UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for March 2, 2010

UAE Bankruptcy Series Part I: Is Bankruptcy a Crime in the UAE?

 

Bankruptcy is not a crime in the UAE.  The Federal Law No. 18 Commercial Transactions Law (the “Law”) provides instructions for determining and extinguishing debts and states what actions by the participants in the bankruptcy proceedings may constitute criminal activity.  Furthermore, the Penal Code for the UAE, Federal Law No. 3 of 1987 (“Penal Procedure”) specifies under what circumstances the participants to the bankruptcy proceedings will be charged for committing a bankruptcy offence that amounts to a crime. 

 

Being declared a fraudulent bankrupt can land one a prison sentence in the UAE.

Article 417 Penal Procedure:

“Where a final judgment has declared the bankruptcy of any tradesman, he or she shall be considered a fraudulent bankrupt and shall be punished by imprisonment for a maximum period of five years in any of the following cases:

  1. If he conceals, destroys, or alters his books.
  2. If he embezzles or conceals part of his assets to prejudice the interests of his creditor.
  3. If he admits fictitious debts or if he makes himself indebted for part thereof, whether in his books, balance sheet or in other papers, by a verbal admission, or by abstaining from submitting any documents or explanations although he is aware of the consequences of such abstention.”

 

Article 878 of the Law:

“Every trader whose bankruptcy has been declared by a definitive judgment shall be punished by imprisonment for a period not exceeding five years if it is proved that he has committed any of the following actions:

  1. That he has concealed, destroyed or altered all or some of his books.
  2. That he has embezzled or concealed part of his property to inflict damage upon his creditors.
  3. That he has knowingly acknowledged debts unpayable by him, whether such acknowledgement is made in writing, verbally or in balance sheet or by refrain from presenting certain papers, notes, clarifications.”

 

A defaulting bankrupt can end up in jail if committing certain activities within the UAE.

Article 418 Penal Procedure:

“Where a final judgment has declared the bankruptcy of any tradesman who causes a loss to his creditors through his serious default, he shall be considered a defaulting bankrupt, and shall be punished by detention for a maximum period of two years or by a fine not exceeding twenty thousand Dirhams in any of the following cases:

  1. If he or she spends huge amounts in gambling or in swindling practices or in fictitious speculations;
  2. If he or she buys goods in order to sell them at less than their purchase price, if he or she borrows funds or issues securities, or uses other means resulting in a great loss with the intention of getting money in order to delay the declaration of his bankruptcy.
  3. If after suspension of payment he makes a settlement in favor of a creditor, causing damage to the interests of all other creditors.”

 

Article 880 of the Law:

“Any trader whose bankruptcy has been declared by a definitive judgment and it is proved that his grave negligence has caused loss to his creditors, shall be considered bankrupt by negligence and shall be punished by imprisonment for a period, not exceeding two years or by a fine not exceeding DHS 20,000.00 in any of the following cases:

  1. If he spends large amounts in gambling or fictitious speculations on matters not required by his commercial activities.
  2. If after suspension of payment he pays the debt of any one of the creditors and thus causes harm to the others even if it is with the purpose of obtaining composition.
  3. If he disposes goods at a value less than its usual price, with the intention of delaying suspension of his payment or declaration of bankruptcy or dissolution of the composition, or in order to achieve this purpose, he resorts to unlawful means to obtain money.”

 

Article 419 Penal Procedure:

“Any tradesman whom a judgment of bankruptcy has been passed may be considered a defaulting bankrupt and shall be punished by detention for a maximum period of one year and by a fine not exceeding ten thousand Dirhams in the following cases:

  1. If he, in favor of another person and without a consideration, concludes contracts, which are too expensive in comparison with his financial position at the time when he undertakes them.
  2. If he or she has no commercial book-keeping, if his books are incomplete or irregular, not reflecting the real position of credit and debit accounts, or if he does not make statutory inventory imposed by law.
  3. If he fails to comply with the rules laid down for the regulation of the commercial register;
  4. If he fails to make a declaration on suspension of payment by the legally fixed deadline, if he or she fails to submit the balance sheet, or if it is proved that entries made by him after suspension of payment are incorrect ;
  5. If he abstains from producing the data required by the competent court, of it if appears that the information produced by him is untrue;
  6. If, after his suspension of payment, he gives a special advantage to any of the creditors with the intention of accepting a compromise.
  7. If his bankruptcy has been repeated before he satisfies the obligations undertaken by him in a previous composition.”

