Insolvency in the UAE – Restructuring

A Comprehensive Guide for Creditors and Debtors – Restructuring

Welcome to our comprehensive guide on the Federal Decree-Law No. 19/2019 on Insolvency in the United Arab Emirates (the “UAE Insolvency Law”), a pivotal piece of legislation governing insolvency procedures in the United Arab Emirates. This newsletter serves as a crucial resource for understanding the nuances of insolvency law from both creditor and debtor perspectives.

Navigating the complexities of financial distress requires a thorough grasp of your rights, responsibilities, and the legal processes involved. Whether you are a creditor seeking to safeguard your dues or a debtor looking for a structured path to resolve financial obligations, this guide offers vital insights and clarity. Join us as we examine the intricacies of the insolvency process, the pivotal role of insolvency trustees, and the post-insolvency implications, ensuring you are well-equipped to navigate these challenging scenarios with confidence and understanding.

Application:

The UAE Insolvency Law represents a significant legal framework, primarily applicable to individuals and businesses facing financial distress. The UAE Insolvency Law is specifically applicable to debtors who are not subject to the provisions of Federal Decree-Law No. 51/2023

Promulgating the Financial Reorganization and Bankruptcy Law (the “UAE 2024 Bankruptcy Law”) abrogating Federal Decree-Law No. 9/2016 (the “UAE 2016 Bankruptcy Law”) – the Bankruptcy Law.

This implies that the UAE Insolvency Law primarily addresses the insolvency issues of individuals and entities that fall outside the scope of the Bankruptcy Law, which generally governs insolvency proceedings for larger corporations and entities​​.

Instead, the UAE Insolvency Law is particularly pertinent to small and medium-sized enterprises (SMEs), entrepreneurs, and individual consumers who find themselves unable to meet their debt obligations.

The UAE Insolvency Law distinguishes between two types of proceedings: one focusing on restructuring (often referred to simply as ‘insolvency restructuring proceedings’) and the other on insolvency and liquidation. This newsletter will focus on ‘insolvency restructuring proceedings.

Insolvency Proceedings (Restructuring):

• Initiators: These proceedings are initiated by the debtor and is responsible for the payment of Court fees and arranging a bank guarantee.
• Role of Creditors: Creditors are involved in the sense that they can register their claims and participate in the restructuring process, approval of the plan but they do not initiate these proceedings.
• Purpose: These proceedings aim to provide a debtor with an opportunity to restructure their debts. It’s a process designed to help debtors overcome financial distress and regain solvency.
• Process: The debtor or their creditors propose a plan to restructure the financial obligations. This involves renegotiating terms with creditors, possibly including extending payment deadlines, reducing the debt amount, or altering interest rates.
• Outcome: The goal is to allow the debtor to continue operating their business and eventually fulfil their obligations to creditors, by part selling some assets thereby avoiding liquidation.

Insolvency and Liquidation Proceedings:

• Initiators: These proceedings can be initiated by either the debtor or the creditor/s (the “Applicant”). The Applicant is responsible for the payment of Court fees and arranging a bank guarantee.
• Purpose: This type of proceeding is initiated when restructuring is not feasible, and the debtor’s financial situation requires winding up their affairs.
• Process: In these proceedings, the debtor’s assets are liquidated (sold off) to pay back creditors as much as possible. The process is more terminal in nature, marking the end of the debtor’s business operations.
• Outcome: The primary aim is to ensure a fair distribution of the debtor’s liquidated assets among the creditors, following the legal order of priority for claims.

The Insolvency Process and Restructuring

Initiating Insolvency Proceedings:

Initiation: Debtors can initiate insolvency proceedings for restructuring or settling by filing an application to the competent court, supported by the following documents.

• A summary of the debtor’s financial situation.
• Details of unpaid debts, creditors’ names, and any collateral.
• A list of the debtor’s assets and their values.
• Information on any legal actions against the debtor.
• A statement of financial difficulties.
• The debtor’s living expenses.
• Proposed plans for settling financial obligations.
• Nomination of an expert for the proceedings.
• Disclosure of any financial transfers outside the state in the past year.
• Any additional supporting documents or those requested by the court. The Debtor must explain any missing documents in their application and the court can give additional time to provide the missing information/document.

