The UAE’s new insolvency law: What we know so far

A new insolvency law was passed on November 17, 2019 by the UAE Cabinet. It is expected that the new law will enter into force in January 2020 and will regulate cases of insolvency in the UAE.

The law will come as a relief to those debtors that are trying to settle their financial obligations. Until now, debtors frequently ended up being caught in a spiral of unpaid debts with a fear of yet another default escalating to a criminal liability, sometimes pushing them to extreme measures, such as having to flee the country.

With the new law in place, the parties involved can now mediate through a court-approved process, using a court-appointed expert. This will create much needed room for negotiation and a new concept of “concessional loans”, allowing the debtors to repay their debts, significantly increasing recovery rates.

In theory, the general belief is that the new law will be mutually beneficial for UAE local and expat residents, and the banks. We are of course yet to see how this works in practice.

Read: UAE legislates protection of citizens, residents in debt

The actual plan and what we know so far

The new law is the government’s attempt to decriminalise the approach towards unpaid debts, and offers a more constructive and pragmatic solution towards unpaid debts by, among other things, providing for a limited, three-year timeline.

When an individual is unable to settle their debts, they are given an opportunity to approach the civil courts. The courts in turn are actively involved in the process of mediation and provide both an actual step-by-step process and the relevant experts, also chosen and approved by the courts.

As for the fees required for the process of restructuring debts, including the process of mediation, it is expected that such fees will remain reasonable, for them not to be an additional source of financial stress for the debtor.

It is unclear whether or not there will be separate insolvency courts created for the purposes of dealing with the insolvency matters. In the meantime, to reiterate the point mentioned above, the civil courts, not criminal courts, will have jurisdiction over the relevant proceedings.

With the exception of Dubai’s initiative back in 2017, to limit issuance of jail sentences over bounced cheques with the value of Dhs200,000 and above, it is unlikely that the approach towards bounced cheques will change with the issuance of the new law.

Lastly, the new law is anticipated to provide a level of balance – the banking sector will have more time to recover loans, and debtors going through financial difficulties will also have extra time to find a solution towards resolving their debts without having to take unnecessary criminal risks.

It will support the UAE’s 2021 vision, which aims to create an environment that will motivate smaller businesses and entrepreneurs to be more ambitious with their plans in the country.

Amir Ahmad is a partner in the Financial Industry group at law firm Reed Smith