The UAE issues a new Personal Insolvency Law

The UAE issued Insolvency Law No. 19 of 2019 on 29 August 2019. The Law comes into force three months after publication meaning it will become effective on 29 November 2019 (the “Insolvency Law” or the “Law”).

The Law aims to provide an enhanced regime for individuals facing financial difficulties. It encourages natural persons to seek expert and professional help through a court-led process.

The Law provides for protective measures and expert assistance to be provided to a debtor facing financial difficulties. Such protective measures are court-driven procedures aimed at assisting a debtor to reach a settlement with his creditors without compromising the rights of the creditors.

What is the difference between the Insolvency Law and Bankruptcy Law?

The Insolvency Law only applies to natural persons and the estate of the deceased. It does not apply to merchants, traders, commercial companies and similar persons which fall under the scope of the Bankruptcy Law No. 9 of 2016.

Both laws primarily focus on assisting distressed persons and entities through offering them settlement options.

What is an insolvent person and what does the Insolvency Law offer?

An insolvent person is someone who faces current or anticipated financial difficulties that render him unable to pay his debts.

The Insolvency Law addresses two key routes and procedures for those facing financial difficulties.  The first route relates to an individual seeking court assistance to settle debts. The second route relates to liquidation proceedings as a result of the inability of an individual to pay his debts for an extended period of time.

The Law provides for a prescribed process with timeframes for each route.

Settlement Proceedings of Financial Obligations

Under the Insolvency Law, a debtor facing financial difficulties may apply to the court for assistance and guidance in the settlement of his financial commitments through one or more court-appointed experts through a court supervised binding settlement plan.

If the court accepts a debtor’s request under this route and appoints an expert, this puts in place an effective moratorium on actions by creditors applying to seize any of the debtor’s assets; unless such assets are the subject of a pledge.   This process also creates a moratorium on a creditor applying to the court for an order commencing liquidation proceedings.

The court will terminate settlement proceedings or reject a request made by a debtor under this route if it determines that:

1. The debtor has tried to conceal or dissipate any part of his assets;
2. The debtor has submitted false statements regarding his liabilities, rights or assets; or
3. The debtor does not settle a due debt for a period exceeding 50 business consecutive days.

The proposed settlement plan must be voted on by the creditors approved by the court pursuant to certain quorum and voting criteria. The settlement plan must then be approved by the court.

The timeline for the implementation of the settlement plan should not exceed 3 years from the date of the court’s approval of the settlement plan albeit this timeline may be extended with the approval of creditors holding two thirds of the as yet un-settled debts at the time of extension.

The Law allows the court appointed expert to request a secured creditor to replace its security with another security if this achieves the interests of the settlement plan. If the secured creditor rejects, the expert may then submit such request to the court. The court has the discretion to approve such replacement if it achieves the interest of the settlement plan and does not harm the interests of the secured creditor.

Where the court decides to terminate the settlement proceedings or annul the settlement plan, its decision will immediately initiate liquidation proceedings under the Law.

Liquidation Proceedings

When a debtor fails to pay any of his due debts for a period exceeding 50 business consecutive days as a result of his inability to settle such debts, he shall apply to the court to commence liquidation proceedings for liquidation of his assets. The monetary threshold for such debts under which a debtor is obliged to submit the application for the insolvency and liquidation would be determined by a future Cabinet resolution.

Such application may also be made by a creditor or a group of creditors where the total amount of their debts is not less than AED 200,000 provided that the debtor has been formally notified to pay the debt and he failed to do so within a 50 business days from the date of notification.

The court would appoint a trustee to carry out the liquidation proceedings, handle the debtor’s assets and pay his liabilities.

All creditors would be invited to make submissions of their claims to the trustee within 20 working days from the date of publishing the court’s decision to commence liquidation proceedings in the newspapers.

The court, upon the request of the debtor and the recommendation of the trustee, may decide to grant the debtor a grace period of not more than 3 months (may be extended for a similar period)  before the liquidation of his assets to try to reach an agreement with his creditors.

