Insolvency law
Picture used for illustrative purposes only Image Credit: Stock image

Dubai: If you find yourself in a position where you are unable to pay your financial liabilities because of unforeseen circumstances, you may be considering declaring insolvency.

In 2019, The UAE Cabinet approved the Federal Decree-Law No. 19 of 2019 on insolvency, which was effective from January 2020. While the law offers relief to a person who is unable to pay their debts, the process to apply for insolvency is quite detailed for the court to determine whether a person is truly insolvent.

According to Jihene Arfaoui, in-house legal adviser at Danube Group, Articles 3 to 27 of the law lay out a detailed and clear process that needs to be followed by the debtor for the settlement of the financial dues.

“As per the procedure for settlement of all debts, the debtor goes to court and opens a case, not against anyone specifically, but instead as a request to the court to help him settle his debt. He should submit all the documents listed and pay the professional fees. The court will then issue a decision, appointing an expert to start the procedures," Jihene said.

As per the procedure for settlement of all debts, the debtor goes to court and opens a case, not against anyone specifically, but instead as a request to the court to help him settle his debt. He should submit all the documents listed and pay the professional fees. The court will then issue a decision, appointing an expert to start the procedures.

- Jihene Arfaoui, in-house legal adviser at Danube Group

The role of the court-appointed expert

For the insolvency case proceedings, the role of the court-appointed expert is critical, as he or she needs to liaise with the Debtor and the Creditor and prepare a settlement plan, which is finally submitted to the court for consideration.

"There can be one or more than one expert, who is required to start the investigation within five days of receiving the notification from the court. The expert would be required to look at the documents submitted by the debtor, calculate the amount of debt and prepare a settlement plan, for which the expert should work with the Debtor himself. When he prepares the plan, he should give a copy to the Creditor to give their opinion and put it in the court within 22 days from the date of appointment of the expert,” Jihene said

Steps to follow to apply for insolvency

According to Chapter 1 of the Federal Decree-Law No. 19 of 2019 on insolvency, titled ‘Application to Open the Financial Settlement Proceedings’ this is the process an individual needs to follow:

Step 1 - Approach the court and file the necessary documents

You need to raise the case with a court in the UAE. To apply for insolvency, you would need to provide the following documents:

1. A memorandum containing a brief description of the Debtor’s financial position and any data relating to his sources of income, both inside or outside the State, his professional, vocational or craft status, as the case may be, and his liquidity projections and sources thereof within a period of twelve (12) months following the submission of the application.

2. A statement of the names and addresses of creditors whose debts are not paid or are not expected to be paid by the Debtor, the amount of each debt, the dates of maturity thereof and the securities provided to the creditors, if any.

3. A detailed statement of the Debtor's movable and immovable property inside and outside the State and the approximate value of each on the date of submission of the application.

4. A statement of any legal or judicial proceedings or actions taken against the Debtor.

5. A statement by the Debtor that he is facing current or anticipated financial difficulties and that he is unable or is expected not to be able to pay all of his debts, whether due at the time of submission of the application or in the future.

6. The funds necessary to support the Debtor, his family and any dependents thereof.

7. The Debtor’s proposals to settle his financial obligations.

8. The Debtor’s nomination of an Expert to undertake the proceedings in accordance with the provisions of this Decree-Law.

9. A statement of the disclosure of financial transfers outside the State that took place during the last twelve (12) months.

10. Any other documents supporting the application or requested by the Court.

Failure to Complete the Required Data

This part of the application is critical and not submitting the required documents can lead to delays. The law states: “If the Debtor is unable to provide any of the documents or data required in accordance with the provisions of Article (3) of this Decree-Law, he shall state the reasons therefor in his application. If the Court deems that the documents submitted are not sufficient to decide on the application, it may grant the debtor a time-limit for the submission of any additional data or documents."

It is also important to ensure that the documents are accurate. If applicant is found to have deliberately manipulated the court and the creditors by eliminating or forging the commercial register or any act that shows bad faith, it is considered a criminal offence.

