For decades, Infospectrum’s clients have used the Post Dated Cheque (PDC) as a means of payment security. Even in these increasingly cashless/paperless times, payment by cheque remains an important part of the risk management of liquidity-strained clients in certain countries. Perhaps the most effective use of PDCs has been in the United Arab Emirates. Here we look at how this came to be, and whether it remains a useful tool.
It is common knowledge that a bounced cheque in the UAE is a criminal offence. In fact, in a rapidly developing country with a transient population, the use of cheques as a form of security in any type of contract has arguably been a necessity.As a starting point, the first reference to bounced cheques can be found in the UAE Penal Code of 1987. Under this law, issuance of a cheque by an individual who has insufficient funds in his bank account to honour the cheque is considered an act of bad faith and therefore a crime. Such crime is punishable by detention for a period ranging from one month to three years or by a fine of up to AED300,000 (circa USD 82,000). Given the severity of the punishment for bouncing a cheque, it is understandable why what is really a simple financial tool has gone on to become a bastion of UAE security arrangements.
Recent legal developments in Dubai
However, in December 2017, a new Criminal Orders law came into force in Dubai which affords additional power to Dubai public prosecutors. This is in respect of minor crimes and includes the bouncing of cheques. Specifically, the new law gives the public prosecutors the ability to downgrade the punishment for bouncing a cheque of low value (AED 200,000/USD 55,000 and below), to only a fine of between AED 2,000 (only USD 540) and AED 10,000 (USD 2,700) i.e. no jail time.
So, in summary, it remains a criminal offence in the UAE punishable by either fine or detention to bounce any cheque, with the exception of those valued up to AED 200,000/USD 55,000 and bounced in Dubai. However this carve out would seem to suggest that a case involving a low value bounced cheque could still be taken to an Emirate other than Dubai. Additionally, the new law suggests that public prosecutors have the ability to downgrade the punishment for issuance of a low value cheque which then bounces, i.e. it is not a given. This is particularly if there is a suggestion that fraud is involved, rather than a simple mistake or financial distress.
This change in Dubai law would appear to make life more difficult for the recipient of a PDC, and the challenges are exacerbated by the lengthy court procedures of the UAE that would need to be undertaken should cases need to be filed before the criminal and civil commercial courts. In addition, by the time the PDC recipient has filed a police complaint in respect of the bounced cheque (the first stage in the criminal case), the issuer would have been already alerted by his bank that the cheque has bounced, affording him ample opportunity to leave the country. An example of this is the recent high profile case before the Sharjah Court involving Abraaj. While the CEO Arif Naqvi was sentenced to three years in jail for issuing a cheque without sufficient funds, he had already left the UAE before the judgment was handed down.
Security cheques in today’s climate and beyond
According to state news agency WAM, the Central Bank of the UAE published statistics which indicated that both the number of cleared cheques and the number of bounced cheques were on the decline. Of course, this may not necessarily mean that the use of cheques as a form of security is on the decline, since many may never enter the banking system (being used as security, rather than payment). Indeed our understanding is that, despite tying up cash flow sometimes in hundreds of cheques at any given time, a PDC is still the weapon of choice for many suppliers, in the absence of a viable alternative. However, the reduction in the number of cleared cheques does suggest a general movement away from the use of cheques in UAE financial transactions.
Going forward, we expect that as the UAE law and its practices continue to mature, the reliance on cheques as a form of security in all sectors will reduce. For example, confidence in the controversial 2016 UAE bankruptcy law appears to be growing. But in the meantime, what can traders and risk managers expect to get out of PDCs now that the legal clout of an already time consuming form of security has been eroded? Certainly not guaranteed payment and not even payment on time. PDCs can certainly appropriate otherwise useful cash flow. However, in the absence of anything better, they have persisted as a means of reassuring oneself that you have done all you can to protect yourself in a market which has yet to devise (or enforce) anything more powerful. In short, PDCs are likely to be around for some time yet.
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