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Insolvency Law: What Debtors can Do to Settle Outstanding Debt

New federal law, Insolvency Law of Natural Persons, has been approved by the UAE government to regulate cases of insolvency. The new UAE insolvency law is aimed at enhancing the competitiveness of the country by ensuring the ease of doing business, creating favorable conditions for individuals facing financial difficulties, and most importantly, giving relief to those who are unable to pay their debts, preventing from going bankrupt.

The new law is part of the government’s efforts to respond to the needs of citizens and expat residents. The law will support individuals who are facing existing or anticipated financial difficulties, rendering them unable to settle their debts. Essentially, this latest government initiative will help them reschedule their debts and provide them with an opportunity to be granted new concessional loans.

Main points of the new law on personal insolvency in the UAE

  • The Insolvency Law of Natural Persons addresses debt default or a debtor’s inability to pay their debts due to bankruptcy. This is known as the ‘insolvency of a natural person.’ The regulation of this case is linked to the Civil Transactions Act, in accordance with a principle called ‘Facilitator’s View.’

Rooted in Islamic jurisprudence, the debtor is granted a reasonable period of time to fulfill the financial obligation in accordance with the circumstances of the debtor. However, this is done provided that such delay does not cause serious harm to the creditor.

The insolvency law applies to a natural person who is not engaged in economic activity and is not a trader. The primary purpose of this legislation is to protect the interest of both the creditor and the debtor in a fair and balanced manner.

The existence of specialized rules governing the insolvency of a natural person is expected to increase transparency on civil debt repayment and increase the general security of financial transactions, thus enhancing financial stability in the country. The new legislation is also expected to accelerate growth and make it easier for individuals to obtain loans, aa there are clear rules that apply in the collection of bad debts and rehabilitate the debtor financially. This enhances creditors’ confidence in retail lending and encourages individuals to engage in calculated borrowing.

Likewise, this protects the dignity of a debtor and helps create an opportunity to manage finances and reduce financial burden.

What are to be expected from the new insolvency law?

The insolvency law will bolster the economic stability of the nation and provide a secure environment for personal loans to the contentment of both the creditor and the debtor.

The law provides the necessary balance to guarantee the rights of creditors and debtors and encourages increased cash flow, in support of comprehensive and sustainable development efforts in the country.

How does the law help the debtors?

The proposed law provides two means to address the insolvency of individuals:

  • Through the possibility of settling financial obligations
  • Through insolvency and liquidation of funds

If the debtor is facing current or anticipated financial difficulties that prevent them from settling all debts, the debtor can file an application with the court in order to have the opportunity to settle financial obligations according to a method approved by a creditor. Once a plan to reorganize and settle financial obligations is being prepared, the settlement plan shall be voted on by the creditors. The plan shall be implemented by the debtor with the assistance of experts and court supervision.

The law also provides another way for debt settlement wherein the debtor will liquidate funds to pay debts. This is applicable if the debtor has stopped paying any of the debts on the due dates for more than 50 consecutive working days due to financial inability.

The creditors of the debtor may also request for the liquidation under special conditions. In the event of liquidation, a trustee shall be appointed to control and facilitate the liquidation process, in accordance with the terms and conditions of the proposed law.

Settlement of obligations by the debtor

The debtor shall advance to the court and request the opening of the procedures in resettling financial obligations without litigation therein to settle financial obligations. This is applicable if the debtor is insolvent in accordance with the provisions of the insolvency law.

The time limit for the court to decide on debtors’ applications

The court shall decide on the application without notice, or pleading, within a period not exceeding five working days from the date of submission of the application provided it fulfills all required conditions. The court shall, if it accepts the request, decide to open the procedure for settlement of financial obligations.

The New Law represents a step forward for the UAE’s insolvency regime and contains provisions that are welcomed by UAE residents. Ultimately, of course, the success of the new regime will depend on the availability, expertise and willingness of both the local courts and UAE-based insolvency experts to implement it. If you want to know more about the insolvency law, you may contact our lawyers and we will be glad to assist you.

Hassan Humaid Al Suwaidi., LL.B. is a Senior Partner in HHS Lawyers. He has 20 years of experience dealing with high-value and complex cases. Frequently featured in local and international legal directories and commended for his ability to attain favorable outcomes for clients, Hassan has been involved in some of the largest legal settlements. A major part of his work is providing expert legal advice on UAE legislation and acting for individuals and businesses during disputes and litigation.