On the 26th October 2020, the UAE Cabinet, approved the issuance of a federal decree-law to amend several provisions of the “Federal Law on Commercial Transactions”.
The amendments which come into full force and effect in 2022 provide for a fast, robust, and civil mechanism to collect the required payments resulting from bounced cheques and cheques without value.
The primary aim of the new decree is to facilitate alternative procedures allowing individuals and companies to seek recourse via a civil mechanism rather than through the criminal court system. A condition precedent to averting criminal charges and proceeding against the Drawer of a cheque is payment in full of the value of the original bounced cheque or cheque without value.
A general interpretation of the amendments would suggest that cases of bounced cheques may not be considered a criminal offence when the new decree-law on “Federal Law on Commercial Transactions” comes into effect in 2022.
Through the civil mechanism, banks will be obligated to deduct the value of the bounced cheque or cheque without value from the Drawer’s bank account and giving it to the payee. However, this assumes that the Drawer will have money in their account in the future, while failing to recognise that a bounced cheque is clearly an indication of financial difficulty, whether just cashflow or perhaps acute financial problems.
A series of punitive measures will be introduced under the amendment to ensure payment of the original value of the cheque. These include, cancelling the Drawer’s chequebook; five (5) year ban from obtaining another chequebook; in addition to barring them from any professional or commercial activities. For companies and legal persons (excluding financial institutions), such measures will include financial fines; the suspension of licences to practice economic activities for six (6) months, and the revocation or dissolution of the licences of legal persons who are repeat offenders.
Albeit a step in the right direction, the amendments fail to recognise the challenges posed by cheques for both Payers and Billers. Cheques are highly susceptible to fraud and theft and cheque fraud is one of the most common forms of financial crime in the UAE today.
A Biller accepting cheques must:
- ensure the creditworthiness of their customers to minimise the risk of a bounced cheque as accepting a cheque for payment does not necessarily mean payment will be made.
- deposit cheques into their account immediately to reduce the risk of loss or theft.
Even after the value of the cheque has been credited to their account there is still a risk that the money could be reclaimed if the cheque turns out that there is insufficient funds in the Payer’s account; or the cheque is deemed to have a signature mismatch; or there is a problem with the date of the cheque; or there is a difference in the amount payable in words and in numbers; or the cheque is damaged; or there is scribbling, overwriting, correction on the cheque; or the bank deems the cheque to be stolen or a counterfeit.
A Payer issuing cheques must
- understand that using post-dated cheques may cause problems if deposited by Biller before the date shown by being returned unpaid or being cleared before you are expecting it.
- record details of cheques issued on chequebook counterfoils and check against bank statements so discrepancies can be picked up and reported to your bank.
- For companies, industry best practice is to allocate responsibility for issuing cheques and undertaking reconciliation with bank statements to at least two (2) different people.
It must be recognised by all stakeholders of the payments system, including CBUAE, banks and financial institutions that “issuing a bounced cheque or cheque without value” is a commercial problem that needs a commercial solution.
The commercial solution is to encourage Payers and Billers to use direct debit as a simple, smart, and secure method to pay, while allowing Billers to accept and reconcile any recurring payments, invoice, or subscription payment.
Author: Dr Padraic McGreal
