Insolvency Law in the UAE – Characteristics and Objectives

The new UAE Federal Law No. 19 of 2019 on Insolvency (the “Insolvency Law”) came into effect on 29 November 2019.  

Definition of Insolvency

The Federal Law No. 19 of 2019 on Insolvency (the “Insolvency Law”) describes Insolvency as “Facing current or anticipated financial difficulties that render the Debtor unable to pay his debts.” And a Debtor is further defined as “the insolvent physical person”.

An insolvent person is thus a natural person, who faces current or expected financial difficulties that renders them unable to settle their debts, whether those debts are owed to individuals or legal entities.

Objectives of the New Insolvency Law

The new Insolvency Law in the UAE aims to enhance financial stability in the country and thus achieve many benefits for its citizens and residents, including:

• Assisting individuals who face current or expected financial difficulties by providing them with the opportunity of reorganizing their debts.
• Providing individuals with the opportunity to work and be productive so that they can support themselves and their families.
• Protecting debtors from legal prosecution.
• Assisting individuals to settle their financial obligations within a maximum period of 3 years.

Advantages of the New Insolvency Law

• Facilitating business for individuals who face financial difficulties.
• Protection and assistance for those debtors who are legitimately unable to settle their debts as a result of current or expected financial difficulties.
• Reorganizing debtors’ debts and giving them the opportunity to borrow again on concessional terms.
• Promotion of the country’s long-term credit worthiness and future growth prospects.
• Increasing state economic power providing access to a stable economy that provides individuals with an environment conducive to doing business.
• Increases the opportunities for legislative integration, which attracts investment
• Contributes to achieving a safe environment for capital investments.
• Supports increased transparency regarding debt repayment rates.
• Eliminates individuals’ fears of criminal prosecution in cases of financial default.
• Serves to align the UAE with global insolvency regimes and policies.

The Difference between Insolvency Law and Bankruptcy law

The difference between the Insolvency Law and the Federal Decree Law No. 9 of 2016 on Bankruptcy is that the latter regulates the bankruptcy procedures in respect of legal entities, such as companies, and does not apply to natural persons. Whereas, the Insolvency Law relates to natural persons. 

It is further clear that the legislator sought to draw a distinction between the 2 pieces of legislation in this regard as Article 2 of the Insolvency Law provides that its provisions shall apply to Debtors who are not subject to the provisions of Federal Decree-Law No. (9) of 2016 on Bankruptcy.

Insolvency Law thus applies to natural persons who do not carry out an economic activity and are not considered legal entities. 

That being said, the basic objective of the laws corresponds in that they were enacted to protect the common interests of both the creditor and the debtor in a fair and balanced manner. 

Legislative Expectations after the Issuance of the New Insolvency Law

It is expected that the existence of specific rules governing a person’s insolvency situation shall lead to:

• Increased transparency regarding civil debt payment transactions.
• Enhanced trust in financial transactions between parties, and thus strengthening the financial stability of the country.
• Increase in economic growth.
• Greater chance for the rehabilitation of the debtor’s financial position, thus increasing creditor banks’ confidence in individual lending operations.
• Encouragement of the public to take up more informed borrowing options.

If you need insolvency lawyers services our judicial expert, specializing in bankruptcy and restructuring and before the courts in the UAE will guide you.