more frequently, especially for individuals and sole proprietorships.

Uncertainty for both lenders and guarantors: The lack of a clear definition of "sufficient" creates uncertainty regarding the enforceability of guarantees.

Potential for litigation: Disputes over the adequacy of guarantees might increase, leading to more litigation.

Additional notes:

Guarantor Liability:

  • Article 69(2) clarifies that both guarantors and the debtor are jointly liable for the debt.
  • This emphasizes the co-extensive liability principle, similar to civil transactions.

Payment Guarantees:

  • Banks can withhold payments under attachment orders for guaranteed funds.
  • This strengthens the bank's right to protect guaranteed funds from court interventions.

Adequacy of Security:

  • Banks must obtain "sufficient" guarantees for all facilities for individuals and sole proprietorships (Banking Law).
  • All borrowers of commercial loans require "sufficient" securities (Updated CTL).
  • The interpretation and enforcement of "sufficient" for corporate loans remain unclear.

  These reforms are part of a broader effort to strengthen the UAE's financial sector and protect borrowers.

While these reforms aren't intended to restrict investment-grade lending, caution is advised for institutions operating in the UAE.

  • To mitigate potential issues, consider the following practical steps:
  • Seek legal counsel for specific interpretations and guidance.
  • Carefully assess individual circumstances and risk profiles before granting loans.
  • Consider alternative security options beyond traditional guarantees.
  • Regularly review existing loan portfolios and adjust strategies as needed.

 

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