Court Procedures:

Deciding on the Application

• The court decides on insolvency applications within five working days.
• Acceptance of an application suspends creditors’ rights to execute against the debtor’s funds or initiate liquidation proceedings.
• Secured creditors may still execute against securities with court permission.
• In the UAE’s insolvency restructuring framework under the law, secured creditors have specific appellate rights. If a court denies a secured creditor’s request to execute against their securities when a debt becomes due, this decision can be appealed to the Court of Appeal. It’s crucial to note that such an appeal does not halt the ongoing settlement proceedings, and the appellate court’s decision is final. This appellate mechanism ensures that secured creditors have an opportunity for judicial review, maintaining a balance between the debtor’s need for financial reorganization and the creditor’s rights to security enforcement.
• Debtor’s obligation to apply for insolvency is suspended during the settlement period.
• Filing for insolvency doesn’t hasten the maturity of deferred debts.

Payment of Fees and Expenses in Financial Settlement Proceedings

• Judicial Fees: The debtor is responsible for paying all judicial fees associated with the insolvency proceedings.
• Estimation and Notification of Fees: The court assesses the expertise fees and other expenses necessary for the financial settlement proceedings. The debtor is informed of these estimated costs no later than the day after their application is submitted.
• Deposit Requirement: The debtor is required to deposit either a cash amount or a bank guarantee with the court’s treasury. This deposit must cover the estimated expertise fees and other expenses. The court determines the due date for this deposit.
• Postponement of Payment: If the debtor cannot afford to pay these fees and expenses at the time of the application, the court may agree to postpone the payment. However, it’s important to note that these fees and expenses will be prioritized

Assignment of the Expert

• The court assigns one or more experts to assist in the settlement process.
• Experts work jointly; decisions are made by majority.
• The expert is notified the day after the decision and must not have conflicts of interest with the debtor.
• The expert publishes an invitation to creditors in two major newspapers and gathers additional debtor information.

Submission of Debt Documents

• Creditors must submit their debt documents and supporting evidence to the expert.
• The expert can request further clarifications or auditing on the debts.

Debt’s Report

• The expert compiles a list of all creditors, detailing the debts and securities.
• A report on the debtor’s finances and potential for settling obligations is prepared and submitted to the court.

Report’s Audit

• The expert’s report is audited by the court.
• If settlement is deemed feasible, the expert is instructed to prepare a plan.

Specific Rights and Protections for Debtors and Rights and obligations of the Creditors

For Debtors:

• Protection from Legal Actions: During the insolvency proceedings, debtors are typically protected from legal actions for debt recovery.
• Opportunity to Reorganize: Debtors have the chance to reorganize their debts and propose a viable repayment plan.
• Fair Treatment: The law ensures that the debtor’s assets are fairly managed and distributed to creditors.

For Creditors:

• Claim Submission: Creditors have the right to submit their claims to the trustee within 20 days period following the expert’s public notification for inclusion in the debtor’s insolvency proceedings.
• Suspension of Rights for Execution: Creditors’ rights to execute against the debtor’s funds or initiate their own insolvency and liquidation proceedings are suspended once the court accepts the debtor’s application for financial settlement.
• Rights of Secured Creditors: Secured creditors maintain the right to execute against their securities when debts are due, provided they obtain permission from the court and appeal to the Appellate Court if denied.
• Participation in the Plan Development: Creditors receive a copy of the proposed financial settlement plan and are invited to meetings to discuss and vote on it. They can propose amendments to the plan during these meetings.
• Voting Rights: However, only creditors whose claims are accepted by the court are eligible to vote, unless otherwise authorized. The plan needs approval by a majority of voting creditors representing at least two-thirds of the verified debts.
• Approval and Nullity of the Plan: The court’s decision on the plan is binding on all creditors. Creditors are not required to return any amounts received if the plan is later ruled null.
• Oversight of Plan Implementation: The expert supervises the implementation of the plan and can sell the debtor’s property as per the plan, with proceeds going to the court’s treasury. Creditors can access periodic reports on the plan’s implementation.

The Role of the Insolvency Trustee

• Appointment and Oversight: The trustee, appointed by the court, oversees the entire insolvency process.
• Asset Management: They are responsible for managing the debtor’s assets, including their sale and distribution to creditors.
• Mediation Role: The trustee acts as a mediator between the debtor and creditors, facilitating negotiations and agreement on the insolvency plan.
• Reporting and Compliance: The trustee ensures that all legal requirements are met and provides regular reports to the court on the progress of the insolvency proceedings.

