UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Current Account in the UAE

 

Definition:

A current account is a contract between two parties whereby the rights and obligations arising from their mutual relationship are converted to account entries which are offset against each other whereby the final balance on closing the account itself is a debt due for payment.

Nature:

The following conditions must be met regarding payments in order that they may be entered in current account:

  1. They must be in cash or replaceable of common kind so that there can be offset between them.
  2. They must arise from verified obligations of specific amount.
  3. The y must have been made to the recipient as an investment with ownership.

There may be more than one current account between the two parties if each account is restricted to a particular type of transaction or currency.

Interest:

Current account payments from the customer shall not produce interest unless otherwise agreed.  The interest shall be at the agreed rate and if the rate is not agreed, it shall be at the market rate prevailing at the time of the transaction but shall not exceed 12%.

Interest shall apply to the debit balance from the date of closure of the account unless otherwise agreed.

Closure:

If no period is specified for a current account it may be closed at anytime at the discretion of one of the parties whilst taking into account the agreed/customary notice periods.

In all cases, the account shall be closed if the customer dies or loses competence r if one of the parties files for bankruptcy.

If a current account is closed down the balance on it shall be deemed a debt payable forthwith unless the parties agree otherwise or the entry of certain transactions that have to be entered in the account is still in progress and the entry would amend the amount of the balance, in which case the balance a debtor shall be deemed payable forthwith from the day following the last entry required by such transactions.

If the proceeds of the discounting of a commercial paper are entered in a current account and the value of the paper is not paid by the date due, the person who discounted the paper, even after the person who presented it for discount has filed for bankruptcy, may cancel the entry of tis value in the current account by making a counter entry.

A counter entry may only be made in connection with commercial papers whose value has not been paid by the due dates and any agreement to the contrary shall be invalid.

An action for the correction of a current account shall not be heard even if the demand is based on error, omission or duplication of entries, in connection with entries made over a year from the date of receipt of the account statement unless during this period, one of the parties notifies the other that he is pleading correction of the account or unless the customer , in the case of a current account opened with a bank, proves that during that period he received no statement of his account from the bank.  In both cases, no action relating to a current account shall be heard upon the expiration of five years from the date on which the account was closed down.

*Emirates Institute for Banking and Financial Studies, Legal Environment in the United Arab Emirates, Laws Relating to Banking

Article 390 of the Commercial Transactions Law, Federal Law No. 18 of 1993  (the “Law”):

The current account is a contract between two people under which the rights and debts arising from their mutual relationship turn into account entries settling the account between them, such that only the final balance at the closing of the account shall be a debt due for payment.

Article 391 of the Law:

  1. The bank shall open a current account for his customer if the operations performed by the bank in favor of the customer involve opening of credit or credit facilities in his favor.
  2. It may be agreed that the account must not be overdrawn by the customer whereby the balance shall always be in the credit side.  It may also be agreed that the account shall be overdrawn by both parties i.e. the balance may be in the credit or debit side for both parties. 

 

Article 392 of the Law:

To facilitate for entry of payments in current accounts, the following conditions must be satisfied:

  1. They must be in cash money or similar items integrated in kind in order for the clearing to take place among them.
  2. They shall be arising from debts that have real existence and specified amount.
  3. They must have been delivered to the receiver by way of ownership.

 

Article 393 of the Law:

Current accounts between two parties may be several if each account is limited to a specific kind of operations or currencies. 

Article 394 of the Law:

The following shall result from the contract of a current account:

  1. The title to the cash and properties received and entered in the current account shall be transferred to the party who has received them.
  2. Entry of a commercial paper in the account shall be considered valid, provided that its value shall not be taken into account if it is not paid at the date of maturity; however, in this case it may be returned to its owner and its entry may be reversed as shown in clause 2 of Article 407.
  3. Details entered in the current account as one whole are indivisible before the closing of the account and the calculation of the final balance.
  4. Settlement between one entry in the current account and another entry in the account itself may not be made.
  5. Details of entries in the current account may not invalidate the rights of both parties in respect of the contracts and transactions causing such entries.
  6. Each party to the current account may have the right to dispose at any time of his credit balance unless otherwise agreed.

 

Article 395 of the Law:

  1. All debts arising from work relationships between both parties to the current account shall be entered therein according to the law, unless such debts are guaranteed by legal securities or an agreement.
  2. Nevertheless, debts accompanied with conventional securities may be entred in the current account whether such securities are given by the debtor or a third party provided that the entry of such debts is agreed upon expressly by all parties concerned.

