September 27, 2023 COURT OF FIRST INSTANCE - JUDGMENTS
Claim No: CFI 055/2020
IN THE DUBAI INTERNATIONAL FINANCIAL CENTRE COURTS
IN THE COURT OF FIRST INSTANCE
BETWEEN
NS INVESTMENT LIMITED
Claimant
and
AJAY SETHI
Defendant
Trial : | 20 June 2023 |
---|---|
Counsel : | Mr Karim Mahmoud instructed by Hadef and Partners LLC for the Claimant Mr Salah Mattoo instructed by M.B. Kemp (ME) LLP for the Defendant |
Judgment : | 27 September 2023 |
JUDGMENT OF H.E. DEPUTY CHIEF JUSTICE ALI AL MADHANI
UPON the Claimant’s Part 7 Claim Form dated 28 June 2020 (the “Claim”)
AND UPON reviewing the Order with Reasons of Justice Roger Giles dated 5 April 2022 dismissing the Claimant’s Immediate Judgment Application.
AND UPON hearing counsel for the Claimant and the counsel for the Defendant at the hearing held before me on 20 June 2023 (the “Trial”)
AND UPON reviewing the reviewing the relevant submissions made in the case file and further documents referred to in the course of the Trial
IT IS HEREBY ORDERED THAT:
1. The Claimant’s Claim is dismissed in its entirety.
2. The Loan Agreement entered into between the partied are null and void.
3. The Claimant is not entitled to seek their interest charged on the loan from the Defendant.
4. The Defendant shall be awarded their costs of these proceedings on a standard basis, otherwise costs shall be subject to the assessment of the Registrar, if not agreed between the parties.
Issued By:
Delvin Sumo
Assistant Registrar
Date of issue: 27 September 2023
At: 9am
SCHEDULE OF REASONS
1. This claim is brought entirely on the basis that the Claimant is entitled to be paid the agreed interest rates arising from a loan agreement (the “Loan Agreement”) signed between the Claimant and the Defendant on 2 July 2019 (the “Claim”). The underlying issue is one related to the applicable law governing the loan agreement and whether the interest rate charged on the principal amount is legitimate and enforceable against the Defendant.
2. It is the Claimant’s position that there can be no doubt that the DIFC law is the applicable law that will give effect to the interpretation of the Loan Agreement and considering the Defendant had failed to challenge this issue or submit its pleadings earlier, namely at the CMC hearing, the opportunity to argue it should be refused. As such, the first material issue the Court will deal with relates to the governing law that will apply to the Loan Agreement, the second issue will deal with the validity of the Loan Agreement, and the third issue will assess the enforceability of the interest rate agreed in the Loan Agreement is “legal” as far as the applicable law is concerned.
3. My reasons for dismissing this Claim are three-fold. First, as a result of the Loan Agreement, the Claimant was in breach of the JAFZA Regulations by trading with an individual based onshore in the UAE, i.e., outside of NS Investment’s financial freezone, such conduct is expressly prohibited under Article 14.1(a) of JAFZA Regulations and Article 4.2(a) of the Claimant’s Articles of Association. Second, the Claimant was clearly operating in a capacity of a financial lender, under which it was loaning money and charging interest in the absence of any financial authorisation, approval or grant of exemption from the Central Bank of the UAE (the “CBUAE”) sanctioning those activities. Further, it is not apparent that the Claimant was by any means taking any positive steps to obtain a financial license, approval or an exemption from the CBUAE permitting it to act with the capacity like that of a bank. Third, the interest rate charged in the Loan Agreement is unenforceable against the Defendant, the Claimant cannot benefit from its breaches of the rules and regulations mandated in the JAFZA Regulations, irrespective of whether the agreed value of interest was justified or otherwise.
4. The material issues which give rise to this Claim will be fully set out in this short Judgment, however I summarise below these matters which are relevant to this Claim. I should make it clear that I have carefully reviewed all submissions made at the Trial of this Claim and if I may omit to reference an argument or an authority that 4 of 17 had been relied on this does not mean that is has been overlooked or not considered.
