An Introduction to Corporate Guarantee

Understanding the Importance of Corporate Guarantee in the UAE

In the UAE, effective risk management is critical for corporate and investment banking businesses. This is particularly true due to the prevalence of “name lending,” where the strength of the proprietors’ names is prioritized over the asset quality and creditworthiness of a business. Unfortunately, poor banking practices and inadequate legal documentation can undermine credit analyses and compromise the guarantee and security support provided.

Exploring the Implications of Corporate Guarantee

Many businesses opt for corporate guarantee agreements to secure funds or capital. The implications of such agreements are far-reaching, requiring careful examination of the facts unique to each case. To shed light on this subject, we’ll provide an overview of the laws governing corporate guarantees in the UAE.

Contractual Undertaking: Ensuring Clarity and Defined Obligations

A corporate guarantee agreement should leave no room for ambiguity regarding the rights and responsibilities of the principal debtor and guarantor under UAE law. Pursuant to Article 1078 of Law No. 5 of the Civil Procedure Code, banks can make claims against both parties involved in the guarantee agreement if one defaults on their payment. This provision encourages banks to rely on corporate guarantees, making debts recoverable from either the principal debtor or the corporate guarantor.

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In the UAE, guarantees are strictly limited to suretyship, with an enforceability period. Typically, banks in the UAE acquire undated guarantee cheques from guarantors to ensure full coverage of their risk. Insufficient funds leading to bounced cheques can result in criminal proceedings against the signer, a relatively straightforward legal pursuit.

To ensure the effectiveness of a guarantee agreement, proper execution and dating are crucial. The agreement should explicitly state the execution period, length, and any conditions triggering its expiry.

Differentiating Commercial Guarantee and Court Precedents

The UAE courts’ interpretations of “commercial guarantee” versus “civil guarantee” under Article 1092 are not consistently defined. While some previous Dubai court precedents deemed a guarantee commercial only if provided for consideration or connected to the guarantor’s trade, recent rulings have taken a more flexible approach. Courts now consider a guarantee commercial if the guaranteed debt is commercial or if the guarantor is a trader deriving a benefit from providing the guarantee. In most reported cases, the nature of the guaranteed debt determines whether it is legally classified as civil or commercial.

It should be noted that parties can contract out of the provisions in Article 1092 if deemed necessary, as it is not a matter of public order and thus not mandatory.

Unraveling Debt Originating from a Guarantee and Termination

Debts mature upon their due dates. However, conflicting judgments have caused confusion regarding the effects and implications of Article 1092 of the Code of Civil Transactions (Civil Code).

Article 1099 of the Law sheds light on guarantee expiration, outlining various scenarios:

  1. Payment of the debt.
  2. Deterioration of the real property held by the guaranteed party due to force majeure before a claim is made.
  3. Termination of the contract that binds the guaranteed party.
  4. Discharge of liability for the guarantor or debtor.
  5. Death of the guaranteed party.
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Termination can also occur as per Article 1101:

“If the guarantor or debtor reaches an agreement with the creditor to settle the debt, they shall be acquitted from the remaining amount. If the agreement concerns only the guarantor, the creditor can choose to pursue the remaining debt from the principal or release the guarantor and claim the full debt from the principal.”

This means that if an agreement is reached between the guarantor, debtor, and creditor to settle a part of the debt, the remaining debt will be automatically waived. However, this should be explicitly stated in the agreement. If the agreement specifies that the guarantor will not be liable, termination will kick in. The creditor can then choose to claim the remaining debt, whether in part or in full, from the original debtor.

Ensuring Enforceability and Understanding the Conclusion

In summary, UAE laws allow for the enforcement of corporate guarantees in court. While discrepancies may arise in their enforcement, the overarching idea remains clear. A well-defined guarantee agreement, outlining the respective rights and obligations of the guarantor, principal debtor, and beneficiary, remains valid and enforceable. Lending institutions often opt to secure security cheques from guarantors or debtors. If these cheques bounce due to insufficient funds, the lending institution can pursue criminal proceedings against the authorized signatory in the guarantor’s company to recover the outstanding amount. Lending institutions must also be mindful of debt maturity, claiming any amounts owed within six months, as stipulated in Article 1092 of the Law.

For more information on corporate guarantees and other legal matters, visit Garrity Traina.

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