The UAE Insolvency Law

As part of its constant strive to create business-friendly environments, the UAE Cabinet has approved a new Federal on Insolvency. The new law, which recently came into effect, was welcomed among legal experts who hoped that it would have a positive impact and help small and medium businesses feel more secure in the United Arab Emirates.

Below is a set of Q&A to help understand the basic principles of this new law:

Q1. Who is subject to the provisions of the new law?
The new law applies to all debtors who are not subject to the provisions of Federal Decree by Law No. (9) of 2016 concerning Bankruptcy.

Q2. Does the new law repeal or amend the ‘bankruptcy law’?
No. The new law regulates cases of insolvent individuals whereas the ‘bankruptcy law’ (No. 9 of 2016) regulates cases of insolvent companies. Therefore, the two laws complement each other.

Q3. What are the objectives of the new law?
The main objective of the new law is to provide a new legal approach towards unpaid debts. It aims to decriminalize the financial obligations of insolvent persons and help create an opportunity to continue working and repay their debts.

Q4. How can a debtor request the settlement of debts?
The insolvent debtor shall submit an application to the Court requesting the settlement of his financial obligations (debts). The debtor shall provide the court with an assessment of his financial position and a list of his creditors, in addition to other documents listed in Article (3) of the new law such as: list of moveable and immoveable assets, summary of claims or court proceedings against him and others.

The debtor will then pay the required judicial fees and provide a cash or bank guarantee covering the expected expenses as estimated by the Court.

Q5. How long does it take the Court to decide on the application?
The Court shall issue its decision on the suitability of the application within 5 working days as of the application’s submission date. If the application was accepted, the Court shall start the procedures.

Q6. Can the Court reject the application?
Yes, it can. The new law identifies 3 situations in which the Court can reject a debtor’s application to settle his financial obligations. These situations are:

1. If it was proved to the Court that the debtor has made any action or abstained from making any action in order to conceal or destroy any part of his funds.
2. If the debtor provided wrong information about his debts, rights or funds.
3. If the debtor ceased payment of any of his debts within their due dates for a period exceeding fifty (50) consecutive working days due to his incapacity to settle these debts.

Q7. What happens after the Court accepts the application?
Upon the Court’s acceptance of the debtor’s application, the settlement proceedings shall begin. As a consequence, any execution against the debtor’s assets by his creditors shall be suspended. Following the acceptance:

1. The Court appoints an expert (or more) who publishes the resolution of his appointment and begins his duties of liaising with the creditors. The creditors have 20 working days to submit their claims and supporting documents starting from the date of publication of the resolution.
2. The Expert prepares a list of all the creditors as well as a report of the debtor’s assets to present to the Court within 20 working days starting from the date the creditors’ period (mentioned above) has lapsed.
3. The Expert prepares a plan, in collaboration with the debtor, for the settlement of his financial obligations. A copy of the plan shall be deposited at the Court and shared with the creditors who are invited to a meeting to discuss the details of the settlement plan and vote on it.
4. The creditors’ meeting shall not be valid if not attended by the absolute majority (half + 1) of the creditors. If this quorum was not satisfied in the first meeting, a second meeting is scheduled and is considered valid as long as the attendees represent two-thirds of the total debts.

Q8. Who is allowed to vote on the settlement plan?
Only creditors whose claims have been accepted by the Court are allowed to vote on the settlement plan. The following persons are deprived from the voting right:

1. The debtor’s husband/wife.
2. Any person supported financially by the debtor.
3. Relatives of the debtor down to the 2nd degree.

Q9. How is the settlement plan approved and executed?
The plan is approved by the majority of attending creditors’ votes, whose debts shall represent at least two-thirds of the debts.

Once passed by voting, the Court ratifies the plan.

Once the plan is ratified by the Court, the appointed expert shall follow up on its execution. A status report is then prepared, every 3 months, and submitted to the Court.

Q10. What if the plan was not executed or annulled?
The Court, upon annulling the settlement plan, will decide to start the insolvency proceedings and liquidation of the debtor’s assets. Once these proceedings start, the Court appoints a Trustee to execute the insolvency proceedings and oversee the liquidation of assets. All assets of the debtor are included in the process except for:

1. Retirement pension or social subsidy provided to the debtor.
2. Necessary funds – as determined by the Court – for the debtor’s living needs and his dependents.

Q11. Are there legal implications of beginning the insolvency proceedings?
The legal implication of considering a debtor insolvent and beginning the procedures are:

1. All postponed debts are considered due and payable.
2. The debtor’s dispositions of assets are considered void.
3. The debtor’s recognition of a new debt shall not be enforced.
4. The debtor is prohibited from managing his business and disposition of funds or properties.
5. The debtor is prohibited from providing personal guarantees unless he obtains prior approval from the Court.

Additionally, the Court may, upon its discretion or based upon a request from the debtor, suspend any already initiated penal proceedings against the debtor because of cases related to bounced cheques.

Q12. Can the debtor practice his rights after the insolvency proceedings are completed?
Yes, a debtor can recover the rights he was deprived of as a result of insolvency 3 years after the completion of the insolvency proceedings and liquidation of assets. This period can be decreased to:

1. 2 years, if the debtor has settled 50% of his due debts.
2. 1 year, if the debtor has settled 75% of his due debts.

The debtor can also recover his rights anytime, before the lapse of 3 years, if he has settled all his debts.

Author: Nadim Al Jisr, Editorial Lead, Legal Professionals, Thomson Reuters