5. The procedural background of this dispute has been set out in Order with Reasons of Justice Roger Giles dated 5 April 2022 (the “Order”) therefore it will not be reiterated in this short schedule of reasoning. However, I accept that none of the current material issues before this Court were matters of dispute before Justice Giles, formerly, the Court was dealing with the Claimant’s immediate judgment application.
The parties
6. NS Investment Limited is a Jebel Ali Free Zone (“JAFZA”) incorporated company set up in compliance with the JAFZA Regulations (hereinafter will be referred to as “NS Investment” or “the Claimant").
7. Mr Ajay Sethi is an Indian national and a resident of the United Arab Emirates.
Submissions
8. I will briefly chronicle the parties’ submissions to demonstrate the way in which the competing contentions have evolved throughout these proceedings. The Claimant submits that this Claim should be granted based on four grounds, the Defendant argues that the debt recovery Claim should not succeed, and the interest rate should be unenforceable.
9. First, the Claimant submits that in the absence of a governing law clause determining the substantive law that will apply to the interpretation of the Loan Agreement, but where is clear evidence that the parties have mutually submitted to the jurisdiction of the DIFC Court, the existence of a jurisdiction clause should compel the conclusion that the DIFC law should govern their dispute.
10. The Defendant refutes these submissions, contending that the JAFZA Regulations should be the starting point when dealing with the first material issue, given the circumstances of this case, namely that the Claimant is an entity incorporated in JAFZA and its licensed activities are regulated by the JAFZA Company Regulations. The Defendant submits that applying the JAFZA Regulations as an express choice of law will inevitably result in a finding that the conduct of the Claimant fell outside the scope of its licensed activities. Such conduct included loaning money, charging exorbitant interest rates by engaging in a prohibited regulated financial transaction 5 of 17 with an individual based outside JAFZA, amounting to a sanctionable breach. Therefore, the Defendant puts forward that the sensible starting position is for the Court to consider in which capacity did the Claimant enter into this loan agreement. I note that in the Defendant’s amended statement of defence, it was pleaded that, in addition to the JAFZA Regulations, it would also be possible and appropriate to apply any UAE laws, including the laws of Dubai, DIFC, Abu Dhabi and other federal jurisdictions, given the broad context of Mr Sethia’s use of NS Investment in inducing the Defendant to invest in a joint venture transaction.
11. Second, the Claimant replies arguing that contrary to the Defendant’s allegations, it was not acting in a capacity of a financial lender or was it carrying out any licensed financial services for its clients, nor it publicly promoted its capabilities of lending money to individuals, hence it rejects that it was subject to the regulatory requirements of the CBUAE. In fact, the Claimant takes an issue with the legal term “capacity” arguing that it has been widened broadly by the Defendant, the Loan Agreement was signed by an authorised representative of the Claimant permitting him to enter into this Loan Agreement. Therefore, if there is an issue to the nature of the transaction because of an existing provision that contravenes the JAFZA Regulations, that issue needs to be determined by the JAFZA registrar of companies who would be best placed to answer that question, not the DIFC Court. The Claimant explains that the Court will need to only determine the question of whether the Claimant had the capacity to enter into a Loan Agreement, and it is the Claimant’s position that NS Investment was competent to do so. The Claimant further stipulates that the Court should not be determining questions of non-DIFC regulations because the regulator has the appropriate tools at their disposal, and they should be determining if the Claimant was in breach of its rules and regulations as a result of the Loan Agreement. The Claimant submits that considering the Loan Agreement was a “one-off” business transaction and there is no justifying reason or any basis requiring it to obtain a financial license from the CBUAE or any other regulator.
