Article on Covid-19 and Debt Collections
Affected by the COVID-19 Pandemic?
How to Improve your Liquidity by Collecting Debts Effectively
Businesses globally and across most industries experience the economic and social impact of the COVID-19 pandemic due to measures taken worldwide against the spread of the virus, such as travel restrictions, mandatory office closures and full or partial lockdowns of cities, regions or even whole countries. COVID-19 and the measures taken to fight it pose a significant threat to the existence of large and small businesses alike, particularly in those industries that involve more extensive human contact and interaction and for companies with small cash reserves.
We recognize that many of our clients are also facing significant and urgent legal challenges. Under these unprecedented circumstances and as the measures taken might continue for an extended period of time, we have developed legal contingency plans for the most important legal aspects our corporate clients are confronted with. They consist of practical advice on
- Contract Law (force majeure, extension of time, right to terminate, etc.)
- Employment Law (dismissal, questions of unapproved absence, remote work, etc.)
- Insolvency Law, Mergers, Assets Sales
- Companies´ Law (e.g. remote AGMs, voting, director´s liabilities, etc.)
- Regulatory issues and instructions (safety standards, changes in governmental services, etc.)
- Liquidity Management (agreements on deferment of payments; debt recovery; repayment plans, etc.)
- Crisis as Opportunity – legal and practical aspects (reduction of costs; streamlining of office work, etc.)
In particular, liquidity management and keeping solvent is all-important at this stage of the economic crisis, but many companies might not yet fully grasp the likely vastness of the problems ahead in this context and the required speed to act. Credit will likely dry up, some clients and customers will probably become insolvent and payments of their accounts receivable are possibly already massively delayed or might never happen. As we cannot cover all legal topics related to COVID-19, however, we would like to focus on one aspect of liquidity regarding which you can actually take action, namely the collection of your accounts receivable – to put it in plain terms: debt collection.
Debt Collection – What Can You Do Today?
Once the realisation sinks in that you really should act now to increase your cash reserves by collecting debts, in particular debts that might likely become bad, there are several obvious actions you can take to increase the chances of a successful debt collection:
Follow-Ups with Debtors
- -follow-ups with your debtors by email and phone
- -sending your debtors legal notices through a) a lawyer or b) the concerned judicial department
- -preparing internally for any further legal escalation with regard to your receivables
- -applying for preliminary attachments against your debtors
- -filing of cases with the court or arbitration centres Below we address each of these actions in more detail.
As a first step, categorise your accounts receivable and prioritise follow ups via email and phone for the most important ones due to the high amounts involved and/or the likelihood of default of your debtors. Many companies may accept late payment by long-standing customers, especially during good times. However, this current situation might very well be different, and time is essential. If full payment is not possible or you consider it important to support your customer during these difficult times, try at least to negotiate and to sign a repayment plan which should include an explicit confirmation of the outstanding amount by your debtor, ideally signed by one of their authorized signatories and stamped. This can be helpful in debt recovery if the debtor does not fulfil the repayment plan.
Keep the deadlines short and move to the next escalation step if no payment is made on time: There is no need to wait too long if it becomes evident that the customers are just dragging their payments because this is usually a clear sign that they are struggling with liquidity issues.
Legal Notice through a Lawyer
As a next step on the legal escalation ladder, contact a lawyer, brief them on the subject-matter and request a legal notice to be sent to your debtors to demonstrate that you are serious and will go down the “legal route” if there is no payment. Depending on the circumstances, the legal notice can be more friendly or stricter, but in any case it should not delay the solution too long, as other creditors might move first – and in the UAE´s legal and court system, the first-mover has significantly better chances.
In this context, we offer ABC members a discounted fee for sending a legal notice to your debtors. For more details, please see at the end of this article.
Legal Notice through the Concerned Judicial Department
If a legal notice through your lawyer does not show any effect, but the debtor-company is still operating, sending an official legal notice through the UAE notaries could be a further option as it clearly shows that you know the procedures and you do not hesitate to contact the judicial department in the debtor´s emirate of seat.
As to the procedure, a legal notice will need to be drafted in Arabic and is then sent through the system of the concerned judicial department by a court messenger. Such legal notices cost only a few hundred dirhams in government fees but could have a significant effect on the debtor because of their official notification through the judicial department. Potentially, your invoices might so be treated with more urgency than others.
Either before or while trying to obtain payment by sending legal notices to the debtor, your company should prepare internally for any further legal action. In particular, the calculation and documentation of the outstanding amount need to be made by collecting and organising all outstanding invoices and other evidence (e.g. via handover confirmation, acceptance certificates or receipt confirmations by debtors).
It also makes sense to regularly request a confirmation of a statement of account from the debtors (via email is sufficient), as this could be used in a court application for preliminary attachments (see below). In general, we recommend also requesting the commercial license of your business partners and the power of attorney of their representative as preparation for any future dispute, if this has not been done at the outset of the business relationship.
If you have a written confirmation of the outstanding amounts from your debtor, you can apply to the courts to order preliminary attachments on a debtor´s assets like bank accounts, vehicles, their commercial license, or even third party debts (i.e. debts owed to your debtor by another party, including governmental agencies).
Even if you have an arbitration clause in your contract, you could still make an application to the local courts as these applications and any subsequent measures ordered by the courts are considered urgent and of a preliminary nature and thus do not need to be decided by the arbitration tribunal.
