What legal actions can the bank take if the customer defaults on a loan in the UAE?

Introduction:Defaulting on a bank loan in the UAE is regulated by the Commercial Code (federal decree-law No. (50) of 2022) and the Civil Procedure Law (federal decree-law No. (42) of 2022). Further, the Central Bank of UAE issued Loan Agreement Notice No. 3692/2012 of the personal loan agreement. This notice stipulates the terms and conditions for loan agreements for both lenders and borrowers.

In accordance with Article 2(1) of the Loan Agreement issued by the CBUAE, the principal loan shall be paid to the customer's account upon completion of all necessary securities and documentation. Additionally, the customer agrees to transfer the monthly income and end-of-service benefits to the bank for the duration of the loan, as well as to provide the bank with a letter from their employer.

According to Article 4, the loan and related amounts become immediately due and payable in the event of default, which includes the customer's employment termination, an unauthorized transfer of their monthly salary, a violation of their obligations, and the failure to make consecutive or non-consecutive monthly instalment payments. Accordingly, the agreement may allow the bank to take appropriate actions such as the possible use of end-of-service benefits to settle outstanding amounts. In addition to this, Article 5 may permit the bank to deduct any amounts owed by the customer from funds in the accounts they hold with the bank or its branches.

The Commercial Code regulates defaulting on a bank loan in the UAE. Article 409 stipulates that a bank loan is a contractual arrangement between a debtor and the bank, where the bank gives money to a borrower or adds the money to the borrower's bank account based on agreed conditions and time limits specified in the loan agreement as specified in Article 415 of the Commercial Code. The law states that the bank should obtain sufficient securities or guarantees for the loans it grants. The borrower is obligated to repay the loan and its interest to the bank within the specified time limits and according to the agreed-upon conditions.

In accordance with the new Commercial code, criminal actions are limited and will only apply to certain cases of bounced cheques. Criminal actions will apply only to specific cases of bounced cheques such as intentional falsification, fraud, providing counterfeit cheques, and withdrawing account balances to prevent payment.

According to the Commercial Code, in the event of a default payment, a bank may have the right to deposit a debtor's security cheque. If security cheques are dishonoured due to insufficient amounts, a bank can file an execution case against the debtor.

Additionally, under the Civil Procedure Law, the bank can approach the court to seek a travel ban against the debtor as per Article 324. A bank may request a travel ban if there is a fear of the debtor escaping the state, provided the debt is not less than AED 10,000. Conditions for issuing a travel ban include providing written evidence of the debt and a guarantee by the creditor for potential harm to the debtor. Furthermore, Article 327 states that if a debtor with a travel ban does not surrender their passport or is suspected of disposing of money, the court may summon them and impose payment or attendance guarantees.

Conclusion:

Defaulting on a bank loan in the UAE leads to legal actions as per the law. It is important for both borrowers and creditors to know and understand these legal consequences when dealing with financial transactions in accordance with UAE law. In case of default by the debtor, the bank is entitled to demand default interest, as stipulated in the loan agreement.

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Dr. Hassan Elhais is a legal consultant in Dubai, specializing in the drafting of all statements of claim, memos and consultation on litigation of all manner.