12. Third, the Claimant observes that in the context of the DIFC Law of Contract (the “Contract Law”), the interest rate provision contained in the Loan Agreement is entirely justified and should not be construed as disproportionate, this observation is founded on three grounds. First, considering that the Contract Law is silent on the value of interest rate that could be charged or enforced on short-term credit facilities, should compel the conclusion that the Claimant was not obligated to enforce interest 6 of 17 rates proportionate to the Defendant’s legitimate interest, particularly in the absence of any limitation cap. In support of its argument, it relies on the reasoning of Justice Roger Giles of Caterpillar Financial Services (Dubai) Limited -v- Omer Transport LLC (CFI-047-2019) [paragraph 29 and 31]. Secondly, given the fact that the credit facility was lent on a short-term basis, the Claimant was justified in applying “high” interest rate considering this is the usual general practice adopted in the market and by many lenders. Third, the Defendant had previously defaulted in repayment of a loan and to protect the Claimant’s interest it was reasonable to charge high interest rates.
13. The Defendant explains that the interest liabilities arising from the Loan Agreement should be dismissed on three grounds. First, the governing law of the Loan Agreement is regulated pursuant to the Laws of the UAE and Sharia Law thereby a demand of interest on a loan ought to be an invalid obligation. Secondly, the Claimant’s recovery of the accrued interest arising from the loan is apt to be against UAE’s public policy. Thirdly, the Claimant is expressly prohibited by its licensing structure, rules and regulations to carry out any financial activities, therefore where an entity does not have a license to carry out a particular business, it cannot simply undertake a business in the same way that a licensed entity may otherwise be permitted to do so, or mitigate its wrongdoings by pleading that this simply a one-off transaction.
14. Fourth, the Claimant takes an issue with the timing of the governing law defence submitting that the Defendant had ample opportunity to argue their position at the CMC hearing or earlier, given the parties have expressly opted into the DIFC jurisdiction, that should extend to the law that will be applicable to the Loan Agreement notwithstanding the fact that the parties have not agreed a governing law clause.
15. The Defendant submits that a party should not be precluded from raising a wellfounded defence albeit delayed, particularly when the key issue in these proceedings turns primarily on the interpretation of the relevant law on the legitimacy of the interest rates. As such, the argument that the Defendant did not fully challenge this issue earlier is a baseless point. During the Trial, the Defendant accepted that it owed the principal loan amount and acknowledge that failing to repay it would otherwise be construed as an unjust enrichment. However, the Defendant contends that any agreement that is derived from an express prohibition has to be considered as null and void because the Claimant was not licensed or 7 of 17 authorised to enter into a loan agreement with the Defendant or charge interest on the principal amount.
Finding of facts on the disputed issues
16. I now turn to make findings of fact on certain disputed issues. In that context, it is necessary to make observations as to the credibility and reliability of the witnesses of facts. The Court had the benefit of oral testimony of two witness in support of the Claimant’s case and their answers in cross examination. Mr Harsh Shah is the financial manager of NS Investment, and he provided his testimony through a video link. Mr Vinay Kamal Kumar Surana is the current director of NS Investment. It is necessary to have in mind that both witnesses might well have been motivated by desire to assist and support their current employer.
17. However, given, the evidence submitted by both parties, their testimony and cross examination of the factual issues did not add to my consideration one way or another. I have determined my reasoning of the two relevant factual issues on the evidence submitted before me.
Discussions
18. I will summarise some of the provisions contained in the Loan Agreement which will be of relevance to the discussion and analysis part of this decision. The loan borrowed by the Defendant was in the sum of USD 1,298,977, the loan period was to end 60 days after the date of the drawdown, by no later than 3 September 2019, and the interest rate during the loan period was to be charged at 24% per annum. In the event that the loan and loan interest period was not repaid at the end of the loan period, the Defendant agreed that the default interest would be charged at the rate of 35% from 3 September 2019 until payment is full (the “Default Interest Rate”). The Defendant did not repay the loan in accordance with the terms of the Loan Agreement. Upon the expiry of the loan period, the Defendant failed to pay the loan and the interest, however made some partial payments towards the loan and interest but not in full.