 

Article 396 of the Law:

  1. If it is agreed that a debt accompanied by a conventional security shall be entered in the current account, such security shall be transferred to a guarantee the balance of the account upon its closure to the extent of the debt regardless of the changes that may occur to the current account during its operation unless otherwise agreed. 
  2. If the law requires certain actions to be taken for conclusion of the security or for using it as an argument against a third party, the security shall not be transferred to guarantee the balance of the current account now shall it be used as an evidence except from the date ssuch actions are made.

 

Article 397 of the Law:

Debts due to either party if entered into the current account  shall lose their own characteristics and intrinsic nature and shall no longer be valid for honoring, clearing, prosecuting, or nonhearing of claims.

Article 398 of the Law:

  1. If details of entries in the current account include cash debts evaluated in various currencies or unsimilar things both parties may agree to include them in the current account provided that they are entered under separate sections taking into consideration similarity of the payments included and that the two parties give authorization for the current account to be kept integrated despites its several sections.
  2. The balance of such separate sections must be transferable so that at the time determined by both parties or upon closure of the account at most clearance may be effected among them to produce one balance.

 

Article 399 of the Law:

  1. Payments by the customers in the current account shall not yield interests unless otherwise agreed.  The interest shall be computed at the agreed rate and if the interest rate is not determined, it shall be computed on the basis of the interest rate prevailing in the market at the time of dealing, provided that it shall not exceed 12%.
  2. The interest shall apply to the debt balance as of the closing date of the account unless otherwise agreed.

 

 Article 400 of the Law:

  1. If a certain time is given for closure of the current account, it shall be closed at the end of such time; however, it may be closed earlier by agreement of both parties.
  2. If no fixed time is given for closure of the current account it may be closed at anytime as desired by either party; taking into consideration the notice periods agreed upon or those customarily practiced.
  3. In all cases, the account shall be closed upon death of the customer or his incapacitiation or upon declaration of bankuprtcy of either party or upon the expirty of the corporation or by deletion of the bank from the lsit of the operating banks or upon the bank’s cessation to carry out its business.

 

Article 401 of the Law:

A current account between a bank and its customer shall be considered closed by the end of the bank’s fiscal year; however, such closure shall not be considered as closure of the account but it shall remain open and its balance shall be carried forward to the same current account and shall recommence its movement on the first working day.

Article 402 of the Law:

If a current account is closed, the balance shall become a matured debt unless otherwise agreed by the parties or if the entry of certain operations which must be posted in the account is still running and the said entry may cause amendment of the amount balance in which case the debt balance shall become matured as of the day following the last entry needed for such operations.

Article 403 of the Law:

The common rules prescribed for non-hearing of a claim by lapse of time shall apply to the debt and its interests.

Article 404 of the Law:

If the debt entered in the current account is eliminated or if its amount is reduced due to a reason related to its entry in the account, the entry of such debt ought to be cancelled or reduced, as the case may be, and the account shall be amended accordingly.

Article 405 of the Law:

The creditor of either party to the current account may garnish the credit balance held by the garnishee at the time of garnishment.

Article 406 of the Law:

  1. if either party to the current account becomes bankrupt, the group of creditors may not be contested by any mortgage made on his properties after the date appointed by the court for suspension of payment in order to secure the debt in an amount equal to the balance of the debt at the time when the mortgage was decided.
  2. However, the group of creditors may be contested by the mortgage with respect to the difference if any between the amount of the debt balance existing at the time of deciding the mortgage and the amount of balance at the time of closure of the account, unless the mortgagee’s awareness of the debtor’s suspension of payment at the time of deciding the mortgage is proved.

 

Article 407 of the Law:

  1. If the total discount of a commercial paper is entered in the current account, and the value of such paper has not been paid at the time of maturity, the person who discounts such paper may cancel its entry in the current account by making a reverse entry even after declaration of bankruptcy of the person who has submitted it.
  2. The reverse entry means entry of an amount equivalent in value to the commercial paper plus the expenses in the debit side of the current account.
  3. No reverse entry may be made except for commercial papers whose value is not paid at the date of maturity and any agreement to the contrary shall be considered null and void.

 

Article 408 of the Law:

  1. Upon denial and absence of a legal reason, the petition for correction of current account shall not be heard even if the petition is based on error or oversight or duplication of entries in respect of entries that have been made since more than one year form the date of receipt of the account statement unless either party gives the other during this period  a notification showing his insistence on correction of the current account or if the customer, in case of a current account opened with a bank, proves that he has not received from it, during the said period, any statement of his account and in both cases, the claim shall not be heard after the lapse of five years from the date of closing the account. 

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

%d bloggers like this: