The recovery process of a defaulted unsecured Bank Loan in a Middle East business

This is the second part of the main story that describes roughly how a Middle East family business that is solely owned and managed by expats secures corporate funding from local banks. Such business setups have a local sponsor who may or may not be part of the business process. They simply take a monthly or an annual fee to be a 51% partner on paper.

Now that the bank has given the unsecured loan, they pretty much need to hope and pray that the company performs as per the expectations of the bank. In some instances, loans aren’t paid timely and are ultimately defaulted. Then what does the bank do in that scenario? What do the owners of the company do? Let us examine that scenario here……

Notice of Loan Default

The typical recovery process for a defaulted bank loan typically begins with the lender (the bank) contacting the borrower (the company) to try to collect the overdue payments. This is followed by a series of letters back and forth between the bank and the defaulted debtor. The first step is that the bank tries to restructure the loan for a fixed time, usually 2 to 3 years. Banks usually give time for an NPA (Non-performing account) to return to normalcy, after all their own reputation is also at stake along with their troublesome client.

If the borrower is unable to repay the loan, the bank usually takes legal action such as filing a lawsuit or obtaining a judgment against the borrower. Depending on the jurisdiction, the lender may also be able to seize assets (a car, land, or property) to repay part or the full amount of the pending dues. In some cases, the lender may also sell the loan to a collection agency, which will then attempt to recover the debt.

Ultimately, the success of the recovery process will depend on the borrower’s ability to repay the loan and the legal remedies available to the lender. It’s important to note that the process and specific steps may vary depending on the laws and regulations of the jurisdiction.

Honorable company management will make sincere efforts to repay the overdue amounts either by liquidating personal assets in their home country or by generating revenue from their business. In some situations, rogue management can flee the jurisdiction without communicating with the bank. This leaves the bank in a very precarious situation as litigation is their only option, which is an expensive and time-consuming process even in the relatively smaller countries of the Middle East.

Rogue management can flee the jurisdiction without communicating with the bank

The banks might hire external counsel or use their own legal departments to pursue the company and its shareholders, who typically would have signed as personal guarantors in the documents of the bank facilities. The banks may pursue three cases in parallel depending on the documentation signed:

1. A commercial case based on the outstanding value in the Account Statement
2. A commercial case based on the Promissory Notes (if part of the documents)
3. A case for Travel Ban against all the guarantors thus preventing them from exiting the jurisdiction.

(Photo by Tingey Injury Law Firm on Unsplash)

A case starts from the First Court and it can take anywhere from 18 months to 3 years to conclude, usually in favor of the bank, as there are several hearings in court or in another judicial department depending on the complexity of the case. In most cases, the bank will likely win such a case as bank facilities are essentially public money that the bank finances from their current assets. A good portion of current assets are deposits of the local public.

The next step after the decision of the First Court is filing the case in Appeal Court, which is what the dishonorable defaulters do just to stretch out time. In the meantime, the bank usually has a right to seize the bank accounts of the company and its management. Since expats aren't allowed to own land and property in some Middle-East countries like Kuwait, the banks have really little leverage to extract their money and such a defaulting business enterprise usually collapses and ends up closing down without any assets while having a huge mountain of liability, meanwhile the legal processes continue in the Appeal Court followed finally by the High Court (also known as Supreme Court in some countries).

The third and last part of this series will describe the situation of the banks once the expat management has fled the country along with a real story of someone who fled from Kuwait to India in 2016 while one major bank in Kuwait is still twidling its thumbs to collect over USD 2 million in defaulted debts! Would be a very interesting read indeed :)

Hope you enjoyed this part. Stay tuned for the next part.

Thanks for reading!