19. I will deal briefly with the first material issue relating to the governing law clause. Evidently, the parties have submitted to the DIFC Court’s jurisdiction without agreeing on the substantive law that will apply and give effect to the Loan Agreement. Noting that the Court’s jurisdiction is not disputed in these proceedings, it is my opinion that in the absence of an agreed governing law clause, the DIFC 8 of 17 Law will apply and give effect to the interpretation of the disputed issues arising out of the Loan Agreement. In forming this view, I rely on Article 6 of the JAL, as amended, which stipulates that “…the DIFC Courts shall apply the [DIFC]’s Laws and Regulations, except where parties to the dispute have explicitly agreed that another law shall govern such dispute, provided that such law does not conflict with the public policy and public morals”. In addition, Article 10 of the DIFC Law No.10 of 2005, which states that “…if the parties do not specify the governing law of contract, the contract shall be governed by the law of the DIFC”. It is for those reasons that I will be guided by the laws of the DIFC when determining the material issues in these proceedings.
20. The validity of the Loan Agreement is a matter of dispute between the parties, the Defendant argues that the Claimant did not have the legal capacity to enter into the Loan Agreement and therefore the Court should declare it null and void, thereby preventing the Claimant from enforcing the agreement for the purposes of recovering any damages arising from it. This was challenged by the Claimant, who submitted that it had the contractual capacity to enter into the Loan Agreement evidenced by the appointment of an authorised person with the requisite authority to sign on its behalf. As a result, the contract should be binding on the Defendant and any outstanding damages shall be recoverable.
21. The entry of the Loan Agreement is not denied by the parties, nor is the loan amount disputed. What appears to be at the heart of this dispute is whether the nature of this transaction was beyond the Claimant’s licensed activities, in excess of the legitimate powers conferred on it by statutory provisions and thereby beyond its authority. The starting point when determining whether a transaction entered into by the company is valid and binding on the other contracting party is the legal capacity of the parties to enter into that particular transaction. In the absence of legal capacity, the contract may be considered null and void as stipulated under Article 8 (3) of the Contract Law, “…where a person not of competent legal capacity enters into a contract, the contract is voidable: (a) at the election of that person or his representative; or (b) by order of the Court”. The Claimant’s legal capacity can be determined in large part by the provisions of the Claimant’s Memorandum of Association (the “MOA”), its licensed activities and any statutory provisions that are binding on the Claimant such as the JAFZA Regulations and the CBUAE rules.
22. The question before me is therefore in what capacity did the Claimant enter into the Loan Agreement considering the express prohibitions and restriction contained in 9 of 17 the JAFZA Regulations, its licensing activities and the licensing requirements outlined in CBUAE.
23. The Claimant’s position on the issue of “legal capacity” was quite clear, challenging the Court’s jurisdiction to decide this issue, by stating that it is not for the Court to determine whether its conduct was beyond the statutory provisions of the JAFZA Regulations, but rather is an issue for the JAFZA registrar of companies, who is the most suitable adjudicator to ascertain if the Claimant’s conduct was in breach of its business regulations or otherwise. The Claimant’s reasoning for this was that the Court should not resolve matters which are related to non-DIFC regulations given that the registrar of companies has the necessary tools at its disposal to impose civil and criminal sanctions against the Claimant where non-compliance issues are to be found.
24. I respectfully disagree with this submission, the scope of matters in which the DIFC Court can assess and determine is not only limited to disputes arising out of DIFC rules and regulations, but it also extends to other non-DIFC rules and regulations provided the Court has jurisdiction to do so. As set out above, the parties have voluntarily submitted to the Court’s jurisdiction and having done so, the Court is entitled to assess the information necessary to resolve a dispute between them. I was not pointed to any provisions in the laws of the DIFC or the RDC that must be read subject to some qualifications on the Court’s jurisdiction which supports the Claimant’s submission. The Court has been provided with considerable amount of evidence allowing it to determine whether or not the Claimant was complying within its business regulations, as a result there is no reason why this Court should limit its scope when determining the issue of capacity.
