A Dubai civil court has ruled that a debt waiver exchanged between two companies is unenforceable after finding it was intended to frustrate a third company’s efforts to recover money it was owed.
The court held that the waiver was issued without consideration and at a time when enforcement proceedings were already under way, indicating a deliberate attempt to deprive creditors of their legal protections.
The case involved three companies. The claimant held a final and enforceable judgment ordering one company to pay Dh1.87 million.
That company, in turn, was owed more than Dh47 million by a second firm. To secure payment, the claimant sought to attach the debtor’s funds held by the second company, a common legal measure to prevent assets from being transferred beyond reach.
The court initially approved the attachment and ordered the company holding the funds to declare the amount owed. The company, however, failed to comply.
Subsequently, the original debtor issued a written declaration waiving its Dh47 million claim against the second company without receiving anything in return. The waiver effectively halted the claimant’s enforcement proceedings.
The claimant returned to court, arguing that the waiver was a legal fiction designed to undermine creditors, and sought a ruling declaring it unenforceable and ordering payment of the outstanding debt.
The second company challenged the case on procedural grounds, claiming it involved enforcement issues beyond the civil court’s jurisdiction. The court rejected this argument, ruling that the dispute concerned the substance of the transaction itself, not merely enforcement mechanics.
After reviewing the evidence, the court found that the claimant’s debt predated the waiver, that the debtor failed to prove it had sufficient assets to meet its obligations, and that the timing and nature of the waiver showed clear intent to cause harm.
The court noted that under the law, a debtor who is insolvent or rendered insolvent by its actions, cannot dispose of assets in a manner that diminishes creditors’ guarantees, whether through gifts or ostensibly commercial arrangements, when bad faith is established.
Judges also cited inconsistencies in the record, noting that the company holding the funds initially denied owing any amount, only to later accept a waiver of a debt it claimed did not exist. This contradiction, the court said, pointed to coordination between the two companies and stripped the transaction of legal protection.
The court ruled that the waiver was ineffective against the claimant, restoring the debt to the debtor’s asset pool and allowing enforcement to proceed.
It ordered the company holding the funds to pay Dh1.8 million, plus statutory interest of five percent from the date of judicial demand until full settlement, and to shoulder court costs and legal fees.
