October 11, 2024 Bounced Checks under UAE Law: A Comprehensive Guide Share In the UAE, a bounced check—also known as a returned check—is a critical issue in both personal and business finance. This comprehensive guide provides an in-depth analysis of bounced checks under UAE law, covering definitions, causes, legal procedures, and consequences. This extensive exploration will help you understand your rights and obligations if faced with a bounced check and offer guidance on how to handle such situations effectively. What is a Bounced Checks under UAE Law? A bounced check, or a returned check, is a financial instrument issued by a drawer to a payee that fails to clear due to various issues related to its coverage or handling. In the UAE, this concept is governed by Federal Decree-Law No. 50 of 2022, which outlines the legal framework for commercial transactions and negotiable instruments. Legal Definition and Requirements According to Article 630 of Federal Decree-Law No. 50 of 2022, a check cannot be issued unless the drawer has sufficient funds available in the drawee bank at the time of issuance, in accordance with either an explicit or implied agreement. This means that when a drawer writes a check, they must ensure that their account has adequate funds to cover the check’s amount at the time the check is presented for payment. A check becomes “bounced” or “returned” when the drawee bank returns it to the payee due to insufficient funds, closure of the account, or other issues that prevent it from being honoured. The drawer is responsible for ensuring that there are sufficient funds to cover the check, and if the check is returned, they are required to pay the check’s value unless they can prove that the drawee had sufficient funds at the time the check was issued. Federal Law No. 50 of 2022: This law, also known as the UAE Commercial Transactions Law, outlines the regulations governing commercial transactions, including debt collection. It provides a legal framework for the enforcement of financial obligations, including the handling of bounced checks and other negotiable instruments. Federal Law No. 5 of 1985 (Civil Code): The UAE Civil Code governs general civil obligations, including contractual agreements and debt recovery. It covers principles related to contract performance, breaches, and remedies. Federal Law No. 18 of 1993 (Commercial Transactions Law): This law addresses various aspects of commercial transactions, including debt collection procedures, enforcement mechanisms, and penalties for non-compliance. Local Laws and Regulations: Each emirate in the UAE may have its own regulations and practices regarding debt collection. These local laws can vary and may impact the collection process, so it is essential to understand the specific regulations applicable to the relevant emirate. Banking Regulations: Regulations governing banking practices, including those related to debt recovery and financial transactions, also play a crucial role in debt collection Reasons a Check May Be Returned Understanding why a check might be returned is crucial for managing and preventing such situations. Here are the primary reasons a check may be returned: Lack of Funds The most common reason a check is bounced is the lack of sufficient funds in the drawer’s account. When the account does not have enough money to cover the check amount, the drawee bank will return the check to the payee with a notice indicating insufficient funds. Insufficient Coverage Even if the drawer has some funds in the account, the funds may be insufficient to cover the full amount of the check. In this case, the drawee bank might return the check for insufficient coverage. This can occur due to various reasons, such as withdrawals made after the check was issued but before it was cashed. Drawer’s Request A drawer may request the drawee bank not to honour the check before the payee presents it. This request can be made for various reasons, such as a dispute with the payee or a temporary issue with the drawer’s account. However, this request must be made before the check is presented for payment. Account Closure If the drawer closes their account or withdraws all the funds from the account before issuing the check, the check will bounce when presented. Account closure or withdrawal of funds renders the check invalid as there are no funds available to cover it. Intentional Freezing A drawer may intentionally freeze or limit their account to prevent the check from being cashed. This is often done to avoid payment due to disputes or financial difficulties but is considered illegal under UAE law. Check Mismanagement Errors or inconsistencies in the check’s details, such as discrepancies between the written and numerical amounts or missing information, can lead to its return. The drawee bank may refuse to honour the check if it is not properly filled out or signed. Drawee’s Statement In some cases, the drawee bank might state that there are no funds or insufficient funds available to cover the check. This statement can be issued when the bank processes the check and finds that it cannot be honoured due to issues with the account. Bad Faith Refusal If the drawee bank refuses to honour the check in bad faith, despite it being valid, the check may be returned. Bad faith refusal can occur when the bank has sufficient funds but chooses not to honour the check for reasons unrelated to the account’s status. Partial Payment Refusal The drawee bank may refuse to make a partial payment on the check and fail to provide a certificate or return the original check to the payee. This can complicate the recovery process for the payee, as they may need to take additional steps to claim the remaining amount. Legal Procedures to Recover the