The Federal Decree-Law No. 19 of 2019 on Insolvency, which was approved by the UAE Cabinet, establishes rules for individuals’ bankruptcy procedures. This law aims to improve the UAE’s competitiveness by increasing the ease of doing business, providing favorable conditions for people who are having financial difficulties, and safeguarding those who are unable to pay their obligations owing to bankruptcy.
Before the Insolvency Law took effect, the UAE did not have a legal framework for individuals’ bankruptcy. There was no way for indebted people to restructure their debts or apply for rehabilitation, as there had been before. This gap was filled by the Insolvency Law.
The Insolvency Law only applies to individuals who are not covered by the Federal Decree-Law No. 9 of 2016 on Bankruptcy (“Bankruptcy Law”). In principle, the Insolvency Law does not apply to natural persons who engage in so-called trading as traders are already governed by the Bankruptcy Law.
While debts incurred in the course of a trader’s operations are covered by the Bankruptcy Law, debts incurred by a trader in his personal capacity are very likely to fall under the Insolvency Law.
A debtor is defined as a natural person who is insolvent in the Insolvency Law. A state of insolvency occurs when a debtor is unable to pay his obligations due to actual or potential financial issues.
Settlement procedure for financial obligations
The process of financial liabilities settlement is available to a debtor who is currently or might be having difficulties in repaying claims that have already been due or will come due in the future, and whose failure to pay has lasted for no more than 50 consecutive working days.
The process is a debtor-led procedure that allows debtors to settle their obligations under a court-approved settlement agreement within a three-year period under court and expert supervision. The procedure is designed to safeguard the debtor from being declared bankrupt or having his assets sold.
The insolvency procedure and liquidation
The insolvency court may not start a payment plan for financial obligations if the debtor has not paid due bills for more than 50 consecutive working days as a result of his inability to do so. The debtor must, instead, file a request to the competent court for insolvency and liquidation proceedings in order to pay his obligations.
It is uncertain whether the debtor’s obligation to submit an application extends to small claims at this time because a Cabinet Resolution has yet to establish the precise value of debts that necessitate the filing of an application.
The only individual who may file an application for the start of a debt settlement procedure is the debtor himself. The individual seeking insolvency protection must submit an entirely new application. Creditors or other third parties are not permitted to file such a request. The application must be submitted with a detailed list of creditors and a list of assets.
During the hearing, a court-appointed expert must draft a settlement plan and follow it through with the help of the court. For this purpose, the expert sells the assets specified in the plan at their highest possible price while taking market conditions into account. The expert must submit a progress report to the court every three months. The debtor is allowed to administer his own affairs throughout the proceeding. If a debtor is unable to fulfill his financial obligations due to an inability to do so for more than 50 consecutive working days, the court must terminate the lawsuit.
Third parties can file an application for the commencement of insolvency and liquidation procedures on the debtor’s behalf, as well as on their own. If there are (joint) claims of at least AED 200,000 against the debtor, a notice for repayment has been issued, and no repayment of the claim was affected within 50 consecutive working days from the date of the notice, one or more creditors may submit an application. The court may also start such processes on its own, for example, if a settlement agreement is canceled or if a financial liability payment term has ended.
The trustee is in charge of the bankruptcy liquidation process.
In general, all of the debtor’s assets are subjected to liquidation. The home that the debtor has taken as his or her domicile may be liquidated under particularly strict circumstances. The court has the authority to preserve these payments, benefits, and incomes of the debtor that are determined by the court to be necessary for his or her living expenses and dependents. In an auction, the debtor’s assets are sold. The money is dispersed to creditors in accordance with a pre-determined priority order established by law.
As a result of the debtor’s insolvency and liquidation of assets, the debtor is prohibited from obtaining new loans or funding for three years after the judgment of insolvency and three years after the judgment of the insolvency and liquidation of assets. Exemptions from the payment order include amounts required to satisfy a debtor’s basic necessities and those of his or her dependents. Any debtor whose bankruptcy has been judicially declared and whose property has been ordered to be liquidated will be entered in a new insolvency register yet to be established.
After three years following the conclusion of the insolvency and liquidation procedures, the debtor’s rights that had been lost as a result of the insolvency and liquidation process are restored. The statute of limitations is shortened to two years if the debtor has settled half of his obligations. If the debtor pays 75% of his debts, the period is reduced to one year.
Regardless of the duration of a debt’s lapse, the debtor’s rights will be restored if he has previously satisfied all prior court-approved obligations before the judgment on bankruptcy and liquidation. The same holds true if the debtor agrees to a settlement with his creditors and keeps to the agreements stipulated in it, or if the debtor demonstrates that all outstanding debts have been paid.
A new feature of the Insolvency Law is that debtors may now be protected from prosecution throughout both proceedings, as long as they do not issue bounced cheques. The payment of bounced cheques, however, is still a criminal offense under UAE law even for individual debtors. If a court begins one of the insolvency proceedings, it may, at its own discretion or at the request of the debtor, order the suspension of criminal prosecutions for issuing bounced cheques, as long as the cheque was issued before an application for starting one of these Insolvency Law procedures is filed. In the instance of a suspension of criminal proceedings, the recipient of a bounced cheque is considered a creditor and his claim become part of the overall debt.
During the resolution of financial obligations, a moratorium is frequently imposed. The consequence of a moratorium is that the creditors’ right to request the debtor’s assets be sold is typically suspended. All legal or judicial actions against the debtor, including enforcement action against his assets, are halted throughout insolvency and liquidation proceedings in general, with the exception of assured claims. It’s unclear whether debtors will continue to be restricted in their travel.
The passage of the Insolvency Law has significantly improved the legal standing of indebted individuals in the UAE. For the first time, the UAE’s bankruptcy law establishes a comprehensive set of regulations that allows debtors to restructure or pursue insolvency under specified rules. Debtors are not only protected against imprisonment for bounced cheques issued in any amount throughout the duration of the insolvency process, but they may also avoid prison for other reasons.
Under the Insolvency Law, creditors’ legal position is generally expected to improve because they are now permitted to file an application for the start of insolvency proceedings. It might also be used as a bargaining tool with defaulting debtors. The current impact of the partial decriminalization of bounced cheques on creditors, however, remains to be seen. If debtors became aware that they no longer had to anticipate imprisonment if a cheque was not paid, the legislated changes may result in less benefit. They may issue cheques more rashly in the future than they have done previously if they are informed that they do not always need to expect imprisonment if a cheque is not paid. On the other hand, it’s possible that making changes to the process will make it easier for creditors to at least partially recover their claims. However, if fewer debtors than previously choose to leave the country or are detained and instead pursue settlement discussions with their creditors or file for bankruptcy at an early stage of their financial difficulties, this would imply that many more debtors will seek expert assistance.
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