Step 2 - Payment of Fees and Expenses

The exact amount of fees is specified by the court, after assessing the expert’s fees and fees of the judicial proceedings. If the Debtor is not in a position to make the payment immediately, the law has provisions for delaying the payment.

Step 3 - Measures to preserve Debtor's funds

The Court may decide to take the necessary measures to preserve the Debtor's Funds while the case is being processed.

Step 4 - Court decides on the application

Within five days of the application being submitted to the court, the court will decide on whether it will accept the application or not. If the application is accepted, the court shall rule to open the proceedings for the settlement of financial obligations.

If the court rejects the application, the individual can take the application to the Court of Appeal. The decision issued in the appeal shall be considered final.

What are the cases in which the application can get rejected?
According to Article 12 of the law, these are the conditions that can lead to the rejection of the application:
1- If it is established to the Court that the Debtor has carried out any action or refrained therefrom with a view to concealing or destroying any part of its funds.
2- If the Debtor has provided false statements on his debts, rights or funds.
3- If the Debtor has ceased to pay any of his debts on the maturity date thereof for more than fifty (50) consecutive working days, as a result of his inability to pay such debts.

According to Article 12 of the law, these are the conditions that can lead to the rejection of the application:

1- If it is established to the Court that the Debtor has carried out any action or refrained therefrom with a view to concealing or destroying any part of its funds.

2- If the Debtor has provided false statements on his debts, rights or funds.

3- If the Debtor has ceased to pay any of his debts on the maturity date thereof for more than fifty (50) consecutive working days, as a result of his inability to pay such debts.

Step 5 - Assigning an expert

The court will then assign an expert, or experts, to the case. The specific regulations related to the selection and assigning of the expert are stated in Article 8 of the law.

Step 6 - Creditors submit their documents

Next, the creditors would need to hand over their debt documents to the expert, along with the necessary statements and collaterals.

Step 7 - Expert completes his report

In 20 days, unless the court grants an extension, the expert will submit a detailed report, clearly laying down the dues and the details provided in the documents of the debtor and creditors. Article 10 of the law states: “He [the expert] shall also indicate in his report the possibility of settling financial obligations or otherwise, in the light of the Debtor's income sources.”

Mohamed Elmasry, junior associate with Al Suwaidi and company, advocates and legal consultants, said: “Once the settlement application submitted by the Debtor is approved by the court, it shall result in the suspension of the Creditor's right to request execution against the Debtor's funds. However, if the conditions mentioned in the Insolvency Law have been fulfilled and the court has declared the debtor as ‘insolvent’, then it will not be permissible to imprison an insolvent debtor. But his failure to settle the dues will lead him to be disallowed from borrowing until he repays what he owes to creditors, and the appointed expert will sell any of his properties or assets and distribute the outcome among the creditors.”

However, if the conditions mentioned in the Insolvency Law have been fulfilled and the court has declared the debtor as ‘insolvent’, then it will not be permissible to imprison an insolvent debtor.

- Mohamed Elmasry, junior associate with Al Suwaidi and company, advocates and legal consultants

Step 8 - Court audits the report

The court will then audit the report and if it deems necessary will instruct the expert to create a payment plan to settle the financial obligations of the debtor.

Step 9 - Preparing the repayment plan

Articles 13 to 20 of the Law lay down the detailed process of approval, voting and clearance from all concerned parties to finalise on a repayment plan.

Step 10 - Implementation of the financial settlement plan

Articles 21 to 24 detail how the expert, who is now in a position of supervising the execution of the plan, would implement the plan. This would include sale of any property held by the debtor and provide regular updates to all parties concerned on the repayment of dues. It is also possible that during the implementation of the plan, the expert finds it necessary to make amendments to the plan. In such a scenario, the process is laid out in Article 24.

Step 11 - Termination, Expiry and Nullity of the Financial Settlement Proceedings Plan

In case the debtor clears all dues as per the plan, the plan shall be completed. However, if the debtor still fails to clear his dues, the law goes on to state how the court and the appointed expert can go on to start insolvency proceedings, which include but are not limited to sale of assets.