The Implications of Personal Guarantee in the UAE

19 Apr 2022

The personal guarantee is an individual’s legal promise to reimburse a credit delivered to a business for which they serve as a managerial or a partner. If the company is incapable of repaying the debt, the person will accept the responsibility to pay the balance. In the UAE, with the continuous growth of the trade, there is an increase of transactions that involves a secured debt recovery mechanism, and the UAE’s laws are not silent about this topic; therefore, Federal Law Number 5 of 1985 (the Civil Code) in article 1057 defines guarantees as a suretyship with the connection of the obligation of a person called the guarantor with the liability of the main debtor in the performance of his obligations. The implications of a personal guarantee are different if the debt is civil (1) or if the debt is commercial (2).


1. Implications of Personal Guarantee according to the Civil Transaction Law

The Civil code states about the guarantees that:

  • The obligation of a guarantor is subsidiary to the responsibility of the principal debtor.
  • In case of bankruptcy of the debtor, the creditor must demonstrate its debt in the bankruptcy, failing to lose its right to claim against the guarantor to the extent of any amounts that creditor might receive had it shown such debt in the bankruptcy.
  • Once the debt is paid, the creditor shall give the guarantor all necessary documents to allow the guarantor to employ its right of recourse against the principal debtor.

The difference between specific guarantees and all monies guarantees is essential. Under an all-monies guarantee, a guarantor promises any and all duties from the main debtor to the creditor, whether existing at the time of the guarantee or appearing in the time to come. Creditors should be aware that guarantees for ‘all monies’ may face issues upon enforcement in the UAE. Article 1061 of the Civil Code stated that guarantees shall be delivered with respect to a specified debt or a thing certain in amount. While there have been decisions in the recent past where the UAE Courts have recognized and apply all monies guarantees, the application of such judgments is restricted.

Article 1068 of the Federal Law, Number 5 of 1985 on the Civil Transactions Law, lays down in paragraph 1 stated that guarantee by self- constrains the guarantor to present the guaranteed in the stated time when the demand of the guaranteed person if he/she did not, the judge can deliver its decision with an intimidating fine and the judge can release him from there if he/she demonstrated that he/she was incapable of bringing him/her.

Furthermore, paragraph 2 established that if the guarantor assumed to pay a specified amount as a penal condition in the case of no-presenting of the guaranteed, he/she must be forced to pay that sum and the judge can release him/her from all or some of that amount if he/she realized what justifies that. Article 1068 states  to punish the guarantor if he does not bring the debtor in front of the judge in case of a disagreement between the parties.

On the other hand, all creditors shall assume the essential due diligence before executing a guarantee in respect of the nature of the guarantor’s assets. The UAE law does not recognize the notion of ‘self-help remedies’. As such, guarantees in the UAE shall be enforced through a process led by the UAE courts. The creditor will need an attachment order, either previous to beginning substantive legal proceedings or once a final judgment has been obtained, to recover the monies due under guarantee. To increase the attachment process’s convenience, creditors should conduct the required due diligence and get all details of the guarantors’ unencumbered assets, counting but not restricted to funds in bank accounts, real estate properties, immoveable properties, vehicles, shares/stocks, etc. The benefit of identifying the assets is that it would assist the court in a reasonable issuance of the attachment order. Such an order will stop the sale of such assets pending the final judgment. Suppose a lender is incapable of obtaining the relevant details in respect of the guarantor’s assets. In that case, the attachment process can be drawn out until the court can ascertain the guarantor’s assets’ extent. While the final result is the same, the process is more cumbersome and time-consuming when the guarantor’s assets are not distinguishable. Article 1070 lays down that the guarantee is released from his responsibility if he brings the debtor to the creditor or accomplishes the suretyship’s obligation object. Additionally, the guarantee must also remove by the death of the guaranteed debtor. Still, in case of death of the person in whose favor the surety is given, this person’s heirs are allowed to ask the surety.

Article 1078 of the Civil Code states that the creditor has the right to file a case against both principal debtor and guarantor covering the total debt. It is a creditor’s option to charge either one or both of them, based upon the total claim amount. Article 1092 of the Civil Code lays down that ‘If a debt is due, the creditor can claim the debt within six months from the date on which it fell due, and otherwise the guarantor must be considered to have been discharged.’ The Supreme Court in Abu Dhabi has clarified Article 1092 to enforced guarantees concerning civil transactions only and has found that period does not apply to guarantees in commercial transactions, mainly where the grantees are banks and financial institutions. In Commercial transactions, the Supreme Court has stated that the applicable period is ten (10) years. In Dubai, the Court of Cassation contemplates a guarantee a civil obligation. It has ruled that Article 1092 applies to all guarantees, and a claim against a guarantor shall be started within six (6) months from the due date of payment.

Article 1099 of the Civil Code lays down that guarantee must expire in the subsequent cases:

  • When the debt payment was made
  • Upon degradation of the property in the hands of the guaranteed by a force majeure previously, a prerogative is made
  • When the guaranteed die.
  • Upon discharging a liability creditor of the guaranty or a debtor of the deb
  • Bringing the secured debtor at the place of delivery after expiration of the term fixed even if the suretyship’s beneficiary refuses to take delivery unless unduly prevented
  • Bringing the secured debtor before the term’s end, and there is no harm to the beneficiary of the suretyship from taking delivery thereof
  • If the secured debtor delivers himself voluntarily.

Additionally, as per article 1101, if there is a contract between the guarantor, debtor, and creditor on the part of the debt and the debt is settled, the remaining debt will be surrendered automatically.


2. Implications of Personal guarantee according to the Commercial Transactions Law

Indeed, enter into a suretyship is more a civil matter than a commercial activity, because of that, the Civil Transaction Law regulates it, nevertheless, if the suretyship is delivered in favor of a commercial debt or if the surety is a trader and has an interest in guaranteeing the underlying debt then it should be contemplated a commercial guarantee in nature, and it will be necessary to apply the provisions of the Commercial Law.

The commercial Transaction Law in article 73 lays down that ‘a guarantee must be commercial if the guarantor has guaranteed a debt which is considered in respect to the debtor to be commercial unless then provided for by law or agreement, or if the guarantor is a buyer and has an interest in undertaking the debt’. To issue a suretyship by a company, the company’s manager must have the authority to sign a suretyship that binds the business. The manager that signs must be expressly and duly allowed to sign the suretyship, whether under the company’s by-laws or in a shareholder’s resolution.