25. As the question of the validity of the Loan Agreement turns on the Claimant’s capacity to enter into it, such an assessment must include the Court’s examination of the activities the Claimant was licensed to undertake, its MoA and the JAFZA Regulations, which the Claimant was bound to comply with during its course of business, and any indication of non-compliance by those provisions would suggest that the Claimant was not legally competent, authorised or licensed to do so.
26. I will turn to the Claimant’s licensed activities authorised to be carried out during its course of business, Article 4.1 of the MoA expressly states that the Claimant was permitted to: (a) carry out the business of General Trading, owning business as permitted by JAFZA namely at the Palm Island, Jumeriah Islands, all or any 10 of 17 properties owned by Nakheel Co. LLC, Emaar Properties, Dubai World, Dubai Holdings or any other properties approved by the Authority, (b) to act as a holding company, (c) to carry out investments in shares and (d) to purchase and sell real estate properties (as approved by the JAFZA rules). Meanwhile, Article 4.2 of the MoA listed several activities that was prohibited from being carried out in the ordinary course of business, including but not limited to: (a) carrying on business with persons residents in the UAE, (b) owning interest in real property located in the UAE and (c) carrying on banking business.
27. A few observations maybe made at this point, the corporate structure of the Claimant was set up as such that it could not trade or transact with residents based in the UAE, and its licensed activities was confined within the JAFZA freezone, based on Article 14.1(a) of the JAFZA Regulations, “an offshore company, which is incorporated under these Regulations, shall not be permitted to: (a) directly carry out any commercial activity in the United Arab Emirates”. As such if the Claimant intended to carry out any commercial activities outside the parameters of its freezone namely with onshore individuals, it was expressly required to obtain further approvals from the JAFZA regulator or an NOC to allow it to carry out those activities, I rely on Article 14.3 JAFZA Regulations which states that “if an offshore company wishes to conduct trade or other business in the Zone or elsewhere in the United Arab Emirates, it must obtain the appropriate license to conduct the trade or other business activity from the competent authorities…”. There is no evidence to suggest that the Claimant was by any means in the process of obtaining further approvals from the relevant authorities to allow it to execute and enter into the Loan Agreement with the Defendant.
28. Therefore, despite the coherent restrictions recorded in the Claimant’s MoA and the JAFZA Regulations, the Claimant nonetheless continued to enter into the Loan Agreement with the Defendant when it was expressly prohibited from carrying out any commercial activity outside its freezone without the required approvals. The defence deployed by the Claimant’s counsel that the loan was only provided because the Defendant insisted on borrowing money from the Claimant on several occasions, is an unpersuasive and a weak defence to mitigate the Claimant’s wrongdoings.
29. Now, the Claimant’s counsel argued that parties are free to agree on the parameters of their contractual relationship and the question of validity of the Loan Agreement should not be doubted unless there is a specific law that prohibits the parties from 11 of 17 doing so. However, even if there is a regulatory breach of the JAFZA Regulations, the legal effect of that breach should not render the Loan Agreement null and void, because it is not a breach of public policy. The effect of the Claimant’s argument is that the Loan Agreement shall supersede any regulatory requirements and when determining the question of validity of the contract the Court should not consider the regulatory provisions which the Claimant was bound to comply with during its course of business.
30. Whilst I agree that the parties are free to formulate their own agreement. I do not agree with the proposition that even if there is a regulatory breach, that should not invalidate the contract. A contract will be considered illegal at its formation if it is incapable of being performed without an illegal or a criminal act, Curragh Investment v Cook [1974] 1 WLR 1559. In the circumstances of this case, the Loan Agreement was formed in breach of the JAFZA regulatory and licensing provisions which the Claimant was compelled to satisfy before making this type of contract, without obtaining such approvals the question of validity sufficiently arose based on the Claimant’s failure to meet its regulatory requirements.
31. As a result, by virtue of Article 8(3) of the Contract Law, the Court is satisfied that the Claimant lacked the legal capacity or competence to enter and conclude that the agreement between the Claimant and the Defendant is tainted with illegality, rendering it null and void.
