Can a Bank Retain Returns on Frozen Funds? Dubai Court of Cassation Defines the Boundaries Between Banking Freezes and Compound Interest

Practice Area: Banking & Financial Disputes / Banking Law

Outcome Summary: The Dubai Court of Cassation confirmed that banks remain obligated to pay returns accrued on frozen funds pursuant to Central Bank of the UAE instructions. However, the Court ruled that statutory interest cannot be awarded on such returns, as this would constitute interest on accrued interest, which is prohibited by law.

Introduction

Funds held in bank accounts may be frozen pursuant to orders issued by the competent authorities. However, does such freezing mean that the account holder loses the right to the returns that would have accrued on those funds? Furthermore, may a claim be made for statutory interest on such returns themselves? In a significant judgment, the Dubai Court of Cassation distinguished between the customer’s right to returns on frozen funds and the legal prohibition against charging interest on accrued interest.

Facts and Procedural History

Three customers, one of whom was an individual and the other two being companies wholly owned by him, filed a claim against a bank seeking payment of amounts representing the returns accrued on funds that had been frozen in their accounts pursuant to a decision issued by the Public Prosecution. This followed instructions issued by the Central Bank of the UAE requiring such funds to be transferred to suspended accounts, with returns accruing thereon at the prevailing market rate.

Following the conclusion of the criminal proceedings and the issuance of an acquittal judgment, the freeze was lifted and the funds were released. However, the bank refused to pay the accrued returns. The Court of First Instance dismissed the claim. The Court of Appeal, however, appointed a three-member expert committee, which concluded that the customers were entitled to the claimed amount. Accordingly, it ordered the bank to pay the amount together with statutory interest at the rate of 5% from the date on which the judicial claim was filed. The bank subsequently challenged the judgment before the Court of Cassation.

Grounds of Appeal and Legal Principle

The bank argued that the Central Bank’s letter did not create a legal obligation to pay returns and that there was neither a statutory provision nor a contractual agreement requiring payment of such amounts. It further argued that the frozen funds did not generate any benefit for the bank and that, if any interest was payable, it should only be calculated for a period of seven days.

However, the Court of Cassation established an important legal principle, holding that instructions issued by the Central Bank of the UAE in the exercise of its supervisory powers are binding on all banks, and that failure to comply with such instructions gives rise to legal liability, even in the absence of any contractual agreement between the bank and the customer.

The Court further confirmed that the freezing of funds does not remove them from the bank’s financial assets; rather, it merely restricts the customer’s ability to dispose of such funds. The funds remain part of the liquidity maintained by the bank and, therefore, their owners are entitled to the prescribed returns in accordance with the Central Bank’s instructions.

At the same time, the Court clarified that the amount awarded represented the principal amount of the accrued returns (i.e., interest). Therefore, it was not legally permissible to award statutory interest on that amount, as this would constitute interest on accrued interest, which is prohibited under Article (88) of the Commercial Transactions Law. Accordingly, the Court partially overturned the judgment and cancelled the statutory interest awarded on the amount of the returns.

Legal Message

The Court of Cassation confirmed that a bank’s obligations are not limited to merely implementing freezing orders; rather, they extend to full compliance with the instructions issued by the Central Bank of the UAE regarding the management of frozen funds and the returns accrued thereon.

At the same time, the Court emphasized that protecting customers’ rights does not mean exceeding the limits imposed by law. Accrued returns cannot serve as a basis for calculating additional interest, as the law expressly prohibits compound interest or interest on accrued interest.

Key Takeaway

The freezing of funds does not mean that their owners lose their financial rights. However, it also does not create an entitlement to claim returns or interest beyond what is legally permissible. Accordingly, understanding the nature of accrued returns and the legal basis for claiming them remains a decisive factor in banking disputes.

Advice

When a dispute arises concerning frozen accounts or banking returns, it is essential to distinguish between the principal amount, the returns accrued thereon, and statutory interest. Confusing these concepts may result either in pursuing claims for rights not recognized by law or in failing to preserve rights granted under the banking system.