Dubai Court declares a loan invalid, orders defendants to pay jointly Dhs2.5m

The Dubai Commercial Court declared a loan agreement invalid due to its contravention of public order. The court mandated that the defendants are jointly responsible for repaying Dhs2.5 million, along with legal interest calculated at 5% annually from the date the lawsuit was filed until the sum is fully settled. All additional claims were rejected.

As per the case file, an investor initiated legal action against a company and its owner, demanding repayment of Dhs2.5 million as outlined in the loan agreement, along with accrued interest. The investor also requested the appointment of an expert to evaluate penalties for delayed payments.

The investor detailed that he and the company's owner had secured the loan to fund his business initiatives under defined conditions, providing a guarantee check as collateral for the entire amount.

The documents reveal that the agreement stipulated repayment of the principal sum with accrued interest within an agreed timeframe, along with compounded monthly penalties for any default.

The investor confirmed that the loan amount had been disbursed and utilised for business operations. However, further evidence pointed to missed payments, a bounced guarantee check due to insufficient funds, and clear signs that the money was misappropriated, deviating from its intended purpose.

The documents disclosed that the company and its owner failed to meet their payment obligations when the due date arrived, and the guarantee check was dishonored due to insufficient funds. As a result, the plaintiff turned to the courts to assert his rights, while the company owner denied any personal liability in the matter.

The court determined that the underlying transaction was an interest-bearing loan secured by the principal, an arrangement governed by specific regulations and prohibited without proper licensing. This classification rendered the agreement contrary to public order, leading to its absolute nullity.

In light of this nullity, the court ruled that both parties must be restored to their original positions before the contract was formed. It ordered the return of the principal amount, excluding any interest or penalties stipulated in the agreement, while authorizing the addition of legal interest for delayed payment.

Furthermore, the court held the company and its owner jointly accountable due to serious violations, including entering into an illegal agreement and issuing a check without sufficient funds. This established the owner's personal liability alongside that of the company. Consequently, the court directed the defendants to jointly and severally repay the principal amount along with legal interest. It also allocated legal expenses proportionally and declined the plaintiff's requests for appointing an expert or imposing the penalties mentioned in the agreement.