 

Article 881 of the Law:

“Any trader against whom a definitive judgment declaring his bankruptcy is issued, may be considered bankrupt by negligence and shall be punished by imprisonment for a period not exceeding one year or by a fine not exceeding DHS 10,000.00 in any of the following cases:

  1. If he fails to keep the adequate commercial books which reflect the truth of his financial state or he fails to make the correct inventory according to the law.
  2. If he fails to adhere to the principals pertaining to registration in the Commercial Register.
  3. If he makes, in favor of a third party and without remuneration, enormous commitments as compared to his financial status at the time when he made such commitments.
  4. If he refrains from providing the details required by the judge of the bankruptcy or the competent court, or if he intentionally submits false information.
  5. If after suspension of payment he gives a special advantage to any of the creditors, in order to obtain acceptance of the composition.
  6. If his bankruptcy is repeated before he performs the commitments resulting from a previous composition.
  7. If he spends huge amounts on his personal or his household expenses whether before or after suspension of payment.”

 

When a company is declared fraudulently bankrupt, the board of directors and managers may face certain penalties.

Article 420 Penal Procedure Law:

“If a trading company becomes bankrupt, its board of directors and managers shall be punished by penalties prescribed for fraudulent bankruptcy if it appears that they have committed any of the acts provided for in Article 417, of if they have contributed to suspension of payment by the company, whether by announcing an untrue position on the subscribed or paid up capital, by publishing an incorrect balance sheet, by distributing fictitious dividends, or by fraudulently receiving for themselves anything in excess of what is permitted to them in the articles of association.

The penalty provided for in this Article shall not apply to any member of the board of directors or a manager who takes no part in the act of constituting the crime or who takes exception to the decision issued in respect thereof.”

Furthermore, Article 111 of the Companies Law, UAE Federal Law No. 8 of 1984 states:

“The chairman and members of the board of directors shall be liable toward the company, the shareholders and third parties for all acts of fraud, power abuse, violation of the Law or the company articles, and for mis-management as well.  Any provision to the contrary shall be void.”

Article 879 of the Law:

“In the event of issue of a definitive judgment declaring the bankruptcy of a company, the members of its board of directors, its directors or liquidators, shall be punished by imprisonment for a period not exceeding five years, if it is proved that they have committed any of the following actions:

  1. That they have concealed, destroyed or altered the books of the company.
  2. That they have embezzled or concealed part of the company’s properties.
  3. That they have knowingly acknowledged debts which are not payable by the company, or refrained from presenting certain documents in their possession.
  4. That they have obtained a special composition for the company by means of fraud.
  5. That they have disclosed untrue information on the subscribed or paid up capital, or have distributed fictitious profits or received bonuses in excess of the amount provided for by the law or by the company’s memorandum of incorporation or articles of association.

The punishment provided for in this Article shall not be applied to anyone whose non-participation in the action, subject of the crime, has been proved, or his reservation on the decision issued in respect of it has been proved.”

Article 882 of the Law:

“Where a definitive judgment is issued declaring the bankruptcy of a company, the members of its board of directors, its directors or liquidators shall be punished by imprisonment if it is proved that they have committed any of the following actions:

  1. If they fail to keep commercial books satisfactorily as to reflect the true financial state of the company.
  2. If they refrain from providing the information demanded by the judge of the bankruptcy or its trustee; or if they intentionally provide false information.
  3. If they dispose of the company’s properties after its suspension of payment, with the intention of keeping such properties away from the hands of the creditors.
  4. If, after suspension of payment by the company, they honor the debt of one of the creditors to inflict harm on the others or provide securities or special benefits to nay of the creditors, thus giving him preference over the others, even if with the intention of obtaining composition.
  5. If they dispose of the goods of the company at values less than their usual prices with the intention of delaying the suspension of payment by the company, or declaration of its bankruptcy, or dissolution of the composition; or have resorted to unlawful channels of money, in order to achieve the said purposes.
  6. If they spend enormous amounts of money in gambling or fictitious speculation on matters not required by the activities of the company.
  7. If they involve in actions contrary to the law or to the company’s memorandum of incorporation or articles of association or have approved such actions.

The punishment provided for in this Article shall not be applied against anyone whose non-involvement in the action, subject of the crime, has been proved or whose reservation on the decision passed in his respect, has been proved.”

Penalties may be imposed on any person who commits certain crimes including but not limited to concealing the bankrupt’s properties, interfering in the proceedings by way of deception, and/or producing a fictitious debt.  Furthermore, a creditor may be penalized who honors a debt by way of deception or takes special advantages in return for a promise or a vote in the bankruptcy deliberations or through executing a prejudicial agreement.

Article 421 Penal Procedure:

“Without prejudice to any more serious penalty provided for in the law, detention, and a fine or one of these two penalties shall be imposed upon:

  1. Anyone who embezzles or conceals all or some of the bankrupt properties, even if such a person is a spouse of the bankrupt party or one of his descendants or ascendants;
  2. Anyone other than a creditor, who interferes in the compromise proceedings by way of deception, or who, in a bankruptcy, produces a fictitious debt in his name or in the name of another person by way of deception.
  3. A creditor who honors his debt by way of deception or who with a bankrupt party or someone else, stipulates for himself special advantages in return for giving or promising to give his vote in the deliberations of compromise or bankruptcy, or who makes a special agreement for his own benefit which prejudices the interests of other adversaries.”