Pension and social support, along with necessary as living expenses determined by the court, will be exempted from the liquidation proceedings. The court may also permit the debtor, upon his request or the request of the trustee, to maintain certain amounts necessary for the debtor to carry on his business or profession.

However, the Law permits the court, as part of the liquidation proceedings, to issue a decision to sell the residence of the insolvent debtor which is owned by him, subject to certain conditions.

The Law identifies the ranking of creditors in the liquidation as follows:

1. Secured creditors (in respect of their secured assets);
2. Court, expert and trustee fees;
3. Expenses and fees disbursed by the order of the court to preserve the Debtor’s assets;
4. Debtor’s employees and servants entitlements;
5. Family alimony as determined by the competent court;
6. Amounts due to governmental bodies; and
7. Unsecured creditors.

Implications of Liquidation Proceedings

Upon approval by the court to initiate liquidation proceedings:

1. all debtor’s debts will mature;
2. any transactions concluded by the debtor, whether for or without a consideration, will not be enforceable, unless the court decides otherwise;
3. the debtor shall be prohibited from managing and disposing his money or assets and may not pay any amounts exceeding AED 5000 except with the approval of the trustee; and
4. the debtor may not provide any personal guarantee or security on any of his assets, without the prior approval of the court.

As a result of the liquidation:

1. the debtor cannot obtain new loans or finances for 3 years from the date of the insolvency judgement; and
2. the debtor is restricted from entering into obligations, whether in return of a consideration or not, (save for certain circumstances) for a period of 3 years from the date of the insolvency judgement.

Moratorium

During the liquidation proceedings:

1. All legal and judicial enforcement proceedings against the debtor and his assets are suspended with the exception of secured debts or privileged debts subject to the court’s approval; and
2. All criminal proceedings initiated against the debtor arising from actions of bounced cheques issued by the debtor prior to application of settlement proceedings of financial obligations or prior to commencement of the liquidation proceedings shall be suspended and the creditor holding a bounced check shall be included within the creditors with an unsecured ordinary debt.

The suspension of the criminal proceedings against the debtor shall remain effective until the termination or nullification of the settlement proceedings or the issuance of a court decision of insolvency, as the case may be.

If the debtor obtains a court’s decision to settle the amounts due to the cheque holder during any stage of the settlement proceedings or the liquidation proceedings, the debtor may apply for the relevant court to consider the criminal case pursuant to Article 401 of the Penal Code.

Rights Restored to the Debtor

The insolvent debtor will be deprived from certain rights as a result of liquidation proceedings such as rights in obtaining credits or entering into transactions as pointed above. Such rights shall be restored to the debtor upon the lapse of three years from completion of the liquidation proceedings. This period is reduced to two years where the debtor pays 50% of his outstanding debts and to one year if the debtor pays 75% of his outstanding debts.

Notwithstanding the above, the debtor shall restore all his rights anytime if (a) he reaches a settlement with his creditors and commits to its execution; or (b) if the debtor establishes that all his creditors have discharged him from the debts.

Insolvent Debtors Register

Pursuant to the Insolvency Law, a special register of the names of all debtors subject to liquidation shall be established pursuant to a Cabinet resolution.

Penalties

The Law provides for fines (ranging from AED10,000 to AED 100,000) and/or as criminal penalties which apply to creditors who commit certain acts, including but not limited to, fraudulent acts to increase its debt, vote on the settlement plan whilst aware that it is not eligible to vote thereon, or enter into an agreement with the debtor, after the commencement of the liquidation proceedings, to earn specific privileges in prejudice to the interests of other creditors.

The Law further stipulates fines (ranging from AED20,000 to AED 60,000) and/or criminal penalties (imprisonment for a period not exceeding two years) which apply to the debtors who commit certain acts that result in losses to their creditors.

How can we assist you?

Al Tamimi and Company has a specialized team dedicated to provide legal advice and assistance in light of the Insolvency Law.

Key Contacts:

Abdullah Mutawi
Partner, Head of Corporate Commercial
a.mutawi@tamimi.com

Nawal Abdelhadi
Senior Associate, Corporate Commercial
n.abdelhadi@tamimi.com