Dubai: If you find yourself in a situation where you are unable to pay off debt, can you apply to the court to get relief from your financial liabilities? The Insolvency law, which has been applicable in the UAE since January 2020, essentially protects debtors from legal prosecution, by decriminalising the financial obligations of the insolvent person and gives them an opportunity to work, be productive and provide for their families.
However, it is important to note that for insolvency to be applied to you, very specific requirements need to be met. Here is all you need to know.
Bankruptcy vs. insolvency – what is the difference?
Bankruptcy and insolvency are two legal terms that may sound similar but actually refer to two different federal laws. While the Bankruptcy law applies to companies, the Insolvency law applies to merchants and individuals.
Abeer Sharif, a lawyer with Dubai-based Prestige Advocates and Legal Consultants, summarised the basic difference between the two as follows: Insolvency is for the natural person or individual, while bankruptcy is for companies and businesses.
“The Insolvency law is applicable to merchants, who trade in products and/or services with the objective of making profits, and have stopped paying business-related debts that are due even if they have assets or money more than their debts. It also applies to individuals who have debts or loans and are unable to pay them,” she said.
When is the insolvency law applicable to you?
According to the UAE government’s official website – u.ae – the Federal Decree-Law No. 19 of 2019 on Insolvency aims at enhancing the competitiveness of the UAE by ensuring the ease of doing business, creating favourable conditions for individuals facing financial difficulties and protecting those who are unable to pay their debts because of their bankruptcy.
However, Abeer spoke about how the law set very specific requirements for the insolvency law to be applicable to an individual.
“The merchant or the individual in debt has to apply for insolvency through the court. The court will, however, not grant the order for issuing insolvency immediately. On applying for insolvency, a thorough investigation will be conducted to check if the payment default is genuine and due to a continuous inability to pay back the loan, or if it shows a shaky financial position of the individual or the merchant, which might mean that his or her business is collapsing. The consequence of the declaration of insolvency is that the merchant or individual will be banned from managing his accounts and assets and will not be granted loans or financial facilities. The debtor’s account will then be managed by the court-appointed expert, who will then distribute the assets to the creditors,” Abeer said.
On applying for insolvency, a thorough investigation will be conducted to check if the payment default is genuine and due to a continuous inability to pay back the loan, or if it shows a shaky financial position of the individual or the merchant, which might mean that his or her business is collapsing.
Documents you need to submit to apply for insolvency
Article 3 of the law stipulates the documentary proof that a person needs to provide, to apply for insolvency, which includes a memorandum containing a description of the debtor’s financial position and his or her assets as well as an official statement from the debtor on why he or she is not in a position to pay off their debt. The documents should also include the nomination of an expert/experts, who will assess the debtor’s claims and submit findings to the court for a final decision.
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.
Can I apply for insolvency if I am unable to pay back my bank loan?
If you are unable to pay off a bank loan, the case essentially becomes one related to the issuance of bounced cheques, or cheques that are dishonoured.
Mohamed Elmasry, junior associate at Al Suwaidi and company, advocates and legal consultants, spoke about how, when a cheque is dishonoured, the complainant - to whom the cheque was issued – can file a police complaint and the subsequent action can include a civil as well as a criminal case against the person who issued the cheque.
It is important to understand that the criminal and civil cases take different paths, and both need to be resolved by the debtor.
As far as the criminal case is concerned, the Public Prosecution will impose a fine on the person who has issued the cheque, if the value of the cheque is below Dh200,000.
The fine amount depends on the value of the cheque, which was issued. The court fine can be anywhere between Dh2,000 to Dh10,000.
“However, if the value of the bounced cheque exceeds Dh200,000, then the Prosecution will not impose a penal order. It will directly refer the matter to the competent criminal court,” Elmasry said
• Dh2,000 fine for any bounced cheque, where the value does not exceed Dh50,000.
• Dh5,000 fine for any bounced cheque, where the value ranges between Dh50,001 and Dh100,000.
• Dh10,000 fine for any bounced cheque, where the value ranges between Dh100,001 to Dh200,000.
Do I still have to pay back the loan if I have paid the court fine?
While the court fine needs to be paid to be released from detention, this in no way means that the debtor no longer needs to pay the loan. This is because the case of the bounced cheque is both a criminal and a civil case. While the court fine helps the debtor be released from detention, due to the criminal case being lodged, the civil case still needs to be resolved.
“The debtor will remain liable to settle the debt amount in case the creditor registered a civil case,” Elmasry said.
If the bank, or any other creditor, has filed a civil lawsuit, there are two paths that the debtor can follow, according to Elmasry:
1. Contact the bank or the creditor and request for debt rescheduling
2. Apply for insolvency, in accordance with Federal Law No. 19 of 2019, provided that the conditions for insolvency are met in the debtor.
The debtor's payment of the fine related to bounced checks does not mean at all that he has been absolved of his civil liability, and therefore, the debtor shall contact the bank and request debt rescheduling and to facilitate the payments or to register an insolvency case in accordance with Federal Law No. 19 of 2019 regarding insolvency.
However, not every bank loan default would qualify for the insolvency law to be applicable and Abeer warned people to not consider the insolvency law as a way to escape their financial liabilities.
“A layman may think that it is easy to get away with defaulting his debts by applying for a bankruptcy or insolvency order. However, this is far from the reality. The court and statutes in the UAE have imposed restrictions on granting the order. As mentioned earlier, the court will check the reality of the financial position of the applicant and will not be granted unless the court-appointed expert affirms the position of the applicant. In addition to this, if the merchant or applicant deliberately manipulates the court and the creditors, either by eliminating or forging the commercial register or any act that shows bad faith, it will be considered a criminal offence,” Abeer said.
Elmasry, too, reminded people that for insolvency to be successfully applied to an individual case, a lot of conditions need to be met.
“If the court reaches the conclusion that an individual is insolvent, then they would not need to pay back the loan. However, there are a lot of procedures involved in doing so, including the fact that the individual’s accounts will be checked for the coming 12 months. So, if for example, the person is employed and is receiving a monthly salary, the court will take a percentage from the salary, as determined by the court-appointed expert. This is only one condition out of a list of conditions that need to be met for the insolvency law to be applicable on a person,” Elmasry said.
To read our detailed guide on how to apply for insolvency, and the process that is followed by a court to find a person insolvent, read our detailed guide here.