Court Strikes Down Debt Waiver, Orders Third Party to Pay Creditor

A Dubai civil court has invalidated a Dh47 million debt waiver between two companies, ruling that it was engineered to obstruct a third company’s efforts to recover money owed under a final judgment.

 

After examining the record, the court held that the waiver lacked consideration and was executed at a time when enforcement proceedings were already under way — a combination that, it said, clearly indicated an attempt to deprive creditors of their legal rights.

 

The dispute involved three corporate entities. The claimant held a final and enforceable judgment directing one company to pay Dh1.87 million. That judgment debtor, in turn, had a receivable exceeding Dh47 million from a second company. To safeguard recovery, the claimant sought to attach the funds payable by the second company, a standard enforcement measure designed to prevent assets from being placed beyond reach.

 

The court initially granted the attachment and ordered the company holding the funds to disclose the amounts due. Instead of complying, the company refused to make the declaration.

 

In a subsequent move that halted enforcement, the judgment debtor issued a written declaration waiving its entire Dh47 million claim against the second company, without receiving any consideration in return. The waiver effectively neutralised the claimant’s enforcement action.

 

Contending that the waiver was a sham transaction intended solely to undermine creditors, the claimant returned to court seeking a declaration that the waiver was unenforceable and an order compelling payment of the outstanding sums.

 

The second company objected on procedural grounds, arguing that the dispute related to enforcement and therefore fell outside the civil court’s jurisdiction. Judges dismissed that argument, holding that the challenge went to the validity and substance of the transaction itself, not merely to enforcement mechanics.

 

On the merits, the court found that the claimant’s debt predated the waiver, that the debtor had failed to demonstrate the existence of other visible assets sufficient to satisfy its liabilities, and that both the timing and nature of the waiver revealed a clear intent to cause harm.

 

The judgment underscored that, under the law, an insolvent debtor — or one rendered insolvent by its own acts — may not dispose of assets in a manner that diminishes the collective guarantee owed to creditors, whether through gratuitous transfers or ostensibly commercial arrangements, once bad faith is established.

 

Judges also highlighted contradictions in the evidence. The company holding the funds had initially denied owing any sums, yet later accepted a waiver of a debt it claimed did not exist. That inconsistency, the court said, pointed to coordination between the two companies and stripped the transaction of any legal protection.

 

Taken together, the court ruled that the legal threshold for declaring the waiver ineffective against the claimant had been met. The waived debt was restored to the debtor’s asset pool, allowing enforcement to proceed.

 

The court ordered the company holding the funds to pay Dh1.8 million, together with statutory interest at five per cent from the date of judicial demand until full settlement, and to bear court costs and legal fees.

 

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