English Court Enforces a Dubai Court Judgment Against UAE National and Holds that Liability Cannot be Evaded by Transferring Assets to Family

June 12, 2023

Key Takeaways

• The High Court in England and Wales has held that a judgment obtained in the onshore Dubai Courts in favour of Emirates NBD Bank to enforce a personal guarantee against a UAE national is enforceable in England and Wales allowing the bank to recover against the individual’s assets in the UK. This judgment follows the judgment in Lenkor¹ which held that a UAE court judgment was enforceable in England and Wales. This may pave the way for further enforcement actions against assets of foreign nationals in the UK, in particular, UAE nationals, given the high prevalence of personal guarantees in the banking sector in the region to secure loans and borrowings for corporates.

• The case demonstrates increased reciprocity and legal co-operation between the courts in the two jurisdictions. Although an English Court judgment has yet to be enforced in UAE’s onshore courts, the UAE Ministry of Justice published a letter in September 2022 requesting the onshore Dubai courts to take note of the Lenkor judgment and reciprocate with enforcement of future English Court judgments.

• This also follows recent changes in the UAE laws relating to personal guarantees which may make it harder to enforce personal guarantees in the UAE due to the requirement that lending must be provided against ‘adequate security’. The Central Bank of the UAE issued a Circular², whereby article 121 bis requires banks to take the necessary or adequate security from personal individuals or sole proprietorship before advancing banking facilities and a personal guarantee on its own is no longer sufficient. The provisions of this Circular have been deemed of public order meaning its requirements cannot be waived by the banks.

• The Abu Dhabi Courts have recently adopted an approach in favour of personal guarantors by suspending litigation and/or enforcement measures against them where adequate security did not accompany such personal guarantees. This is likely to lead to a significant shift in the banking and lending practices in the region which have historically been a relationships-based practice.

• The Court also held that transfers made by the UAE national to his son of certain property and monies in the UK contravened section 423 of the Insolvency Act 1986 and was therefore a transaction defrauding creditors and had been entered into for the "prohibited purpose" of putting the assets beyond the reach of his creditors, including Emirates NBD Bank. The Court of Appeal recently considered the scope of section 423 in more depth in the case of Invest Bank PSC v El-Husseini and others [2023] EWCA Civ 555, you can read about that decision in Dechert’s OnPoint here.

• The Court dismissed Emirates NBD Bank's argument that the transfer of property and monies to his son created a resulting trust in favour of the UAE national and that he retained the beneficial ownership in the assets on the basis that there was insufficient evidence to rebut the presumption of advancement which applies to transfers between a parent and a child.

Background

Rashed Abdulaziz Almakhawi (“Mr Almakhawi”), a UAE national, was the sole beneficial owner (until his shareholding was diluted to 51%) and one of three directors of System Construct Dubai, LLC (“System Construct Dubai” or the “Company”) which entered insolvent liquidation on 28 September 2014. Mr Almakhawi, along with the other directors (the “Guarantors”), provided personal guarantees to support the Company’s borrowings from Emirates NBD Bank PJSC (“Emirates NBD Bank”). Following the Company’s liquidation, Emirates NBD Bank commenced proceedings in the Dubai Courts against the Company and the Guarantors (the “Dubai Proceedings”) for recovery of outstanding amounts and obtained judgment in favour from the Dubai Court of First Instance. This was unsuccessfully appealed at the Court of Appeal and then a further appeal at the Dubai Court of Cassation (highest court) was also unsuccessful and the Court ordered the Guarantors to pay c.AED 211.3m (c.£47.5m) plus interest (the “Dubai Judgment”).

What is a Personal Guarantee?

A personal guarantee is a legal obligation whereby an individual, usually a shareholder or director, agrees to be personally liable to the lender for debts of the company debtor in the event of default (including insolvency).

Under the UAE Civil Code, Article 1057 defines guarantees as a suretyship with the joining of the liability of a person called the surety (the guarantor) with the liability of the obligor (the principal debtor) in the performance of his obligations. It distinguishes between a personal guarantee and a personal financial guarantee.

Following limited recoveries enforcing the Dubai Judgment, Emirates NBD Bank sought recognition of the Dubai Judgment in England and Wales by way of a common law action on the judgment. Further, Emirates NBD Bank sought relief against a London property and certain monies that Mr Almakhawi had transferred to his son (the “Transfers”) on the grounds that such Transfers: (i) created a resulting trust in favour of Mr Almakhawi who retained the beneficial title to the transferred assets; or alternatively (ii) the Transfers were transactions defrauding creditors pursuant to section 423 of the Insolvency Act 1986 (“s.423 IA”).

