Failing to Honour Bounced Cheques in Loans and Other Transactions

Tim Elliot: Hello and welcome to another edition of Lawgical, the regular weekly podcast from the Dubai-based law firm, HPL Yamalova & Plewka, still the Gulf Region’s first and only legal podcast.

I’m Tim Elliot at the firm’s offices and here is the Managing Partner, Ludmila Yamalova. Thank you for taking the time out to talk once again.

Ludmila Yamalova: Thank you for visiting us once again and for coming to chat with me.

Tim Elliot: In this edition of Lawgical, we’re going to be talking about borrowing money in the form of either a personal loan or a credit card perhaps. But we’re also going to be talking, and perhaps more importantly, about not honouring signed contractual payment when it’s issued in the form of a cheque, so bounced cheques.

Ludmila, let’s start with that very topic, not honouring a cheque is an offence here in the UAE, but even though the law has changed in recent years, and we will consider those changes to the law in a moment, it’s something that concerns many of us living here in the Emirates really simply because cheques are still commonly used.  Most of us pay rent to our landlord using a cheque to secure that rent.  A cheque is a legal instrument.  The law is very clear:  If you write a cheque, you must honour it on the date it becomes due.

Ludmila Yamalova: Yes, it’s a great topic. This is an issue that has been quite contentious in the UAE for many years for the reason, as you said, it has been such a commonly used instrument in so many commercial transactions over the years, especially when times have become harder and those who might have held these cheques use less security, would try to cash them, even when they were not really supposed to, and as a result, there have been a lot of criminal cases that arose out of dishonoured cheques.

In the UAE, in short, (1) it is a criminal offence to dishonour a cheque, and (2) until recently any kind of cheque for any amount would lead to imprisonment. For example, if you issued a cheque to your landlord for AED 20,000 and the cheque bounces for whatever reason like insufficient funds, a bounced cheque, back then, would give that landlord the right to go to the police and file a criminal case against you.

The minute the police would take that case and open the claim, then that person would be placed in what’s called and usually referred to as a blacklist, so, therefore, they are now wanted.  For example, if I’d given a cheque to my landlord for AED 20,000 and the cheque bounced and I was outside of the UAE at that point in time, now I’m flying into the UAE and I’m not even aware the cheque had bounced, then I could be apprehended at the airport, taken to the police, and then I would either have to pay the money right there to the police, post bail or deposit my passport as a guarantee. It was pretty serious.

Also, because of that reason, cheques continue to be a very popular instrument in a lot of commercial transactions because parties consider them to be very strong leverage. When somebody is ultimately faced with imprisonment, then I guess the popular belief is that they are a lot more forthcoming in honouring their obligations and figuring out solutions on how to pay off their obligation than if it is just a claim in a civil case. That was sort of the reason why cheques, and bounced cheques, in particular, have been such a hot topic in the UAE for so long until recently.

In particular, about last year or maybe two years ago now, particularly in Dubai, there have been a few amendments about the types of cheques, and so now, not every bounced cheque is a criminal offence. Anything below AED 200,000 is no longer a criminal offence.  If you go back to my example of a cheque issued to the landlord for AED 20,000, that cheque is no longer a criminal offence. Anything above AED 200,000 is still the same and treated the same way as before.

However, that’s not to say that if I dishonoured that cheque for AED 20,000 now the landlord has no recourse against me. It is just the recourse now is through a civil court versus criminal, and that is the big change in the law that has happened in the last year. It has been very well received and very much welcomed in the community because until recently cheques have in many ways been abused or the issuance of the cheque has been an abusive instrument in the business community.

Tim Elliot: Let’s take two examples and in both cases for amounts over AED 200,000.  Let’s say you’ve not been paid and you’re low on funds, therefore, your cheque bounces, but you signed that cheque in good faith, and a complaint is made.  What happens next there?

Let’s also say you bounced a cheque in bad faith. You got the money. You just withdrew it and didn’t want to pay it. What happens in that case? Or is it the same thing?

Ludmila Yamalova:  Effectively, and in short, it is the same thing.  This is for a number of reasons.  One, and this is very important, is that a cheque is considered to be an entirely separate legal instrument from any other contractual or commercial transaction to which it might have been attached.

Let’s go back to the same example.  Let’s say you and I are in a business together, and you lend me money, AED 500,000.  I gave you a cheque for AED 500,000 as a guarantee. Then I returned to you your AED 500,000 but you still hold the cheque. Obviously, I gave you the cheque, and we even have a document where it says, yes, you will return to me the cheque or you will not be allowed to use the cheque once I repay the loan.

