Sandeep Bhalothia and Aman Garg
The Oath
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Sandeep Bhalothia and Aman Garg of Node.Law talk about the key provisions of the UAE Personal Insolvency Law introduced to address individual financial crisis in a structured manner.
The UAE’s Federal Decree Law No. 19 of 2019 on Insolvency (the “UAE Insolvency Law”) represents a landmark reform, addressing individual financial crises with a structured, empathetic approach. It aims to support those facing insolvency, balancing debtor protection with creditor rights, significantly impacting the nation’s legal and financial systems.
Previously, the UAE’s bankruptcy regime lacked specific provisions for individual insolvency, often leading to punitive measures. The introduction of the UAE Insolvency Law filled this gap, offering a structured framework for personal debt resolution.
Applicability to Natural Persons and the Estate of the Deceased
The UAE Insolvency Law extends its applicability to natural persons, which includes any individual human beings, regardless of their financial acumen or business activities. Unlike corporate insolvency which is designed to manage the debts of legal entities or businesses, this law focuses solely on individuals facing financial hardship.
The UAE Insolvency Law is distinct from the UAE’s Federal Decree - Law No. (9) of 2016 on Bankruptcy, which is tailored for merchants, traders, commercial companies, and other business entities engaged in economic activities. The 2016 Law is designed to address commercial insolvency and allows for the restructuring of a business or the liquidation of its assets. On the other hand, the UAE Insolvency Law extends its applicability to natural persons. The UAE Insolvency Law offers a separate pathway for individuals who do not engage in commercial activities as defined under the 2016 Law.
What Qualifies as Insolvency?
In the context of the UAE Insolvency Law, insolvency is defined as the financial state of an individual who is unable to pay debts due to insufficient funds or assets. This includes both current and anticipated financial difficulties[1] that render the debtor incapable of settling their liabilities as they become due.
Provisions for Insolvent Individuals
The law provides a dual approach for individuals in financial distress: a court-assisted debt settlement process and a liquidation procedure. These provisions aim to protect insolvent individuals from legal persecution, offer them a structured debt settlement plan, and if necessary, a dignified process for asset liquidation.
Settlement of Financial Obligations
This process is initiated when a debtor files an application with the court, seeking help to reorganise their debts. The application must include a detailed list of creditors, assets, financial status and a proposal to settle their financial obligations. The court assesses the debtor’s financial circumstances and determines the most appropriate course of action. This structured approach is aimed at helping debtors clear their debts in a manageable way, without the immediate threat of legal action from creditors.
Application for the settlement proceedings can be rejected if the debtor attempts to conceal assets, provides false statements, or fails to settle a due debt for over 50 consecutive business days[2]. The settlement plan’s implementation is generally capped at 3 years from court approval, with possible extensions if creditors holding a significant portion of the debt agree.[3]
Role and Appointment of Experts
A central element of the settlement proceedings is the role of court-appointed experts. These experts are tasked with analysing the debtor’s assets and liabilities, devising a debt restructuring plan, and overseeing its implementation. They act as intermediaries between the debtor and creditors, ensuring that the settlement plan is feasible and fair. Their appointment is crucial as they bring professional expertise to the often-complex financial negotiations and help to maintain the integrity of the process.
Protective Moratorium on Debt Recovery Actions
To protect the debtor during the settlement proceedings, the law provides for a protective moratorium on debt recovery actions by creditors. Once the court accepts the debtor’s application, an automatic stay[4] is placed on all actions to seize the debtor’s assets or initiate liquidation proceedings. This stay allows the debtor a period of relief to focus on restructuring their finances without the immediate pressure of enforcement actions. However, secured creditors retain the right to enforce their security upon obtaining permission from the court. This moratorium is a critical aspect of the law, providing debtors with the necessary breathing space to work towards regaining financial stability.
Liquidation Proceedings
When a debtor is unable to settle debts for over 50 consecutive business days, they are required to submit an application under Article 28 of the UAE Insolvency Law to the court to commence liquidation proceedings. The law sets a monetary threshold, currently at Two Hundred Thousand United Arab Emirates Dirhams (AED200,000), above which creditors can initiate liquidation proceedings against a debtor who has been formally notified and fails to pay within 50 consecutive business days.
The court appoints a trustee to manage the liquidation and creditors submit claims within 20 days of announcement. The debtor may get a grace period to negotiate with creditors. Essential living expenses and certain business funds are protected, but the court can order the sale of the debtor's residence under specific conditions.
In liquidation, debts are repaid in a specific order: secured creditors first, followed by costs like court and trustee fees, then employee entitlements, family alimony, governmental dues, and finally, unsecured creditors.[5]
Restoring Debtor’s Rights
Post-liquidation, an insolvent debtor loses specific financial rights, including obtaining credits or making transactions, for three years. This restriction period can be reduced to two or one year with 50 per cent or 75 per cent debt repayment, respectively. However, rights are fully restored if the debtor settles with creditors or proves all debts are discharged.
Penalties and Enforcement
The specific penalties under the UAE Insolvency Law include fines ranging from Ten Thousand United Arab Emirates Dirhams (AED10,000) to One Hundred Thousand United Arab Emirates Dirhams (AED100,000) for creditors who engage in fraudulent actions or manipulate the settlement plan. For debtors, penalties range from Twenty Thousand United Arab Emirates Dirhams (AED20,000) to Sixty Thousand United Arab Emirates Dirhams (AED60,000) and/or imprisonment for up to two years for acts that result in losses to creditors, such as concealing assets or providing false statements. These strict penalties serve to deter fraudulent behaviour and ensure compliance with the legal process.
Conclusion
The UAE Insolvency Law significantly reformed the UAE’s legal landscape, offering a compassionate approach to personal insolvency. Its future implications suggest a more balanced and humane treatment of debtors while ensuring creditors’ rights are upheld, potentially leading to a more stable and trustworthy financial environment.
[1] Article 1 of the Federal Decree Law No. 19 of 2019
[2] Article 12(3) of the Federal Decree Law No. 19 of 2019
[3] Article 13(7) of the Federal Decree Law No. 19 of 2019
[4] Article 51 of the Federal Decree Law No. 19 of 2019
[5] Article 42(2) of the Federal Decree Law No. 19 of 2019