Evolution of UAE Insolvency Law: Addressing Economic Dynamics and Prioritizing Rehabilitation

Need for Insolvency Law:

In response to the swift economic growth and increased global business presence, the UAE identified the necessity to confront challenges faced by individuals in financial distress. Preceding the enactment of this law, instances such as bounced cheques and unmet financial obligations often triggered criminal prosecutions, posing formidable barriers for individuals seeking financial recovery.

The absence of a well-defined insolvency framework left a legal vacuum for debtors, impacting the country’s standing as a business hub. Acknowledging this imperative, the UAE implemented the Insolvency Law, offering a structured and rehabilitative approach to enhance the economic landscape.

Key Pain Points Resolved:

1. Criminalization of Debtor: Earlier, financial difficulties could lead to criminal charges, particularly concerning bounced cheques. This punitive approach hindered individuals from re-entering the workforce, perpetuating a cycle of financial distress.
2. Lack of Rehabilitation Focus: The absence of a rehabilitation-focused approach meant that debtors were not provided adequate opportunities to recover financially, impacting not only their lives but also the broader economic ecosystem.
3. Complexity in Debt Resolution: Without a dedicated insolvency law, debt resolution lacked a systematic process. Creditors faced challenges in recovering debts, and debtors struggled to navigate a complex legal landscape, exacerbating financial stress.

Introduction of the Law:

The UAE recognized the need for a comprehensive insolvency law that prioritizes the rehabilitation of individuals facing financial challenges. Commencing from January 2020, the United Arab Emirates (UAE) enacted Federal Law No. 19 of 2019, subsequently amended, with a primary focus on regulating insolvency cases for natural persons. This legislative framework is strategically designed to elevate the country’s competitive edge, streamline the ease of conducting business, and extend vital assistance to individuals grappling with financial distress. A paramount objective of the law is the prioritization of rehabilitation over criminalization in addressing financial challenges.

Comparative Assessment: In terms of global benchmarks, the UAE’s Insolvency Law places a strong emphasis on rehabilitation, distinguishing it from jurisdictions where punitive measures take precedence. The law aligns with international best practices by providing mechanisms for settling financial obligations, appointing trustees, and ensuring a fair and transparent insolvency process.

Key Principles:

• Emphasis on Rehabilitation: Foremost among the guiding principles is an unwavering emphasis on the rehabilitation of individuals encountering financial difficulties. The law meticulously shields such individuals from criminal prosecution associated with financial obligations, particularly those arising from bounced cheques.
• Scope of Application: The purview of this law is confined to natural persons not actively engaged in economic activities. Merchants, traders, and commercial entities are expressly excluded from its regulatory scope.
• Exclusions from Insolvency Procedures: Certain funds, notably retirement pensions and funds essential for meeting basic needs, are expressly exempted from the rigors of insolvency or liquidation proceedings.

Mechanisms for Initiating Insolvency:

The law provides two primary mechanisms for individuals to navigate financial challenges:

1. Settlement of Financial Obligations: This facet ensures the protection of debtors facing financial difficulties, while concurrently preserving the rights of creditors.

Creditors are rendered the opportunity to extend personal loans within a framework that maintains equilibrium between the interests of both parties.

Application of Insolvency Mechanism

• • Documents Required: The submission of a request to settle financial obligations necessitates a comprehensive documentation process. This includes evidence of financial standing, sources of income, property details, declarations of financial difficulties, and a commitment to debt repayment.
  • Termination of Settlement Procedures: The law allows for the termination of settlement procedures under specified circumstances, such as the debtor’s failure to implement an agreed-upon plan or voluntary termination.
  • Invalidation of Settlement Request: The court reserves the right to reject a settlement request if it is found that the debtor has concealed assets, provided false information, or taken actions detrimental to creditors.

2. Insolvency and Liquidation Procedures:

• • Initiation Criteria: Insolvency and liquidation procedures are triggered if a debtor ceases to pay debts for 65 consecutive working days. Alternatively, creditor or a group of creditors can apply for liquidation if the debt exceeds AED 1,000,000.
  • Appointment of Trustee: Upon initiation of insolvency and liquidation procedures, the court appoints a trustee. Creditors are mandated to submit claims within a stipulated timeframe. The trustee compiles a detailed report on the debtor’s financial situation.

