In brief
- The UAE Personal Insolvency Law came into effect on 29 November, 2019.
- It is anticipated that this new Law will encourage individuals in financial difficulty to deal with their creditors in an open and non-confrontational manner.
- In this article, we break down the main provisions of the UAE Personal Insolvency Law, including, the advantages and disadvantages of settlement and the process involved.
The UAE Personal Insolvency (Law) came into effect on 29 November, 2019. The Law is intended to address the traditional stigma associated with personal bankruptcy, reduce the number of people leaving the UAE without settling all of their financial obligations and to ease the burden on financial institutions left with the high cost of bad or doubtful consumer debt.
It has been a long time in the making. A personal insolvency framework was suggested and drafted for incorporation into the bankruptcy regime at the time that the UAE Federal Bankruptcy Law (now Decree Law No (9) of 2016) (UAE Bankruptcy Law) was formulated. However, a personal insolvency Chapter in the draft law was not adopted – hence the wait until now for a discrete insolvency framework for individuals.
Historically, the position of an insolvent individual was dealt with through relevant provisions in the UAE Civil Code which gave jurisdiction to the Courts to issue Restriction Orders against affected individuals who were unable to pay or discharge their non-commercial debts. This process was little-used.
The Law does not apply to traders, commercial companies and other persons carrying out commercial activities who fall under the scope of the current UAE Bankruptcy Law. Consequently, relevant debts incurred by an individual may be a mix of both personal and commercial debts provided that such debts are not incurred by that individual in the course of carrying out any commercial business as a trader.
Consistent with the approach made in the UAE Bankruptcy Law, the Law offers (i) a Court-sponsored Settlement procedure (similar to Protective Composition for traders); and (ii) a formal insolvency or liquidation procedure.
Access into either set of proceedings will be determined by the debtor’s financial position at the relevant time.
Settlement
The Settlement procedure may be an alternative to bankruptcy. It is governed by Chapter 2 of the Law.
Settlement is a debtor-led process but run under the supervision of an expert (taken from the Court’s list of experts) who supervises the Settlement according to its terms but under the ultimate sanction of the Court. A debtor can petition if he is unable or to has no reasonable prospect of being able to pay his debts either present or future. The procedure may therefore allow the debtor to either:
- settle his outstanding debts by paying a proportion of them to his creditors; or
- come to an arrangement with his creditors over the payment of his debts
Advantages of a Settlement
For the debtor
- Effective alternative to bankruptcy proceedings.
- Protection against impatient creditors.
- Flexible proposals may be drawn up by the debtor to accommodate his personal circumstances.
- Avoids the stigma, restrictions and effects of personal bankruptcy.
For creditors
- The costs of administering a Settlement may be lower than with a bankruptcy estate.
- Potentially higher return for creditors.
Disadvantages of a Settlement
- Public process: any Court order commencing Settlement proceedings must be publicised. However, the agreed terms remain confidential. A Court deposit and filing fees are payable.
- Change of circumstances: if the debtor’s circumstances change and the creditors reject amended terms, the Settlement is likely to fail. A debtor will still owe his creditors the full amount of what had been owed at the start of the Settlement (less whatever has been paid to creditors under the Settlement)
- Personal assets at risk: if the Settlement fails, the debtor’s home (if owned by him) and personal assets may still be at risk. On a Settlement failure, the debtor may be made bankrupt by Court order.
Process
A scheme of Settlement requires the approval of creditors holding at least 2/3 or more of the debt. If approved, it binds the debtor and all of his creditors to accept the terms in settlement of their debts. This includes secured creditors. Contrast the position with Protective Composition for traders where secured creditors cannot vote in respect of their secured interests (unless they value their security at nil and submit a proof of debt for voting and dividend purposes as an ordinary unsecured creditor).
Any creditor approval must be sanctioned by the Court. The Court must be satisfied that that the creditors would receive more in a Settlement than they would in formal insolvency proceedings.
A Settlement may last for a period of three years and may be extended by majority creditor consent. At the end of the Settlement if the debtor’s payments into the scheme are not enough to pay all of their settlement debts in full, the shortfall would be expected to be written-off by the creditors.
