Non-Enforceability Of The Debtor's Disposition Of His Assets With The Intent Of Removing Them From The General Guarantee

Creditors often find themselves unable to recover their debts from a debtor when, upon initiating enforcement procedures, they discover that the debtor has no assets available for execution. This may contradict the creditor's prior knowledge that the debtor indeed possessed assets that could be subject to enforcement. The simple explanation is that the debtor may have disposed of these assets by means of sale, donation, mortgage, or gift, among others. At this stage, the creditor may think the matter is over and that his rights are lost. However, the legislator has addressed this situation through one of the most prominent principles in civil law: the principle of the general guarantee of creditors.

The principle of the general guarantee of creditors is one of the fundamental pillars of the civil legal system. It establishes that all a debtor's property constitutes a general guarantee for the payment of his debts. Nevertheless, some debtors may attempt to harm their creditors through transactions designed to remove their assets from this guarantee, such as selling or donating them to others to conceal or transfer them.

To counter such fraudulent actions, the UAE legislator has provided a legal remedy known as the action for non-enforceability of the debtor's dispositions, which protects creditors from the debtor's deceit and manipulation.

The legal basis for this action, in addition to Article 391(1) of the UAE Civil Transactions Law (Federal Law No. 5 of 1985) which provides that "The debtor's property shall be a general guarantee for the payment of his debts," is found in Article 396 of the same law, which states:

"If the debtor's debts, whether due or deferred, encompass his property by exceeding or equalling it in value, he shall be prohibited from making any gratuitous disposition that is not binding upon him and is not customary. The creditor may request a judgment declaring that such disposition is unenforceable against him."

In the same context, the higher courts in the United Arab Emirates particularly the Dubai Court of Cassation have established judicial principles stating that the general security afforded to a creditor extends to all the debtor's assets as a guarantee for the fulfilment of all debts. Accordingly, if the debtor's liabilities are equal to or exceed his assets, he may not dispose of his property through a gratuitous or non-binding or unusual transaction, and the creditor may request a judgment declaring such a transaction unenforceable against him

For the action to be admissible, the creditor must have an existing and specific debt owed by the debtor prior to the impugned disposition, whether the debt is due or deferred. If the debt arises after the disposition, the creditor cannot challenge it by means of a non-enforceability action.

Moreover, there must be a legal disposition transferring ownership or creating an obligation such as a sale, donation, mortgage, or transfer of property since mere material acts do not constitute dispositions that can be challenged.

To strengthen the case, the creditor should present supporting evidence or circumstantial indicators showing that the purpose of the disposition was to remove the assets from the general guarantee of creditors. Such indicators may include:

• The debtor's sale of assets at an unreasonably low price.
• Disposing of all or most of his assets.
• Transferring property to his spouse or relatives by way of gift or without consideration.

The effect of a judgment declaring the debtor's disposition unenforceable is that it does not bind the creditor who brought the action. The creditor may then pursue the asset subject to the disposition to satisfy his claim as though the disposition had never occurred, thereby restoring the asset to the general guarantee.

In conclusion, the action for non-enforceability of the debtor's dispositions serves as an effective tool to protect creditors from fraudulent acts committed by debtors seeking to conceal or dissipate their assets. The UAE legislator has wisely adopted this mechanism, striking a balance between the protection of creditors' rights and the preservation of the principle of freedom of contract.

Thus, the debtor remains accountable for any actions that infringe upon the general guarantee of his creditors, ensuring that justice is upheld on the foundation of good faith and the prohibition of harm to others.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.