Contact: Hassan Elhais; Al Rowaad Advocates & Legal Consultants (United Arab Emirates)
An Introduction to Corporate Guarantee
Strong relationships with customers remain the key to successful contractual lending and borrowing arrangements in the UAE. However, lending on the strength of relationship (or name) alone is not economically viable or justified.
In the UAE, the risk management activities inherent in running a corporate or investment banking business remain of crucial importance, not least because of the strong local characteristic of "name lending", by which is meant lending or providing other banking facilities to family or other private businesses, primarily on the strength of the "name" or "names" of the proprietors standing behind the business, rather than on the strength of the asset quality and underlying credit of the particular business. Of course, in practice, there is commercial overlap between the proprietors and the companies which they own, but the credit analyses can break down where poor banking practices and procedures result in poorly constructed legal documentation and gaps in guarantee and security support documents.
The Guarantee agreement should be unequivocal in its terms and should clearly define the rights and obligations of the Principal debtor and Guarantor, as per the laws of UAE. Law No.5 of Civil Procedure Code, Article 1078 (the Law).
According to its provision, a bank can claim against both parties (one who guarantees and one who is a beneficiary in the guarantee agreement) provided one of the parties defaults on any payment. This provision encourages banks to lend based on corporate guarantee and ensures that the debt is recoverable from either of the parties involved in the transaction – principal debtor and corporate guarantor.
The UAE courts' precedents are also not uniform in defining a "commercial guarantee" as distinguished from a "civil guarantee" for the purpose of Article 1092. In cassation petition 201/1992 and another 1997 precedent (Dubai Cassation petition 85/1990), Dubai courts held that a guarantee may only be regarded as commercial if it's offered for a consideration or in connection with the guarantor's trade. However, in a more recent precedent the court adopted a more flexible criterion regarding a guarantee as commercial if the guaranteed debt is a commercial one i.e. a debt which arose in the course of the original debtor's trade, or where the guarantor is a trader or derives some benefit from providing the guarantee. Most reported cases in fact hold the position that the legal description of a guarantee i.e. whether it is civil or commercial, follows that of the guaranteed debt.
In the light of above and other reported cases, the current position in brief seems to be as follows:
A debt becomes mature upon its Due Date.
The issue under consideration here is the confusion created by conflicting judgements relating to the effects and implications of Article 1092 of the Code of Civil Transactions (Civil Code).
Termination may also kick in due to Article 1101, it states:
"If the guarantor or the debtor compounded the creditor of amount of the debt, they shall be acquitted from the rest. If the quittance was provided only for the guarantor, the creditor may choose between taking compounded amount of the rest from the principal or leaving the guarantor and claiming the principal by all debt".
To put it simply, UAE laws provide for enforcement of corporate guarantees ion the courts. The laws are strictly defined and courts practice suggests that there might be a few discrepancies in its enforcement, however, but the broader idea remains clear and focused. If the Guarantee Agreement clearly defines the rights and obligations of Guarantor, principal debtor and beneficiary then such Agreement remains valid and enforceable at law. It might be suitable for the lending institution to take security cheques from the guarantor or debtor, and if any of those cheques bounces due to the lack of sufficient fund, then lending institution will have recourse to criminal proceedings against signatory authority in the Guarantor's company to claim the outstanding amount. Lending institution should also consider about debt maturity and should claim any amount within six months, as per the Article 1092 of the Law.
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