Effect
The making of a Settlement order by the Court confers a stay (or moratorium) from creditors taking action against them personally – as well as their assets – unless and until the Settlement proposal is considered and voted on by the creditors. This may include current criminal actions for recovery of monies under ‘bounced’ cheques/
Secured creditors may not enforce their security without Court consent.
The debtor may continue to hold and manage his assets under the supervision of the expert. The expert may dispose of assets in accordance with any agreed Settlement terms.
The Settlement binds every person who in accordance with the Law was entitled to vote in the creditors’ decision procedure.
The Settlement terms will determine when the debtor completes his Settlement. Such terms could commonly provide for the Settlement to end upon either:
- the termination of the Settlement by the expert (usually following the debtor’s breach of the terms but also because the debtor has died or has been made bankrupt); or
- he completion of the Settlement in accordance with its terms.
The proposal would be expected to specify a term during which time the debtor makes contributions or lump sum payments to the expert which would be distributed to the creditors by way of dividend (after payment of the expert’s remuneration and expenses).
Settlement terms would presumably provide for the debtor to be released from all liability for the debts which fall within the scope of the arrangement on completion.
What if the debtor breaches the terms of his Settlement?
There are limited grounds on which to end Settlement terms. The Court may order transition directly into formal bankruptcy on a number of prescribed grounds. Neither the expert nor a creditor may effect such transition.
Formal bankruptcy (liquidation)
Bankruptcy is a formal individual insolvency procedure governed by Chapter 3 of the Law.
The purpose of bankruptcy is to grant relief to the bankrupt and fairly distribute his asset recoveries among his unsecured creditors.
1 The bankrupt’s assets and property form his bankruptcy estate which will vest in his trustee in bankruptcy (trustee) on appointment.
2 The trustee (ameen) administers the bankrupt’s estate under the general supervision of the Court and seeks to realise the value of the assets for distribution pari passu among the bankruptcy creditors.
3 Bankruptcy is a collective remedy. The bankruptcy creditors are generally bound to accept their distribution in settlement of their bankruptcy debts and are prevented from taking further recovery or enforcement action against the debtor and their property without Court consent.
4 Bankruptcy commences on the date stated in the bankruptcy order and continues until the debtor is formally discharged. There are detailed provisions in the Law that deal with discharge.
5 The trustee’s administration of the bankrupt’s estate may continue beyond the debtor’s discharge.
Who can petition the court to make a debtor bankrupt?
The following parties may present a bankruptcy petition to the court for a bankruptcy order to be made against an individual debtor:
1 The debtor himself.
2 One or more of the debtor’s creditors.
3 The Court (but not the expert or any creditor of the debtor) based on failed Settlement proceedings.
In the context of bankruptcy, a creditor is anyone to whom the debtor owes a bankruptcy debt. Bankruptcy debts are broadly debts or liabilities which either:
- the debtor owes at the date of the bankruptcy Order; or
- arise under an obligation incurred by the debtor before the bankruptcy Order, but which fall due after the date of the order (contingent debts).
Gateways into personal bankruptcy
- Debtor
A debtor may present his own bankruptcy petition to the Court on the grounds that he has been unable to pay his debts for a continuous period of more than 50 working days.
Creditor’s bankruptcy petition: process
A creditor (or creditors acting together) can only present a bankruptcy petition to the Court if, at the time the petition is presented, all of the following apply:
- The debt (or minimum total debts) equals or exceeds Dirhams 200,000. The debt may be secured or unsecured.
- The debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor(s) either immediately or at some certain future time.
- The debtor has been formally notified to pay the debt (as petitioned) and has failed to pay within a 50-day period from notification.
Although ultimately a question of fact, a Court will presume that a debtor cannot pay his debts if the debtor has failed to satisfy the debt(s) against which a notification has been made.
In either case, the Court’s decision to appoint is published in two daily Arabic-language newspapers.
Which Court?