Amount of a Bounced Check When a check is bounced, the payee has several legal avenues to recover the amount owed. Understanding these procedures can help in effectively pursuing recovery and ensuring compliance with legal requirements. Partial Payment If the funds are insufficient, the bank is required to partially pay the check amount. The drawee bank must provide a certificate of partial payment to the payee, indicating the amount paid and the remaining balance. The payee can then claim the remaining amount from the drawer. This process ensures that even if the full amount cannot be recovered immediately, the payee can still obtain a portion of it. Enforcement of Check A check is considered an executable instrument under UAE law. This means that the payee can pursue legal action against the drawer, endorsers, and other obligors to recover the full amount. The payee must ensure that the check is presented within the legal timeframe to be considered for enforcement. Bank Statement The holder of the bounced check must obtain a statement from the drawee bank indicating the date of presentation and the reason for the refusal due to insufficient funds. This statement is essential for initiating legal proceedings and proving the check’s status. Central Bank Notification If the drawee bank fails to honour the check, the check holder should notify the Central Bank of the account holder’s details. This notification helps track the drawer’s financial status and ensures that appropriate measures are taken to recover the amount. Execution Procedures Once the check is submitted to the execution departments in the courts, legal procedures will be undertaken to recover the owed amount from the drawer. The execution process involves legal actions to enforce the payment of the check and may include garnishment of the drawer’s assets or wages. Legal Consequences of Issuing a Bounced Check Issuing a bounced check can have serious legal consequences under UAE law. The Federal Decree-Law No. 50 of 2022 outlines the penalties and obligations related to bounced checks. Good Faith If the bounced check was issued due to the drawer’s lack of knowledge about the remaining balance and they acted in good faith, no penalty will be imposed. However, the drawer is still required to pay the full amount or the remaining portion of the check. Good faith defenses may be considered if the drawer can demonstrate that they had no intention to defraud the payee. Obligation to Pay The UAE Commercial Transactions Law requires the drawee bank to pay the check, even partially. This requirement represents a shift from previous laws that allowed banks to refuse payment due to insufficient funds. This obligation ensures that payees have a legal recourse for recovering partial amounts when full payment is not possible. Penalties Article 675 of the UAE Commercial Transactions Law imposes significant penalties on the drawer of a bounced check. The penalties include: – Imprisonment: The drawer may face imprisonment for a term not less than six months and not exceeding two years. – Fines: A fine of at least 10% of the check’s value is imposed, with a minimum of AED 5,000 and a maximum of double the check’s value. This ensures that the financial penalty is proportionate to the value of the check and serves as a deterrent against issuing bounced checks. Penalties apply if the drawer: – Requests or instructs the drawee bank not to honor the check before its due date or closes or freezes the account. – Withdraws all funds from the account before the payee presents the check. – Intentionally writes or signs the check in a manner that prevents it from being cashed, such as discrepancies between the written and numerical amounts. – Omits essential details that prevent the drawee from cashing the check. Frequently Asked Questions Can the Bank be Required to Pay a Partial Amount of the Check? Yes, the bank can be required to pay a partial amount of the check as stated in Article 648. The drawee bank must fulfill the check amount partially, mark it as partially paid, and provide the original check along with a certificate of partial payment to the holder. The holder can then claim the remaining amount from the drawer. How Can a Bounced Check be Cashed? A bounced check can be cashed if presented within the legal deadlines. The holder may seek recovery from the drawer or endorsers. The check is considered an executable instrument and can be enforced through execution departments in the courts. The recovery process involves legal actions to compel the drawer to pay the amount owed. Preventive Measures To prevent bounced checks, both businesses and individuals should take proactive measures: – Account Management: Regularly monitor and manage account balances to ensure sufficient funds are available for issued checks. – Accurate Record-Keeping: Maintain accurate records of all transactions and checks issued to avoid discrepancies and ensure timely payments. – Clear Communication: Communicate with payees and banks regarding any issues that might affect the payment of checks. – Legal Advice: Seek legal advice before issuing checks in significant amounts to ensure compliance with legal requirements. In the UAE, the debt collection process is governed by a combination of federal laws, local regulations, and judicial practices. Case Study: Bounced Checks Recovery A creditor in Abu Dhabi encountered issues with a bounced check. The creditor followed the legal procedures, including issuing a formal demand and filing a claim in the commercial court. The court issued a judgment in favour of the creditor, and the debtor’s assets were seized to recover the debt. This case demonstrates the effectiveness of legal remedies for bounced checks. Published by Anda Musaraj