The Plan for the Settlement of Financial Obligations

Presentation of the Plan to Creditors

• The expert prepares the settlement plan with the debtor and shares it with creditors within 22 working days.
• Creditors are invited to meetings to discuss and vote on the plan.

Replacement of Securities

• The expert may propose alternative securities to secured creditors, subject to court approval if necessary.

Voting on the Plan

• Valid voting requires a majority of creditors, representing two-thirds of total verified debts.
• If quorum is not met, a second meeting is held, and if still unsuccessful, the matter is referred to the court.

Amendment of the Plan

• Amendments can be proposed and voted on during creditor meetings.

Approval of the Plan

• Approval requires a majority vote of creditors present, representing at least two-thirds of verified debts.
• Creditors who didn’t approve or attend the meetings are given a chance to join the plan later.
• Special privileges granted by the debtor to a creditor for plan approval can be voided by the court.

Extension of Voting Period

• The court may extend the voting period if required approval is not achieved.

Court’s Approval of the Plan

• The court verifies that creditors receive at least as much as they would in liquidation.
• The plan becomes binding on all creditors once approved by the court.
• If not approved, the court may commence insolvency and liquidation proceedings.

Post-Insolvency Procedures and Their Implications – Implementation of the Plan

After Plan Approval: Management of the Implementation of the Plan

• The expert as the trustee supervises the plan’s implementation, reporting any failures to the court.
• The debtor retains control over business operations and legal obligations during this phase.
• Assets are distributed to creditors as per the terms of the plan.

Sale of the Debtor’s Property

• The expert sells the debtor’s property as per the plan, with proceeds deposited in the court’s treasury.

Report of the Implementation of the Plan

• The expert reports every three months on the plan’s progress.
• These proceedings are confidential, with limited disclosure rights.

Amendment to the Plan after Commencement

• Amendments to the plan during implementation require court approval.
• Affected creditors are notified and can make observations before the court decides.

Termination and Expiry of Settlement Proceedings

• Settlement proceedings can be terminated if the debtor is unable to fulfill obligations, fails to implement the plan, or at the debtor’s request.
• Proceedings expire once all obligations under the plan are fulfilled.

Nullity of the Plan

• The plan can be invalidated for evasion or fraudulent activities by the debtor.
• Claims of nullity must be filed within specific timeframes i.e. within six (6) months from the date of discovery of the act. In all cases, the lawsuit shall not be accepted if it is filed after two (2) years from the date of the Court’s decision to approve the Plan.

Effect of the Plan Nullity

• If the debtor fails to comply with the plan, creditors may have legal recourse to recover their dues.
• The debtor might face legal consequences for non-compliance, including potential liquidation of assets.
• If the plan is nullified or terminated, insolvency and liquidation proceedings may commence if the debtor remains unable to pay due debts.

Long-Term Impact:

• Successful completion of the insolvency process can lead to a discharge of the remaining debts, offering a fresh start for the debtor.
• Creditors may need to write off some debts but can mitigate losses through the structured recovery process.

Conclusion:

In conclusion, the UAE Insolvency Law represents a comprehensive legal framework addressing insolvency issues for individuals and small to medium-sized enterprises (SMEs). This law plays a crucial role in the UAE’s legal system, offering a structured approach for debtors experiencing financial distress, while protecting the rights and interests of creditors.

The UAE Insolvency Law also outlines the consequences of non-compliance and fraudulent activities through well-defined penalties. Creditors face penalties for fictitious claims or illegal imposition of debts, while insolvent individuals can be penalized for irresponsible expenditures or preferential debt repayments.

Author’s Bio:

Nikhat Sardar Khan, a distinguished legal expert with extensive experience in the UAE’s legal landscape, currently heads the Department of Litigation, ADR and Corporate at Hilal & Associates Advocates & Legal Consultants. Her expertise encompasses complex litigation and dispute resolution in commercial matters, banking, finance, corporate practice, and more. As a qualified arbitrator and experienced mediator, she holds certifications from prestigious institutions like the Chartered Institute of Arbitrators (FCIArb) and The Royal Institution of Chartered Surveyors (RICS). Her legal acumen, honed over decades of practice in both India and the UAE, positions her as a formidable figure in the field of law.

Nikhat Sardar Khan (FCIArb)(RICS)
Head of DIFC Litigation, Corporate & Arbitration- UAE,
MENA and India.
Arbitrator | Mediator | DIFC Practitioner
Email: nikhat@hilalassociates.com