Financial regulated activity
32. I will move on and deal with the disputed issue related to whether the activity of lending and charging interest on a loan was a financial regulated activity as far as the CBUAE Federal Law is concerned which will allow the Court to make an assessment if the interest rate imposed in the Loan Agreement is legitimate and can be enforced against the Defendant.
33. In principle, the CBUAE Federal Law applies in the UAE, outside of the financial freezone (i.e., DIFC and ADGM) and any financial institutions regulated by the authorities of these freezone (i.e., Dubai Financial Services Authority and the Financial Services Regulator Authority) by virtue of Article 151 of the CBUAE Federal Law. As such, considering that the Claimant is based in JAFZA it would be subject to the scope of this law and its legal framework.
34. The CBUAE Federal Law establishes a system of licensing and regulation based on the type of financial services that is being carried out by the financial institution. There is a general prohibition on carrying out any regulated financial services in or from the UAE without the CBUAE’s sanctioning and licensing such activity. I note that the categories of financial services falling within the remit of the CBUAE are prescribed under Article 65(1)(b) which specifically states that “providing a credit facility of all types” is a licensed financial activity, which can only be carried out by a licensed financial institution. The prohibition of carrying out a licensed financial activity without obtaining a CBUAE license is set out under Article 64 of the CBUAE Federal Law which states that:
(1) a Licensed Financial Activity may only be carried on, in or from with the State, in accordance with the provisions of this decretal law, and the rules and regulations issued in implementation thereof.
promotion of any of the Licensed Financial Activities and financial products may only be carried on, in or from within the State, in accordance with the provisions of this decretal law, and the rules and regulations issued in implementation. The promotion referred to in this item shall mean any form of communication, by any means, aimed at inviting or offering to enter into any transaction or offering to conclude any agreement related to any of the Licensed Financial Activities.”
35. In the context of the Loan Agreement and for the purposes of Article 65(1)(b), it is quite clear that the Claimant was carrying out a financial regulated activity without obtaining the required approvals or licensing from the CBUAE, as such providing a credit facility and charging interest on a loan fell within the definition of a financial activity. Thereby, the Claimant was evidently subject to the licensing rules and regulations contained in the CBUAE Federal Law and in the absence of the CBUAE’s licensing and regulatory approvals, the Claimant was in clear prohibition in lending and providing a credit facility and charging interest
36. I note that the Claimant sought to rely on the defence that providing a credit facility could not have been a financial activity because on no account the Claimant held itself as a financial institution or it promoted that its capabilities of lending money. As such the Loan Agreement was a pure commercial practice offered at the request of the Defendant. During the re-examination of Mr Shah, counsel for the Claimant invited Mr Shah to clarify whether NS Investment had advertised or promoted its activities to be that of a financial lender, capable of lending and charging interest on loans to its customers and if NS Investment had an assessment credit risk and 13 of 17 analysis department. Mr Shah explained that by no means NS Investment held itself publicly as a financial lender, nor was it ever required to establish an assessment credit risk department.
37. The implication of the Claimant’s argument in theory is that given the fact NS Investment did not promote itself as a financial institution nor it promote that it lent and charged interest on loans, it was permitted to behave and act without being required to comply with the regulated rules that would otherwise be imposed on an entity that carried out financial regulated activities. It must be admitted that this is a new argument on me, and it must be dismissed because in practice if entities are free to behave and carry out regulated financial activities without the required licensing and approvals simply because it did not promote that it carried out that financial activity to its clients, suggest that all corporate entities are free to behave and conduct transactions outside its corporate and licensing scope of activities simply because it did not promote that it was a bank.
38. Further, the Claimant’s reliance on the defence that it could not have been acting in a capacity of a financial lender due to a lack of a risk assessment department is quite flawed because the Court’s assessment is not based on whether the Claimant had a credit risk department rather the evaluation is established on whether the relevant activity that had been carried out by the Claimant is a regulated financial activity that fell within the scope of the CBUAEs licensing requirements.