Such applications cause court fees and lawyer´s fees and require the filing of a case (court or arbitration) within eight days from the preliminary attachments being granted. To be able to file such an application for preliminary attachments, certain formalities need to be adhered to, like a notarised power of attorney for the court lawyer, a copy of the trade license of the debtor etc. It is important that the application is prepared by an experienced lawyer who focusses on the essential documents and keeps such applications as simple as possible. This increases the chances of them being granted, as the judge for expedite matters does not and cannot verify claims in detail. Despite the costs involved for such applications, they could be an effective method to safeguard receivables and also to apply maximum legal pressure on a debtor.
Litigation / Arbitration
If all the above measures do not help to obtain payment, the final option is to file a case. Depending on the dispute resolution mechanism provided for in your contract you must either file a case with an arbitration institution (e.g. International Chamber of Commerce, Dubai International Arbitration Centre, Abu Dhabi Commercial Conciliation and Arbitration Centre etc.) or the ordinary courts provided for in the contract or at the seat of the debtor.
Any court or arbitration proceedings in the UAE involve relatively high fees and take time:
The arbitration fees depend on the claim amount and are usually a few per cent of the claim value. There is no cap on the tribunal´s fees, but the percentage decreases with the amount. You can check the expected arbitration fees by using fee calculators which are often available on the website of arbitration institutions.
Lawyers’ fees in arbitration cases are mostly charged by hour. The legal market is competitive, and in such times, it is advisable to compare the rates while always checking the experience and expertise of the potential lawyer to be engaged.
The duration of arbitration proceedings can vary greatly, as a respondent in an arbitration case has many ways to delay the procedure. However, as a broad indication, from the filing of the request for arbitration until the issuance of an award, at least one year needs to be calculated.
The court fees depend on the claim amount and are approx. 6% (depending on the actual claim amount-bracket in which your claim falls) in Dubai and 5% in Abu Dhabi. In both of these emirates the court fees are capped at AED 40,000. If an appeal must be filed, the fees are 50% of the first instance fees in Dubai and 3% in Abu Dhabi of the claim amount with a cap of AED 10,000. Other emirates have similar percentages and caps. Often court experts are appointed whose fees usually range between AED 5,000 and AED 15,000. If a claim value is more than AED 500,000, an appeal to the Court of Cassation in Dubai or in Abu Dhabi can be filed. In both emirates the fees are approx. AED 7,000 for the Court of Cassation.
In addition to the above costs, lawyer´s fees arise. Lawyer´s fees again depend on the claim amount but are usually a fix percentage of the claim. It is widespread in the legal market that lawyer charge around 10% of the claim. In current difficult times, we recommend requesting several proposals before deciding.
The procedure can take up to 1.5 years, excluding the execution procedures, which can again be lengthy. For example, if preliminary attachments are in place which can be converted into executionary attachments (that is to say: preliminarily blocked funds on accounts of the judgement- debtor are transferred to the court for payment to the creditor) and / or if other assets easily convertible into cash can be identified, the execution is obviously faster than auctioning off illiquid assets like machinery. If no or only insufficient assets can be identified, a travel ban against a manager of the judgment-debtor can be applied for as a further measure to put more pressure on the judgement-debtor and to safeguard the recovery process.
As always it is essential that you can prove your claim, consider the execution risk (i.e. the risk of not receiving any funds despite a judgment in your company´s favour because the judgement-debtor is either bankrupt or its shareholders and managers have left the country) and seek professional advice to avoid throwing good money after bad.
If you are struggling with cashflow and you have significant outstandings, consider undertaking the above steps to increase your chances of payment from your debtors. The choice of the measures outlined above obviously depends on each individual case and the invoice value. In any case, given the difficult circumstances, good preparation and, even more important, fast action are essential.
Crisis as Opportunity
There is hardly a better time to focus on cost reduction than under the given situation. Maybe your company could change to a cheaper sponsor or could restructure its corporate set-up in a cheaper free zone; or you could outsource PRO services instead of paying your own PRO; you might also want to reduce your work force or streamline salaries and contingent liabilities (as, e.g. end of service benefits). Please contact us if you want us to check your savings potential and their legal requirements and implications.
Daburon & Partners Legal Consultants LLP offers ABC members a discounted fix fee of only AED 500 for a legal notice to be sent by our firm to your company’s debtors. Take this cost-efficient opportunity to increase your chances of debt recovery. Please contact us for the applicable terms and conditions.
If you require any advice on the subjects of this newsletter or on any of the legal topics outlined in the introduction above which are of particular importance during this state of the economy, please do not hesitate to send us an email or give us a call as per the contact details below. As per our fee policy any initial advice is free of charge.
About the Author
Ms Sali Jumah, partner at Daburon & Partners, is a German lawyer and the officially appointed Lawyer of Trust of the Swiss Embassy in Abu Dhabi. She has extensive litigation experience in the UAE, having previously worked as Head of Litigation at one of the largest Emirati litigation firms, advising, drafting and appearing at court expert hearings for a wide range of corporate clients, from construction to shipping and real estate. She pleads and writes in German, Arabic and English.
If you have any questions or require any advice or legal assistance regarding the above, please contact Ms. Sali Jumah (email@example.com).
Daburon & Partners Legal Consultants LLP
Phone: +971 2 6948655
Emergency Direct Mobile Number: +971 50 44 35303
Address: Office 2404, 24th Floor Al Sila Tower, Abu Dhabi Global Market Square, Abu Dhabi, UAE
This article is provided on a complimentary basis as general information. It does not constitute legal advice, and the authors do not assume any legal liability whatsoever.