Either debtor or creditor may begin bankruptcy proceedings against a debtor by presenting a bankruptcy petition to the debtor’s local Court. The normal rules set out in the Civil Procedure Law will apply. There is no personal service on the debtor.
Either party must also lodge judicial fees and a deposit (to cover the trustee’s costs of administering the bankruptcy estate). The deposit amount is determined by the Court. The trustee’s own remuneration ranks as a preferential debt and ranks pari passu with the Court deposit repayment.
The Court will exercise its discretion in making a bankruptcy order where a creditor has presented a petition and served it on the debtor. The Law gives no guidance on whether the Court must take into account any previous offer and any subsequent refusal to compound or secure outstanding debts.
On receiving the petition, the Court may either:
- make an interim order allowing a ‘grace’ period of up to three months (renewable for similar periods) to facilitate a settlement with all creditors who have submitted their proofs; or
- make a bankruptcy order
depending on what action it deems appropriate.
What are the powers and duties of a trustee in bankruptcy?
The debtor’s bankruptcy estate vests in the trustee upon appointment. This vesting is automatic by operation of law and takes place without the need for any documentation to effect or evidence the transfer of title.
The primary function of the trustee is to realise the value of the assets within the debtor’s bankruptcy estate and to distribute the asset recoveries to satisfy, as far as possible, the debtor’s bankruptcy debts.
The trustee pays the costs and expenses from asset recoveries before making a distribution to creditors.
The trustee has powers similar to (but less extensive than) those of a trustee in the context of a trader in bankruptcy. These include the power to compel parties with knowledge of the debtor’s affairs (including the debtor himself), to provide that information to the trustee and (with Court’s consent) to disclaim any onerous property. However, the trustee has no specific powers to deal with voidable or suspect transactions pre- commencement of bankruptcy.
The Court has no inherent power to pierce the corporate veil of companies operated by an undischarged bankrupt.
The effect of bankruptcy on creditors
Unsecured creditors
Unsecured creditors who are owed a bankruptcy debt must submit details of their claim to the trustee in the normal way. The trustee uses the submitted proofs of debt to calculate the return to each creditor when distributing realisations from the bankruptcy estate. There are no exceptions for ‘small debts.’
A bankruptcy order has the following effects:
- Unsecured debts are accelerated; i.e: they become immediately due and payable.
- Interest ceases to run on outstanding debts.
- Stay on disposal of the debtor’s assets.
- Stay on enforcement of judgment debts.
- Freeze on the ability of the debtor to incur new debt within period of three years from date of commencement.
- Suspension of pending criminal actions for recovery of monies under ‘bounced’ cheques (provided that the action covers a debt proved by the affected creditor in the insolvency proceedings).
Secured creditors
The debtor’s bankruptcy does not affect the right of any secured creditor to enforce its security over the debtor’s assets. However, there would be nothing in principle to prevent a secured creditor of a bankrupt to prove in the bankruptcy, if the creditor chooses to do so. In those circumstances, a secured creditor of a bankrupt debtor would have three options:
- To rely entirely on its security and take whatever realisations result from the enforcement of that security in satisfaction of the entire debt due.
- To enforce its security and prove as an unsecured creditor for any shortfall.
- To surrender its security entirely and rank as an unsecured creditor for the full amount of its debt.
What assets fall within a debtor’s bankruptcy estate?
The bankruptcy estate comprises all of the debtor’s assets and property at the date of his bankruptcy order (including the family home), except assets necessary for the basic domestic needs of the debtor and his family.
When does a bankruptcy end?
Discharge from bankruptcy
A debtor is automatically discharged from bankruptcy on the third anniversary of completion of the bankruptcy. Shorter periods apply if at least 50% or 75% of the debts have been paid in the insolvency.
Summary
It is hoped that the new Law will encourage individuals in financial difficulty to deal with their creditors in an open and non-confrontational manner rather than ‘skipping’ the UAE to evade financial responsibility.
Time will tell whether the negative mindset associated with insolvency and insolvency-related procedures is likely to endure or whether debtors and creditors alike will be willing to embrace the availability of these new procedures