39. Also, I find the lack of a credit risk department argument to be quite inconsistent, on the one hand the Claimant contends that it did not have a credit assessment risk department whilst simultaneously arguing that the interest rate imposed on the Defendant were higher than usual practice because the Defendant had defaulted in a repayment of a loan, which in effect suggest that the Claimant had carried out a risk assessment on the Defendant when it was evaluating whether to lend USD 1,298,977 and the amount of interest rate that should be imposed in the Loan Agreement.
Mitigation of liability and culpability
40. I move on to the Claimant’s mitigating defences deployed with respect to the breaches of the CBUAE licensing rules and the JAFA regulatory rules, it was submitted by the Claimant’s counsel that even if NS Investment were found to have been required to obtain approvals from the relevant authorities, which it denied it did, 14 of 17 the Loan Agreement was a one-off transaction carried out at the request of the Defendant.
41. The problem with the “one-off” transaction defence is that it does not set-off nor does it mitigate the Claimant’s wrongdoings and breaches and it is my opinion that it ought to be dismissed. The Claimant’s conduct being the determinative factor here, clearly reveals that it provided a credit facility to an individual and charged interest rate on the principal amount, this particular activity fell within the scope of a “licensed financial activity” for the purposes of Article 65(1)(a) of the CBUAE Federal Law, not only that but it is a “regulated activity” which required the CBUAE approval and authorisation. As far as the evidence is concerned, there are no proof demonstrating that the Claimant took any steps to remedy this breach, apply for an approval from the relevant authorities to sanction the Claimant to conduct this type of activity, in fact the Claimant brought these proceedings in an attempt to impose the interest rate against the Defendant.
Penal Code
42. I will now move on to address the issue on why the Claimant cannot claim or seek to enforce the interest rate agreed in the Loan Agreement as a consequence of its unlawful conduct. The Claimant contends that lending and charging interest is not illegal and even if the Court finds that the Claimant has been in breach of the JAFZA regulations, it does not compel the conclusion that the Loan Agreement should be rendered null and void.
43. In reply, the Defendant contended that lending money and charging interest is a prohibited practice and considering that the DIFC Courts does not have jurisdiction to adjudicate criminal disputes, the Penal Code shall be the interpretive point with respect to the express prohibition related to lending money and charging interest on credit facilities.
44. I agree with the Defendant’s proposition that the Penal Code should be applicable in these circumstances when making the assessment on the resulting impact on the Loan Agreement particularly when the Court has found that the Claimant lacked the legal capacity to lend money and receive interest. I rely on Article 458 and 459 of the Penal Code which expressly prohibits the entering of an agreement where one individual lends money to another and impose interest rate. As such, an individual or an entity that engages in the practice of lending money on interest is considered to 15 of 17 be a criminal offence and is punishable with a minimum of one year imprisonment and a fine of no less than AED 50,000 as prescribed under Article 458 and Article 459 of the UAE Penal Code.
45. As far as my understanding of the Penal Code, the practice of providing credit facility is an authorised activity permitted to be carried out by licensed banks and regulated financial institutions in the UAE by virtue of the regulations determined by CBUAE. In general, the primary reason for regulating financial activities derives from the notion that if those activities are not monitored by an independent regulator, it would create a huge distortion to the financial market, a poorly regulated financial institutions could have the potential in undermining the stability of the financial system, harm consumers and can damage the prospects for the economy. A financial regulation is important in identifying market failures and risks and putting rules in place to prevent and to safeguard the wider financial system and protect consumers if things go wrong. Thereby, an unlicensed lender is not permitted to carry out a financially regulated activity that is otherwise subject to licensing and regulated requirements and it is unpersuasive to defend its position on the notion that the transaction was a one-off practice conducted at the request of the Defendant.
46. Thereby, considering that the Court is satisfied that the Claimant’s conduct is in contravention of Article 458 of the Penal Code, it may not be necessary to assess whether the interest rate imposed on the Defendant was fairly conscionable or whether it amounted to a punitive interest rate. For the sake of completeness, I will address some of the Claimant’s submissions on this issue very swiftly.
