The Insolvency Law No. 19 of 2019 (“Insolvency Law”) aims to combat the procedural difficulties associated with debt collection. Insolvent residents have previously had no opportunity to mediate with financial institutions and have often resorted to abscondment as a means of avoiding severe legal consequences. The Insolvency Law offers two alternative solutions for any resident who faces financial difficulty. The “Financial Settlement Procedure” involves a court appointed expert, who develops a three-year financial plan to assist the debtor in repaying the debts. The “Liquidation Procedure” involves a court appointed trustee, who liquidates the assets of the debtor to repay the debts directly. Both of the procedures encourage cooperation between the debtor and the creditor which in turn helps to escalate recovery rates and ensure legal compliance.
The Financial Settlement Procedure is an appropriate solution for a debtor who is facing financial difficulties but has not defaulted on repayment of the debts for a period longer than 50 consecutive days. Below is an overview of the procedure that the court will follow under the Financial Settlement Procedure.
It shall be noted that the Supporting Documents include a memorandum containing a description of the debtor’s financial position, the property owned, the ongoing judicial procedures, the funds necessary to support the debtor, the debtor’s proposal to settle financial obligations, nomination of an Expert, disclosure of financial transfers outside of the UAE, a statement that the debtor is facing financial difficulty, details of the creditors as well as the amounts owed. If the debtor cannot submit any of the abovementioned documents, the reason for such default must be substantiated by the application.
Other pertinent information to the implementation of the Financial Settlement Procedure includes:
- All judicial and expert fees shall be settled by the debtor. However, the Insolvency Law offers an opportunity for the court to postpone the payment of such fees until the debtor is financially capable of making the payment.
- Upon receipt of the final approval, the Expert will prepare a report every three months to record the implementation progress.
- Any amendment to the Plan requires approval of the court.
- If the Plan involves sale of the debtor’s assets, it is the responsibility of the Expert to obtain the best price possible under the prevailing market circumstances.
The Financial Settlement Procedure will be terminated once all the debts are settled in accordance with the Plan. However, the Insolvency Law provides additional causes which may result in the termination or nullification of the procedure. Such causes include inability to settle the debts, cessation of payment for a period longer than 50 consecutive days, expiry of the period prescribed by the Plan, failure of the debtor to abide by the Plan, evasion of the debtor’s financial obligations or upon the debtor’s request to terminate the procedure.
As previously mentioned, the Liquidation Procedure can be initiated by the court in an instance that the application for a Financial Settlement Procedure is rejected. However, the Insolvency Law also allows the debtor to apply for the Liquidation Procedure directly provided that he has not defaulted on repayment of the debts for a period longer than 50 consecutive days. Similarly, the creditor may also apply for the liquidation of the debtor’s assets so long as the creditor is owed no less than AED 200,000, a notice to fulfill the payment has been served to the debtor and the debtor has failed to settle the same within 50 consecutive days from receipt of the notice. Below is an overview of the procedure that the court will follow under the Liquidation Procedure:
Other pertinent information to the implementation of the Liquidation Procedure includes:
- All judicial and expert fees shall be settled by the applicant. However, the Insolvency Law offers an opportunity for the court to postpone the payment of such fees until the applicant is financially capable of making the payment.
- The Trustee can liquidate all of the debtor’s assets except those that the court considers are necessary for the debtor in order to pursue his occupation. In certain instances, the court may also prohibit the sale of the debtor’s place of residence.
- All of the sales must be carried out via public auction, unless otherwise permitted by the court.
- The Trustee must notify the court every month in order to record the implementation progress.
- During the Liquidation Procedure, no execution proceedings may be initiated, unless otherwise permitted by the court.
- Among other acts such as fraud or deceit, the debtor may also be penalized by the court if he transfers any property which exceeds the value of AED 5,000 without the approval of the Trustee.
The Liquidation Procedure can be terminated only in two instances, those being (a) if the reasons for initiating such procedures have ceased to exist and (b) if the proceeds of the debtor’s funds are sufficient to satisfy the sums owed to the creditors.
Once Insolvent, the debtor may rehabilitate in the following instances:
- The lapse of three years from the date of completion of the Liquidation Procedure and liquidation of the debtor’s funds.
- The lapse of two years from the date of completion of the Liquidation Procedure and liquidation of the debtor’s funds, if he has paid 50% of his debts.
- The lapse of one year from the date of completion of the Liquidation Procedure and liquidation of the debtor’s funds, if he has paid 75% of the debts.
The abovementioned period may, however, be avoided in the following instances:
- The debtor has reached a settlement with all his creditors and implements it.
- The debtor proves that the creditors have discharged him from all remaining debts after the court's decision declaring insolvency and liquidation.
The Insolvency Law provides various penalties, against both, the creditor and the debtor, ranging from AED 10,000 and AED 100,000 as well as AED 20,000 and AED 60,000 respectively. It is therefore, strongly advised for all parties to the Financial Settlement Procedure or the Liquidation Procedure to seek legal representation.
Nonetheless, it is evident that the Insolvency Law intends to assist the debtors and the creditors and attempts to overcome the hurdles previously witnessed in the application of the bounced cheque procedures, in particular, Article 401 of the Federal Law No. 3 of 1987.