New Insolvency Law Proceedings in UAE
New Insolvency Law Proceedings in UAE
The new insolvency law of UAE helps those who are struggling to meet their financial obligations and are unable to manage their liabilities either by payment plan or insolvency and liquidation proceedings. The ministry of Economics sets the plans, required documents, qualifications, and implications for insolvency proceedings.
Procedures under Insolvency Law:-
The UAE Insolvency Law provides two ways and procedures with a prescribed time frame for insolvent persons' anticipated financial problems. The first way out is for the individual who sought court indulgence to settle his financial difficulties.2nd procedure is linked with the Liquidation process after the failure of an individual to pay off his debts even after an extended time.
Procedure for Settlement regarding Financial Obligations:-
Following are the steps carried out during the insolvency process under the law
- Application by the debtor:-The insolvent debtor will file an application for the indulgence of court regarding his financial difficulties.
- Required details/documents:-The debtor while applying for a payment plan/ insolvency and liquidation will provide the list of his creditors along with the details of his assets. The insolvent debtor also will provide the details of legal/ judicial proceedings which are pending against the debtor.
- The decision of the court:-The court will decide the application of the person facing financial difficulties who seeks indulgence from the court within 5 days.
- Appointment of Expert:-On acceptance of the application, the court will appoint a qualified professional for the assistance of the debtor in respect of the settlement of his debts. The settlement plan is given under the supervisory power of the court.
- Approval by creditors:-The proposed settlement plan must be approved by the creditors according to voting criteria and specific criteria.
- Restricted time line:-There is a restricted timeline for instance 3 years for the implementation of a settlement plan approved by the court which can be extended with the court approval with at least 2/3rd creditor’s consent regarding unsettled debts.
- The effective moratorium:-This procedure led to an effective moratorium on further steps of creditors in respect of any assets of the debtors until not pledged. Under this process, there is a moratorium for creditors to apply for liquidation regarding assets of insolvent persons.
Termination of settlement:-
The court has the authority to reject the application or terminate the procedure of settlement under the following:-
- concealment by the debtor:- If the debtor has concealed his assets or any part of his assets, the court has the power to reject the application by terminating the settlement proceedings.
- Submission of false statements by the debtor:-On the filing of false statements regarding assets, rights, and liabilities, the court can terminate the settlement proceedings.
- Expiry of due date:-There is a time limit of fifty business days for settlement of debt, on expiry of this period the court can terminate the settlement process.
Change/replacement of security:-
After gaining the interest of an approved settlement plan, the secured creditor can replace the security with another security at the request of the court's appointed expert. The court itself has the power to replace the security on achievement of settlement plan interest subject to securing the interest of secured creditors in case the creditors refuse to replace the security.
Proceedings of Liquidation:-
On the expiration of the due period for settlement, if the court decides to discontinue by annulling the settlement proceedings, the Liquidation procedure is immediately initiated under the law.
- Application by the debtor:-On failure of payment according to the proposed settlement plan after the expiry of Fifty two consecutive working days the debtor files an application before the court for the commencement of liquidation proceedings.
- Application by the creditors:-For the commencement of the liquidation, the application by a creditor or group of creditors can also be submitted before the court if the amount of debt is 200 K and more. Before such notice, a statutory notice is required for fifty business days for the payment of debt.
- Appointment of Trustee:-For the proceedings of liquidation, the court will appoint a trustee to supervise the assets of debtors and manage their payments.
- Grace period:-The court can grant a grace period of three months to the debtor to settle his debts before the commencement of liquidation. This period can be increased further for 3 months if creditors and trustees recommended it.
- Exempted assets/income:-On the application of the debtor, the court can exempt all necessary amounts to maintain his business profession and other essential expenses. It is worth mentioning that pension, social support, and necessary living expenses are exempted from liquidation proceedings.
- Selling of insolvent debtor’s residential house:-The insolvent debtor’s residential house can be sold with the court order subject to certain restrictions, and limitations and with due process of law under the liquidation proceedings.
Ranking of creditors:-
Under the proceedings of liquidation, the ranking of creditors can be identified as mentioned below:-
- Court-appointed expert and Trustee fees
- Secure Creditors
- Disbursed expenses and fees to preserve the assets of the insolvent debtor on the order of the court
- The employees and servants of insolvent debtor salaries and other entitlements
- The court can determine the family alimony
- Payments of Government institutions/bodies
- Unsecured creditors
After the initiation of liquidation proceedings:-
It is the authority of the competent court to take steps to proceed further after initiating the liquidation proceedings, following are important as mentioned below;-
- The insolvent debtor can not conclude any transaction until approved by the court
- All insolvent debtors’ debts may be mature
- No disposal of any asset by the insolvent debtor
- The debtor can not dispose of any money
- The debtor can not pay more than 5 k UAE Dirham
- The debtor can pay an amount of more than 5000 UAE Dirham subject to the approval of the trustee
- No personal guarantee can be offered by the debtor
- No security can be offered by the debtor except approval of the competent court
Consequences of the liquidation proceedings:-
Upon the liquidation proceeding, the debtor lost many of his benefits/rights/privileges for three years as mentioned below:-
- No new loan/finance
- Restricted to enter into new obligations
- From the insolvency judgment, the insolvent debtor is restricted for 3 years to get into any agreement, taking loan/finance, or any kind of obligation irrespective of consideration.
A moratorium is a legally allowed period to suspend/postpone/delay the commencement of any legal obligation to pay any debt. As the liquidation proceedings begin, all the legal and judicial proceedings against the insolvent debtor and his assets are suspended subject to court permission as discussed below:-
- Any civil proceeding
- Any criminal proceedings
- Any settlement
- This suspension against any proceeding remained effective until the competent court terminated the settlement process. It also could be ended if a competent court declares the whole proceeding null and void.
Crimes, penalties, and penal actions:-
The criminal case also can be initiated if the cheque holder during any stage creates any violation in respect of the court's decision to settle the amount. Foregoing reasons the debtor can request the competent court to register a criminal case against such violation under Article 401 of the Penal Code. There are some penalties under the insolvency law in the UAE.
- Sham claims:-These fines are for creditors for crimes like increasing illegally and unlawfully called shame claims against a debtor ranging from 10 K UAE Dirham to 100 K Dirham
- For debtor:-These fines are for debtors for violation of any payment plan or spending money in such a way that creates financial problems or adversely affects the creditors' interests. These fines range from 20k UAE Dirham to 60k UAE Dirham. Such violations may lead to imprisonment. The debtor can’t pay off the whole payment of one creditor, it will affect the payments of other creditors. The debtor can’t sell an asset without taking permission from a competent court or on less than the market price.
Restoration of the Insolvent Debtor rights:-
The insolvent debtor’s assets and other restrictions i.e. obtaining credit, and going through any transaction can be restored after the expiry of three years from the Insolvency proceedings.
- On settling even during liquidation proceedings the debtor’s rights can be restored.
- To the satisfaction of creditors, the debtor’s obligations can be declared as discharged.
- If an insolvent debtor pays his 50 percent debt, his period for not entering into any transaction can be reduced to two years.
- If an insolvent debtor pays his 75 percent debt, the period can be reduced to one year.
The intention behind the enactment of the New Insolvency Law UAE is to protect natural persons from civil and criminal legal and penal proceedings who are in financial crises and are not in this position to settle their debts and other financial liabilities, unlike the other laws which are promulgated for the financial issues of commercial companies.
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