47. The Claimant contended that the Defendant cannot challenge the charging interest rate on the lent money simply because the Defendant had acknowledged his liability to the principal amount of the loan. The Claimant also placed reliance on the fact that the Contract Law does not qualify the lender’s power on the rate that could be imposed in a loan agreement. Finally, the Claimant’s counsel also relied on the premise that the Defendant is a commercially “sophisticated client”, and for the purposes of these proceedings, he should not be treated as a retail client.
48. I find the Claimant’s submission in connection with the Defendant’s liability to the principal amount to be unpersuasive and must be rejected, the two issues are separate albeit the interest rate arises from the Loan Agreement. Further, NS Investment cannot claim or recoup the interest rate from the Defendant in the course 16 of 17 or as a consequence of an unlawful criminal conduct and where it would be unlawful for the Claimant to be obtain a remedy as it has been established earlier.
49. With respect to the classification of the Defendant being a commercially sophisticated client, I was not pointed to any documentary evidence to suggest that this statement was accurate, nor any information were revealed to demonstrate the type of practice and standards that was used to assess and conclude that the Defendant is a “sophisticated client”. As far as the Claimant’s counsel submissions were concerned, it was argued that the Claimant did not have a risk and an analysis department when it lent the loan to the Defendant, so it is a mystery to me how the “sophisticated client” assessment was made. Nonetheless, it is an irrelevant defence for the Claimant to rely on and it does not assist them in mitigating their breach of the JAFZA Regulations and the CBUAE Federal Law.
Conclusion
There was no competent legal capacity to enter into this Loan Agreement. A Court will not enforce an illegal contract or provide remedies that may arise out of it. A contract will be considered illegal at its formation when it is incapable of being performed without an illegal act.
50. It is not a valid claim for the Claimant’s counsel to put forward that the activity of lending money on interest took place on one occasion. That is not acceptable, the activity of lending money and charging interest is a regulated activity whether it was done once or routinely does not alleviate or justify the Claimant’s misconduct. To say that this is a matter for the regulator to determine this question is not enough, because the focal point that the court has to grapple with is the contract has been concluded on an unlawful basis. The Claimant’s attempt in seeking a contractual remedy arising from an unlawful agreement and their Claim shall be dismissed, not because the interest rates imposed in the Loan Agreement is oppressive and could be construed as an illegal penalty in a civilised legal system. Rather the whole activity is illegal and punishable under the Penal Code.
Cost
51. The Claimant invited the Court to make a cost order on an indemnity basis and to be assessed on a detailed basis, however it failed to address the Court on the rationale behind claiming costs on indemnity basis other than the proceedings have drawn longer than anticipated.
52. As set out under RDC 38.7(1), the unsuccessful party will be ordered the costs of the successful party. The Claimant was unsuccessful in this Claim, as such it is just that the Claimant is ordered to pay the costs of the Defendant on a standard basis for the reasons set out above.
53. With respect to being awarded costs on an indemnity basis, I remind myself of the Practice Direction PD5/2014 which mandates certain factors, inter alia, to be taken into account in determining whether costs should be assessed on the indemnity basis as opposed to standard basis being: (i) the circumstances where the facts of the case or the conduct of the paying party are/is such as to take the situation away from the norm, for example where the Court has found deliberate misconduct in breach of a direction of the Court or unreasonable conduct to a high degree in connection with the litigation or (ii) otherwise inappropriate conduct in its wider sense in relation to a paying party’s pre-litigation dealings with the receiving party, or in relation to the commencement or conduct of the litigation itself or (iii) where the court considers the paying party’s conduct to be an abuse of process.
54. The Court takes a strict view in awarding costs on indemnity basis and there is an exceptionally high threshold for the Claimant to demonstrate to the Court that cost should be awarded costs on indemnity basis. I do not think this threshold has been met in this matter.
55. It is on that basis that the Defendant shall be awarded their costs of this Claim on a standard basis, otherwise costs shall be subject to the assessment of the Registrar, if not agreed between the parties.