According to US Bank, cashflow is the reason a staggering 82 percent of small businesses fail.
So, while the product might be sound, the service seamless, the route to market established, if there isn’t enough money flowing into the business in a timely manner, no organisation can pay its employees, its suppliers or its operational expenses. Every business must do all three to stay alive.
The bottom line is that a company might have a million bucks of business on the books, but if none of it is being handed over, it’s going to cause problems.
Rita Jansen, partner at Ince & Co, and member of The Dubai Business Women Council (DBWC) addressed the issue at a recent session of the body that focused on helping SMEs prevent bankruptcy – and then shared her insights with Arabian Business.
How big an issue is not getting paid for work done in the UAE?
Debt recovery in the UAE can sometimes be challenging. According to the Euler Hermes Collection Complexity analysis, UAE and Saudi Arabia rank as the most difficult countries in the world for debt collection.
This particularly affects SMEs both as debtors and as creditors. Mostly this relates to the vicious circle caused by the non-payment for the services carried out by SME customers. The payment terms vary from 30 to 60 days, but are not always observed by the debtors. The actual number of days it takes the defaulting party to make a payment varies from one industry to another.
How can small companies and individuals enforce payment terms here? What kinds of remedies are available?
There are a number of remedies available to companies and individuals. As a first step, it is worth approaching a defaulting debtor directly with a written demand to make a payment immediately with clear indication that if payment is not made within a certain number of days (seven to 14 days is usually a sufficient period), then the creditor will start an official enforcement process via courts or arbitration.
If there is no positive reply to this demand, then the next step could be to issue a legal notice via notary public. This step does not give significant advantage over the first step but can serve as an indication of the seriousness of the creditor’s intentions to progress the matter either through court or arbitration (as the contract stipulates).
As both judicial and arbitration proceedings can be a costly endeavour, if the parties can avoid taking these measures, they would save a lot. For this reason, the option of filing a complaint with the Dubai Department for Economic Development, or referring the dispute for amicable resolution with the Dubai Chamber of Commerce (if one of the parties is a member), prior to submitting a claim to court or arbitration may lead to a resolution of the dispute.
This is because the mediation and reconciliation processes which are run by official bodies in Dubai provide dispute resolution services at a relatively low cost to small businesses and individuals.
Since 2016, creditors also have the option to serve a demand on the debtor under the Bankruptcy Law – if the debt exceeds AED100,000 and remains outstanding for over 30 days after the due date. A debtor’s failure to pay after receiving such a demand entitles the creditor to start bankruptcy proceedings against the debtor.
What would you say to a supplier or SME who thinks, “Well, that’s a big company, I’m never going to win that fight”…?
I can tell from my experience that it is not true. Just because you are up against a big company does not mean that your case is hopeless. It just means that you have to be smarter in how you approach your claim. The problem is that if you go directly to court, you can indeed be dragged into a battle that will cost you a lot of money and even if you win the case, it may drain you financially and emotionally.
What strategies can be put in place to ensure better payment cycles to ensure non-payment doesn’t even become an issue?
Suppliers can look to incorporate terms in their contracts that may help, such was demanding full or partial payment upfront before providing any goods or services. This would be particularly relevant when transacting with someone for the first time.
Generally speaking, it is worth doing due diligence on any counterparty that you have never worked with before. This may help you to assess whether it is someone you want to do business with and also gather some essential information which can come in useful if things do get sour.
It is important to ensure that contractual terms are as certain as can be on such issues as the timing and delivery of goods/services as well as timing and method of payment. The more thoroughly your contract is drafted, the less disputes are likely to arise regarding the interpretation of it.
We still see SMEs relying on cheques as a means of security, which can work to some extent. But importantly the UAE law in relation to cheques is evolving and recently the Dubai Attorney General issued an order stating that minor cheque offences (below AED200,000) shall now be subject to financial penalty only and not a prison sentence as long as the debtor’s actions weren’t fraudulent.
How easy are the DIFC courts for settlement? And are they advisable for what may seem like small sums?
The DIFC Courts have a special court for small claims – the Small Claims Tribunal (SCT). The SCT has jurisdiction over certain disputes in the DIFC, but even the parties that are not based in the DIFC can refer their disputes to it as long as the amount in dispute is less than AED1m. The court fees at the SCT are set at a lower level to enable any SME or individual to have access to justice.
The dispute resolution mechanism at the SCT is simplified and proceeds without the need for lawyers, which helps to level the playing field in some circumstances and to save on legal fees. According to SCT’s statistics, 88 percent of cases are resolved in less than four weeks after successful service. I am not saying that this would be a suitable forum for everyone, but it is certainly worth considering it at the stage of drafting the contract.
Formed in 2002, the Dubai Business Women Council (DBWC) is the official representative organisation for businesswomen, both professionals and entrepreneurs, in Dubai.
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