Procedural Steps:

• • • • Publication Requirement: Trustee publishes court decision in Arabic and English within (5) working days, ensuring comprehensive information dissemination.
      • Claim Submission Period: Creditors submit claims within (20) working days, critical for efficient and transparent claim processing.
      • Audit and Report Preparation: Trustee conducts final audit of creditors’ claims, submits a detailed financial report within (10) working days.
      • Court Decision and Asset Liquidation: Court decides on claims, initiates asset liquidation within (15) days of receiving trustee’s report.
      • Extension Possibility: Court may, in specific circumstances, grant a not exceeding 3-month extension, overseen by the trustee, for an amicable settlement attempt.

Effects of Insolvency:

• Restrictions and Prohibitions: Upon a court’s decision to initiate insolvency proceedings, various restrictions are imposed on the debtor’s business activities and fund disposal. The debtor is prohibited from obtaining new loans for a specified period.
• Rehabilitation of the Debtor: The law delineates conditions for the restoration of debtor rights, contingent upon the fulfilment of specified criteria, including the passage of time, debt repayment percentages, settlement with creditors, or complete debt satisfaction.

Rehabilitation Criteria:

In line with the rehabilitation focus, the debtor’s rights, initially restricted during proceedings, are restored based on specific conditions:

• Three Years After Completion: Restoration occurs after three years from insolvency proceedings completion.
• Two Years After 50% Payment: Rights can be restored two years after paying 50% of debts.
• One Year After 75% Payment: A one-year lapse post proceedings is adequate if 75% of debts are paid.
• Immediate with Full Debt Settlement: Instant restoration upon settling all debts before the court’s decision.
• Upon Successful Settlement with Creditors: Rights restored if the debtor reaches and implements a settlement with all creditors.
• Immediate with Creditor Absolution: Instant restoration upon proving creditors’ absolution subsequent to insolvency declaration.

Penalties in the Legal Context:

-Penalties Against Creditor – Stringent penalties are outlined for creditors found exploiting the provisions of the law, ensuring the integrity of the insolvency process by committing any of the following acts:

• If the claim of the Creditor against the debtor is not real.
• If the Creditor unlawfully increases the indebtedness of the Debtor.
• If in meetings, the Creditor votes on decisions pertaining to the settlement of the Debtor’s financial obligation, fully aware that he does not have the legal right to vote.
• After the Court’s decision to commence the proceedings, if the creditor knowingly enters into a contract or agreement with the Debtor which provides him with special benefits at the expense of other creditors.

Any Creditor who commits any one of the aforementioned actions, shall be punished with imprisonment and a fine between AED 10,000/-Dirhams – AED 100,000/-.

– Penalties Against Debtors where a debtor, declared insolvent, inflicts loss upon creditors, penalties are imposed for the following acts:

• Non-Essential Expenditure – Spending significant sums on non-essential business activities.
• Excessive Personal Expenditure – Purchasing unnecessary goods or services disproportionate to financial turmoil, affecting household or personal use.
• Gambling Activities.
• Partial Payment Favoritism – Paying the debt of one creditor, disadvantaging others.
• Acting in bad faith, including wasteful spending and disposing of assets below market value.
• Behaviour Detrimental to Creditors with the intention of delaying insolvency declaration.
• Breach of Plan Terms of the insolvency plan by prematurely paying debts or disposing of funds.

Any Creditor who commits any one of the aforementioned actions, shall be punished with imprisonment and a fine between AED 20,000/-Dirhams – AED 60,000/-.

Conclusion:

The UAE’s Insolvency Law underscores a commitment to the fundamental objectives of predictability, equity, and transparency in the allocation of risk within its market economy. By prioritizing equitable treatment and embracing the collective nature of insolvency proceedings, the law instils confidence in the credit system, fostering economic growth for the benefit of all stakeholders. The emphasis on transparency of procedures ensures that parties, creditors, and debtors, have access to sufficient information, enabling them to exercise their rights effectively and efficiently.

Additionally, the law actively pursues the objective of safeguarding and maximizing value during rehabilitation of debtors contributing to the overall economic well-being. The careful balance of these objectives reflects a robust legal framework that not only addresses the unique challenges of insolvency, but also fortifies the UAE’s position as an attractive and reliable investment destination.

If you need guidance or wish to understand your rights under UAE Insolvency Law, our team of legal experts is here to offer assistance. We provide essential advice and support to navigate these complex challenges effectively. Please feel free to reach out to [email protected].