Now, I have repaid the loan.  We have this document that clearly establishes our understanding, and yet you have the physical possession of my cheque. You can go and you can cash the cheque, and I don’t have the AED 500,000 to give you back, it becomes a dishonoured cheque and with that, you can now file a criminal case against me. The police will not look at the underlying agreement between you and me that said you could only use that cheque in the event I didn’t pay you back because that would really entail interpreting a commercial deal between us, but the cheque is treated as an entirely separate legal instrument from that commercial deal under which I issued you this cheque.

This is a very important issue because there are so many cases that we see where a cheque is issued as a condition to a particular deal, and then ultimately when that condition is not met and the cheque is used, the obvious expectation, and therefore the belief, is that when the party cashes the cheque when it shouldn’t have cashed, the obvious conclusion is, oh, that’s easy, they are not entitled to this cheque so therefore this is not a criminal offence because look, I’ve got this document that says that they should not have cashed it.

But unfortunately, for now, in the law the two are treated as entirely separate legal claims. Going back to the example of you and me, that is not to say that now I have to pay you AED 500,000 and I have no recourse. There will just ultimately be two separate legal cases. You will file a case against me, a criminal case where I owe you AED 500,000 and I ultimately will actually have to pay you that money if I want to be free because the criminal offence is actually to issue a cheque which you cannot honour.  That is the crime.

You would pursue me for that, and now if I want to be free, I will have given you the AED 500,000, and then that case would be dismissed. Now, on the back of that, I will now file a civil case against you and claim compensation for breach of contract, and that’s where I will present the document that you and I signed whereby that cheque was linked to my failure to pay off the loan, and so therefore now I’ll be arguing a contractual dispute to the court and compensation for the damage that I’ve suffered, i.e., I am minus AED 500,000 which I had to pay you to dismiss the criminal case.

You see, it’s not that there is no recourse. It’s just I will have to file a separate legal case against you to seek compensation and ultimate reimbursement of the money that I’ve paid you in order to basically erase that criminal case off my record.

Tim Elliot: Okay. So anything over AED 200,000 is not just a criminal matter. It’s a civil matter. Here in the Emirates though, the criminal court and the civil court work separately.

Ludmila Yamalova: Yes, and what’s important to that point is for any of the cheques that are below AED 200,000, so it’s not like there is no more recourse or that any cheques that are below AED 200,000 are now unenforceable. That’s not the case. All of those cheques are still valid instruments. It is just no longer criminal. Let say, going back to the same example, the AED 20,000  issued to the landlord, now the landlord can file a civil claim against me and seek compensation for the AED 20,000 as a breach of contract. There is still a recourse even for cheques below AED 200,000. It’s just that they have to be done through a different avenue, and that is for the civil courts versus criminal.

Tim Elliot: Okay. Let’s take another example. You bounce a cheque. You are unable to pay the person you bounced the cheque with, keeps the case with the police. You do have to serve the requisite jail time, however long that is. You are released. You still can’t pay. How do you collect?

Ludmila Yamalova: It depends on the ultimate judgement. Sometimes the court judgment will include a penalty to the government for bouncing a cheque. For example, there will be a penalty from the government, a jail sentence, and something else, and that something else, for example, could be deportation, or it could be just basically a jail sentence and then you’re free to go.

It could be that sometimes the court will say, okay, well, for this you have to serve a jail sentence and nothing else. So you’ve served a jail sentence because that was the penalty. The penalty was not to pay back. The penalty was just serving a jail sentence. You’ve served the jail sentence, and now you’re out free. That’s, again, not to say that I, who holds a cheque, am without a recourse. What I would have to do is I would have to file a civil claim against that person and try to get that money recovered through the civil court.

Tim Elliot: What if you’re a signatory on company cheques on behalf of the company that you work for, but perhaps don’t own? What’s the situation there?

Ludmila Yamalova: Historically that always been a very difficult subject and that’s because, once again, the banks and the authorities look at cheques as a separate legal instrument. They look at who signed the cheque. As the first point of contact, they will look at the person whose signature is attached to the cheque, and then if the cheque is dishonoured, they have full right to go after that person. The person then is seeking indemnification from the owners of the company, but unfortunately, as far as the first point of liability is concerned, it is the person who actually signed the cheque on behalf of the company that will be responsible.

That’s why it is quite a serious matter and these days, because of all these reasons, cheques are being used less in business transactions in general and certainly much less so by those in the commercial context where the person actually does not own the company, but yet previously would have had the authority to sign. Fewer and fewer people actually want to take that responsibility on themselves, and with all this, the practice of issuing cheques as guarantees is subsiding.

Tim Elliot: If you signed, you’re liable, so it’s a good idea to keep track of any cheques you might have written on a purely personal level. For example, a security cheque that you may have given to a bank as a personal loan, security or a credit card security, always keep a copy of personal cheques that you sign for banking, for rent, or for any other purpose.

