Reciprocating territories: Bridging the gap

Following recognition as a reciprocating territory by the Indian government, UAE banks begin to prepare for legal actions against defaulters in India. Sachin Kerur, Head of Middle East Region at Reed Smith, explains how this new move will impact the banking sector

In January 2020, the Indian Ministry of Law and Justice published an official notification recognising the United Arab Emirates as a ‘reciprocating territory’ for the purposes of enforcement of foreign judgments in India. This development potentially marks the dawn of a new era in the “golden age” of UAE-India trade, commercial, political and legal cooperation. At the same time, it has the potential to open floodgates of litigation and execution action against credit defaulters that have assets in India or have fled to India to avoid enforcement.

Banks in the UAE are now said to be in good stead to pursue long-pending claims against their customers from whom financial recovery was, until now, a bleak prospect.

What does the notification entail?

The 2020 notification (the Notification) provides that civil judgments issued by superior courts in the UAE are going to be directly enforceable in India, much like a judgement issued by an Indian court. “Superior courts” for this purpose are identified as the UAE Federal Courts, the local Emirate Courts as well as the courts of the Abu Dhabi Global Market and the Dubai International Financial Centre.

Important exceptions to this enforceability principle are judgments from the UAE criminal courts and those relating to taxation or administrative charges and penalties.

Why is it so important?

It is no secret that Indian and Indian-led businesses have a huge presence in the UAE—indeed the Indian expat population represents the largest foreign community in the UAE. Some of the biggest players in the real estate, manufacturing, infrastructure and retail sectors in the UAE are those of Indian origin. Many of these businesses have obtained credit facilities from UAE banks or UAE branches of foreign banks on the back of assets located in other jurisdictions including India and guarantees issued by Indian corporates or individuals.

PHOTO CREDIT: Oleksii Liskonihn/iStock

“BANKS IN THE UAE ARE NOW SAID TO BE IN GOOD STEAD TO PURSUE LONG-PENDING CLAIMS AGAINST THEIR CUSTOMERS FROM WHOM FINANCIAL RECOVERY WAS, UNTIL NOW, A BLEAK PROSPECT.”

— Sachin Kerur

It has historically been next to impossible for a creditor to enforce a debt obligation against Indian assets or Indian individuals who have, following a default, fled home to India. Prior to the Notification, many Indian obligors exploited the ‘non-reciprocating’ territory status of the UAE to delay or avoid altogether the enforcement of a UAE court judgement. The only option for a bank in such a scenario was to initiate fresh civil proceedings in the Indian courts, seeking an Indian judgement which could then be enforced against the debtor’s Indian assets. The immense cost, time and inconvenience of litigating in India would usually deter banks from undertaking this route.

This is expected to change with the issuance of the Notification. The level of change is something only time will tell, once there are some concrete legal precedents in place under the new regime. It should be noted that there are still grave concerns around the ultimate feasibility of bringing enforcement proceedings in India due to the lengthy delays typical of Indian court procedures.

How UAE banks need to position themselves?

It has been reported that quite a few UAE banks are considering commencement of execution action against defaulters in India as well as, in some cases, knocking on the doors of India’s insolvency court, the National Company Law Tribunal (NCLT). Obtaining expert advice from Indian legal practitioners is essential in this respect.

Banks with Indian exposure on their books need to conduct internal audits to identify the relevant defaulters and their current outstandings. Investigations also need to be made into the whereabouts of any individual defaulters and whether they have any valuable assets in India against which attachment can be sought. If there are existing UAE court judgments against any of these creditors, applications for the recognition and enforcement of such judgments in India will likely be the next course of action.

Formulating future credit and risk strategies

The ultimate enforceability of a debt obligation against a borrower and its assets has immense bearing on a bank’s credit risk assessment. The idea that Indian defaulters will no longer be able to find a safe haven in their home country is likely to have a positive impact on UAE banks’ risk profiling of transactions with Indian counterparties. This will also perhaps facilitate the acceptance of guarantees by Indian companies and natural persons by banks in the UAE.

It would be interesting to see how third-party litigation funders approach the change in the legal enforcement regime. One would expect that they would be more keen to fund litigation and enforcement proceedings against Indian businesses. If this happens, it will provide an additional comfort to UAE-based lenders.

All is well that ends well?

While it remains to be seen how Indian court practice in relation to enforcement of UAE judgments evolves, the Notification should boost UAE banks’ confidence in Indian credit. Improved enforceability prospects also means that more UAE-centred disputes involving Indian counterparties are likely to be litigated in the UAE courts. We would expect to see more banks opting for dispute resolution clauses in credit agreements in favour of UAE courts rather than, for instance the courts of England or arbitration provisions.

All in all, the development brought about by the Notification justifies a re-visiting of transactional risk and litigation strategies adopted by UAE banks in respect of its existing and potential Indian customers.

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Institutions can nominate themselves in all relevant categories as deemed appropriate, provided the submission is sent in before the deadline, and in the required format. Award submissions will be critically evaluated and mutually analysed, utilising market knowledge, marketing materials, research and relevant company financial statements, before a shortlist is made. The editorial team will then create the shortlist based on those submissions, which will be announced on the CPI Financial website.

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AWARD CATEGORIES

Leaders in Banking and Finance 1. Best Bank in the Middle East 2. Lifetime Achievement Award 3. Banker of the Year 4. Outstanding Contribution to Banking & Finance 5. Leadership Excellence Award

Financial Services 6. Best Retail Bank 7. Best Islamic Bank 8. Best Corporate Bank 9. Best Commercial Bank 10. Best SME Bank 11. Best Insurance Provider 12. Best Takaful Provider 13. Best Private Bank 14. Best Trade Finance Institution 15. Best Bank for Sustainable Financing 16. Best CSR Programme 17. Fastest Growing Bank 18. Capital Market Transaction of the Year 19. Best Marketing Campaign 20. Best Brand Positioning

Investment 21. Best Investment Bank (Conventional) 22. Best Investment Bank (Islamic) 23. Best REIT Manager 24. Best Wealth Management Firm 25. Best Private Equity Firm 26. Best Project Finance Institution 27. Best Brokerage Solutions Provider 28. Best Investment Management Firm

Service Providers for the Banking Sector 29. Best Audit Firm 30. Best Accountancy Firm 31. Best Law Firm 32. Best Management Consultancy 33. Best Research & Consultancy Firm 34. Best Ratings Agency

Technology 35. Best Digital Bank (Neobank)* 36. Best Mobile Banking Solution 37. Best Online Banking Service 38. Best Innovation in Digital Banking 39. Best User-Experience 40. Best Digital Transformation 41. Best Cybersecurity Implementation 42. Best Payment Solutions Provider 43. Best Cybersecurity Provider 44. Best Communications Infrastructure Provider 45. Best Core Banking Service Provider 46. Best Digital Banking Innovation Provider 47. Special Achievement in Digital Innovation

*Our interpretation of a digital bank is a bank that operates exclusively on a 100% digital and mobile platform with no physical branches—which is now often referred to as a Neobank. A digital bank is NOT a bank that offers digital and mobile solutions in addition to its traditional banking services.

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