 

Article 884 of the Law:

  1. “The trustee of the bankruptcy shall be punished by imprisonment for a period not exceeding five years if he embezzles funds of the bankruptcy while he is in charge of its management.
  2. He shall be punished by imprisonment if he intentionally gives untrue information concerning to the bankruptcy.”

 

Article 885 of the Law:

“Whoever embezzles or steals or conceals funds of a bankruptcy, shall be punished by imprisonment and by a fine or by either one of the two penalties, even if such person is a spouse of the bankrupt or from his ascendants or descendants, or from the ascendants or descendants of his spouse; and the court shall, of its own accord, decide to return the funds even if a judgment of acquittal has been issued on the crime, and the court shall, at the request of the concerned parties award compensation when necessary.”

Article 886 of the Law:

“Any creditor of the bankrupt shall be punished by imprisonment if he commits any of the following actions:

  1. If he increases his debts held with the bankrupt by way of deception.
  2. If he favors himself, vis-à-vis the bankrupt or a third party with special benefits for voting in favor of the bankrupt at the deliberations of the bankruptcy or the composition.
  3. If he knowingly concludes with the bankrupt, after suspension of payment, a clandestine agreement that confers upon him special benefits with prejudice to other creditors.

The court shall of its own accord, adjudge the said agreements null and void, with regard to the bankrupt and any other persons, and shall force the creditor to return what he has taken under the void agreement, even if a judgment of acquittal has been issued.  The court may, at the request of the parties concerned, award compensation, when necessary.”

Article 887 of the Law:

“Whoever introduces into the bankruptcy by way of fraud fictitious debts in his name or in the name of a third party shall be punished by imprisonment.”

Article 889 of the Law:

“The debtor shall be punished with imprisonment for a period not exceeding five years:

  1. If he intentionally conceals all or some of his properties or if he overestimates them with the intention of obtaining preventive composition.
  2. If he intentionally enables a creditor who is fictitious or is prohibited from participation in the composition, or who overestimates his debt, to take part in the deliberations and voting, or if he intentionally lets him take part in them.
  3. If he intentionally neglects to mention a creditor in the list of creditors.”

 

Article 890 of the Law:

“The creditor shall be punished with imprisonment:

  1. If he overestimates his debts.
  2. If he takes part in the composition deliberations or voting, knowing that he is legally prohibited from doing so.
  3. If he knowingly concludes with the debtor a clandestine agreement that confers upon him special advantages with prejudice to the interests of the other creditors.”

 

Article 891 of the Law:

“Whoever is not a creditor and knowingly takes part in the deliberations of the composition or the voting shall be punished with imprisonment.”

Article 892 of the Law:

“Any controller who intentionally gives false information on the situation of the debtor or confirms such information shall be punished with imprisonment.”

A bankruptcy conviction may be published in the UAE.

Article 422 Penal Procedure:

“The court may order the publication of any conviction issued for any of the crimes shown in this chapter, in the appropriate manner, and at the expense of the convict.”

 

Criminal and Civil Actions in regard to Bankruptcy in the UAE

The bankruptcy proceeding itself is a civil action, however, if a criminal case of fraud or negligence has been filed regarding the bankruptcy case, this would be a separate action in the criminal court.  The criminal proceeding would stay the civil proceeding and the judgment of the criminal court would then subsequently be used to determine the outcome of the civil proceeding.

Article 883 of the Law:

“If a criminal case regarding bankruptcy by fraud or negligence has been filed against a bankrupt, or a member of the board of directors of a bankrupt company, or its director or liquidator or if he has received a judgment in connection therewith according to the provisions of the preceding articles, the civil or commercial claims shall remain independent from the criminal case, and the proceedings related to the bankruptcy activities shall remain as organized by the law and shall not be referred to the criminal court, nor shall the court be entitled to deal with it, unless otherwise provided for by the law.”

Article 893 of the Law:

“Instigation of a criminal case for bankruptcy by fraudulence or negligence shall not cause amendment of the provisions pertaining to the proceedings of the bankruptcy, unless otherwise provided for by the law.”

Article 894 of the Law:

“If a crime is related to an agreement concluded by a debtor with one of the creditors for granting the creditor special advantages for voting for the composition or for harming the interests of the other creditors, the criminal court may, of its own accord, adjudge such agreement null and void, and shall force the creditor to return whatever he has taken under the void agreement, even if a judgment of acquittal is issued on the crime, and the court shall, at the request of the concerned parties, also award compensation when necessary.”

Article 895 of the Law:

“All criminal judgments passed on crimes of bankruptcy shall be published in the manner prescribed for the publishing of the bankruptcy judgment.”

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance