Key Amendments to the UAE Commercial Transactions Law: New Decree on Bounced Cheques
On 27 September 2020, His Highness Sheikh Khalifa Bin Zayed Al Nahyan, President of the United Arab Emirates, issued Federal Decree No. 14/2020 (the “Decree”) amending and adding several articles to the Commercial Transaction Law No. 18 of 1993 (“CTL”). Most of these amendments address commercial cheque rules. The Decree also cancelled Articles No. 401, 402, and 403 of the UAE Penal Code, which previously penalized the issuance of cheques in bad faith or with insufficient funds.
All the new amendments under the Decree were scheduled to come into force by January 2022. The reason for this delay was to allow the market to absorb the dramatic changes, which significantly impact not only individuals (cheque issuers) but also corporates and their commercial dealings.
Before the Issuance of the New Law
The phrase "issuance of a cheque in bad faith" in Article 401 of the Penal Code had long been subject to broad interpretation by the Criminal Court. This allowed the court to treat any bounced cheque regardless of reason as a criminal offense by the drawer of the cheque (the “Drawer”). Consequently, criminal liability often rested on the discretionary power of the court due to the absence of clearly defined acts that would constitute bad faith.
After the Issuance of the Decree
The Decree introduced Articles 641(1), (2), and (3), which specifically outline exclusive acts that, if committed by the Drawer, would be considered criminal offenses punishable under UAE law. These acts include:
- If the Drawer, before the due date of the cheque, ordered the bank not to cash the cheque.
- If the Drawer closed the account or withdrew all funds before the cheque due date. This also applies if the Drawer had a dormant account at the time of issuing the cheque.
- If the Drawer deliberately signed the cheque in a way that would prevent the bank from processing it (e.g., a deliberate wrong signature).
These exclusive acts reflect the clear intention of the legislator to abolish the criminal classification of bounced cheques due solely to insufficient funds.
The Decree affirms that only these specific fraudulent actions, and others under Articles 641(1) and (3), will trigger criminal liability. Since these are inherently fraudulent acts, they are justifiably punishable. However, the burden of proof in such cases remains a point of concern and is yet to be fully tested in practice.
New Civil Enforcement Procedures
The Decree also introduced Article 635 and amended Article 617 of the CTL, both of which aim to reduce criminal cases and provide civil enforcement alternatives to cheque beneficiaries. These include:
- The beneficiary has the right to request partial payment of the cheque amount from the bank, subject to the Drawer’s available account balance.
- Banks are obligated to process partial payments upon request. Failure to do so may result in criminal liability for the bank.
- If a cheque is dishonored due to insufficient funds, and the beneficiary obtains a certificate of non-paymentfrom the bank, the cheque may be treated as a civil executive deed under Federal Civil Procedures Code No. 11 of 1992. This allows the beneficiary to initiate civil execution proceedings, including the seizure of assets or movables belonging to the Drawer, up to the value of the cheque.
Conclusion
Starting January 2022, the long-anticipated reform of bounced cheque laws came into effect in the UAE. By removing criminal liability for bounced cheques due solely to insufficient funds, this reform:
- Enhances business confidence among individuals and corporates, encouraging wider use of cheques in commercial transactions.
- Reduces the number of travel bans issued by the police against individuals.
- Affects financial institutions that previously relied on cheques as a form of security for loans and credit facilities.
Importantly, while the new law protects the rights of cheque beneficiaries by allowing fast-tracked civil enforcement, it also safeguards Drawers from the previously broad and often harsh discretion of the Criminal Court.
Note:
The above is a summary and legal overview of the new Decree and does not constitute legal advice. We anticipate some practical challenges may arise as the decree continues to be implemented and interpreted by UAE courts.
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