Ludmila Yamalova: Absolutely. Interestingly enough, still to this day, we see so many examples where copies of these cheques, not even copies, but even records of cheques that are issued to third parties as securities are not often kept. Therefore, people forget and also because at least in the past it was a very common practice to issue cheques quite far into the future.

For example, you buy a car that has a five-year car loan, so you would actually issue cheques for the entire five years of the term of that loan. You are ultimately issuing cheques into the future, and as a result, a lot of people forget what they have issued and what they signed. Historically, surprisingly enough, they have not been taking copies or keeping records of them. It is very very important as you rightfully said, (1) to keep records of all those cheques, and (2) even more importantly, at the end of your obligation that you demand those cheques to be returned to you.

This does not happen by default. Let’s take the same example of a car loan. Let’s say I had a car loan for five years. I’ve issued cheques for the next five years. Now I’ve paid off my loan. I have a document from the bank that says, yes, your loan has now been cleared and you owe zero. That in and of itself does not relieve me of the obligation of those cheques that are perhaps still in the hands of the bank, so it’s extremely important to request that the bank returns all those cheques physically, because if it doesn’t, chances are and I have seen cases like this, the bank may go and try to cash those cheques, and then once again you have to go through this criminal versus civil battle of trying to first pay off the cheques and then in civil court argue why the bank should not have done it.

We have had cases like this. It is very very important to demand from all those parties holding your cheques that they actually return the physical cheques. Now, sometimes, and this is a real story, sometimes that party cannot find those cheques. These things happen, so it’s very very important in that case to at least have some sort of a document from that party that yes, I have lost those cheques and these are the cheques that we are talking about, and in any event I release you from any obligation and therefore in the event these cheques are ever used, you can use this document showing basically that those cheques are invalid.

These kinds of undertakings can be enforced and, in a way, if they are drafted properly, can replace the return of the physical cheques.

Tim Elliot: So legally speaking, that could be held up in a court of law and that is a reasonable proof?

Ludmila Yamalova: Yes. Not only that, and we’ve seen this as well, not just in the court of law, but also with the police. Let’s say a bank goes to the police, I want to file these cases, and then the police calls and says, well, what about these cases? I’ll bring this document from the bank that shows, hey, listen, the bank itself said to me in the past that I do not owe that money and that these cheques should not be used. The police in most cases would actually accept that document.

Tim Elliot: Just while we are on the subject of loans, just briefly, situations when perhaps a company may have guaranteed a loan for an employee, for example. Is that something you’ve seen?

Ludmila Yamalova: Very much so, but much less so in the last few years. In perhaps kind of the early 2000s and mid-2000s, it was a lot more common for a company as an incentive to bring employees. They would often offer these kinds of facilities where the company would guarantee particular loan repayment on behalf of the employee. It was a very dangerous practice because if the employee leaves then the company is stuck with the obligation. We have seen cases like that, and they do not end well for the company if that employee decides to abscond.

But it has been a painful lesson for many, and therefore now we don’t see many cases where a company still continues to do so. But in general, just like anywhere else in the world, if you guarantee to someone else to cover an obligation of somebody else, well, then you’re stuck with it. It’s a contractual obligation. If you sign off to the bank to pay on my behalf and I cannot pay, then you will be stuck with that obligation because you signed onto it.

Tim Elliot: To sum up, if you have guaranteed a loan, if you have signed a cheque, keep a record, keep a copy.

Ludmila Yamalova: Right, or just don’t guarantee somebody else’s loan. Yes, and the reality is such that as much as we wish to learn from these examples and not issue cheques, for now, they are still very much used in connection with any kind of financing in the region. If you want to have a car loan, the fact that the bank has the car as a guarantee is not enough; the bank will still require cheques as security. If you want to take a mortgage for a property, once again, that mortgage will be secured not only by the property but also by a whole set of guaranteed cheques and any other personal loan, even credit card.

When you open a credit card, banks very often to this day ask for a cheque as a guarantee. That instrument is still used quite commonly, but hopefully, people will be more aware of them now and at least keep a better record.

Tim Elliot:  Ludmila Yamalova is the Managing Partner of the Dubai-based law firm, Yamalova & Plewka.  As is always the case, a big thank you.

Ludmila Yamalova: Thank you too.

Tim Elliot: That’s it for Lawgical this time around. We can’t hope to cover every aspect of the UAE’s legal framework in each episode of Lawgical, but if there’s a specific question that you’d like answered get in touch via Lylawyers.com or any of our social channels, you’ll find us easily, and we’ll try to answer it in a future podcast.

For a legal consultation, Lylawyers.com is the best place to start. All you need to do is hit Contact.

This article is a transcription of the Lawgical with LYLAW podcast episode published on 1 October 2019.

Written by:

Ludmila Yamalova | HPL Yamalova & Plewka DMCC