Mr Almakhawi contended that the Dubai Judgment had been obtained as a result of a breach of natural justice due to certain erroneous references to outdated UAE law that had been contained in two expert reports that formed part of the evidence during the Dubai Proceedings.

He further contended that the Transfers represented gifts principally for the purposes of succession or inheritance planning and were not made for one of the prohibited purposes under s.423 IA.

Judgment:

Enforceability of the Dubai Judgment

The Court held that the Dubai Judgment was enforceable as a matter of common law under English law. A foreign judgment in personam given by the court of a foreign country with jurisdiction to give the judgment may be enforced as a claim or counterclaim for the amount due under it if the judgment is for a debt or a definite sum of money and is final and conclusive. There are certain exceptions to this principle, including where the proceedings in which the judgment was obtained were opposed to natural justice. Natural justice relates to procedural fairness and proof of a mere irregularity in a foreign court is not enough. Availability of a remedy in the foreign court is also a relevant factor in determining whether substantial injustice occurred.

In this instance, the Court held that the erroneous references to outdated law in the expert reports were not sufficient to breach natural justice. Mr Almakhawi had multiple opportunities to object to the Dubai court’s reliance on the reports or to argue that the erroneous references rendered the reports null and void but did not do so. Accordingly, the Court declared that the Dubai Judgment is enforceable in England and Wales and entered a monetary judgment against Mr Almakhawi.

Transfers

Resulting Trust

The Transfers were gratuitous and the general rule is that a gratuitous transfer is rebuttably presumed not to be a gift³. This presumption is “easily rebutted⁴” by evidence and by the counter-presumption of advancement which applies to transfers between parent and child, even as was the case here, where the child is not a minor⁵. The focus is on the intention of the transferor and acts and declarations antecedent to, contemporaneous with or immediately after (so as to constitute part of the same transaction) may be relied upon to rebut or support the presumptions.

The Court held that there was insufficient evidence to rebut the presumption of advancement. The transfer of the property in particular, had written evidence from advisers as well as lawyers from the outset which showed Mr Almakhawi’s intention that the property was intended to be a gift and a deed of gift had been entered into, albeit it post-dated the transfer of the property. Accordingly, the Court dismissed this ground for relief.

Section 423 of the Insolvency Act 1986

s. 423 Insolvency Act 1986 - Transactions at an Undervalue

Requirements:

A person makes a gift to the other person or otherwise enters into a transaction with the other on terms that provide no consideration.
Court is satisfied that such transaction was entered into by him for the purpose of:
- putting the assets beyond the reach of a person making or may make a claim against him; or
- otherwise prejudicing the interests of such a person in relation to a claim.
Court may make an order as it thinks fit to restore the position to what it would have been if the transaction had not been entered into and protect the interests of the persons who are victims of the transaction.

The Transfers were on terms that provided no consideration and the critical question, therefore, was whether the Transfers were made for a "prohibited purpose".

This requires proof of a subjective, positive intention on Mr Almakhawi to achieve a "prohibited purpose" which may be, and very often is, inferred from the circumstances. The "prohibited purpose" does not need to be the only or dominant purpose, however, it has to be a real substantial purpose and it is not sufficient that the consequence, by product or result of the transaction is to put the assets beyond the reach of creditors. It is possible that “the motive to defeat creditors and the motive to secure family protection will co-exist in such a way that even the transferor himself may be unable to say what was uppermost in his mind.”

The Court held that while one of the purposes for the Transfers was preservation of assets for his children and succession planning, another purpose (and not merely consequence) was a "prohibited purpose" (i.e., to put the assets beyond the reach of, and to prejudice the interests of, Emirates NBD Bank and his other creditors).

The principle factors for determining this were timing of the Transfers and certain other divestments by Mr Almakhawi around the same time. These all occurred after the Dubai Court of First Instance had entered a judgment against him and the Transfers, in particular, took place after his appeals failed. Therefore, the Court held that the Transfers were “responsive and reactive to, and that I infer were motivated by, defeats and reversals in the Dubai proceedings”. The Court held that there was every reason that Mr Almakhawi both foresaw and desired that the effect of the Transfers would be to put assets beyond the reach of his creditors. There was also unsatisfactory and contradictory evidence relating to the circumstances of the Transfers which were further factors the Court considered in deciding against Mr Almakhawi.

The Court of Appeal recently considered the scope of Section 423 in more depth, particularly as it applies to assets held through corporate structures, in the case of Invest Bank PSC v El-Husseini and others [2023] EWCA Civ 555, you can read about that decision in Dechert’s OnPoint here.