Dubai: The UAE Cabinet on Sunday approved a federal law to regulate cases of insolvency of natural persons or individuals.
In 2016, the UAE government had adopted a similar insolvency law for companies which was widely welcomed by businesses and financial institutions.
The legal framework for insolvency for both companies and individuals are expected to improve the competitiveness and the ease of doing business of the UAE.
Debt restructuring for individuals under legal protection is widely seen as a great step forward in helping those who are unable to pay their debts from going bankrupt.
“The approval of a new federal law to regulate the cases of personal insolvency is a step forward in improving the ease of doing business for both debtors and creditors. The current scenario was far from ideal for creditors since they resulted in very low recovery rates and placed the debtors also under a lot of stress. Many debtors just chose to flee away from the country rather than paying off their debts since in many cases it was treated as a criminal offence. The new law will decriminalise financial insolvency, and this in itself will be a great morale booster for those heavily indebted,” said Vijay Valecha, Chief Investment Officer, Century Financial.
A legal framework for addressing debts and financial difficulties will help them reschedule their debts and provide them with the opportunity to be granted new concessional loans.
“The introduction of any form of personal insolvency regime is a critical step in both enhancing and rounding out the already improved UAE insolvency provisions. Every major financial market in the world has already enacted some form of personal insolvency provisions and by doing so in the UAE, it further improves the effectiveness of doing business in the country,” said Guy Wall - Partner, Restructuring Advisory, Grant Thornton UAE.
Experts say an appropriate legal framework will be in the interest of both creditors and debtors. The new law will protect the debtors from legal prosecution offers them an opportunity to work and resolve the debt through a restructured repayment schedule protected by law.
“In an ideal situation, we will see those with debts that have now turned to potential personal enforcement and those individuals approaching significant debt levels being able to manage the problematic position of unserviceable debt whilst maximizing returns to creditors,” said Wall.
The law, which will enter into force in January 2020, provides for engaging court appointed experts in assisting debtors and creditors to come up with a resolution plan to settle the outstanding debt.
“The new law helps to bring UAE in line with the global best. A very humane approach has been taken with the law mandating that an expert appointed by the court should coordinate with the debtor and creditor and come up with a plan which doesn’t last for more than three years. The fees for rescheduling and restructuring of debt has also been reduced. This helps the debtor as it reduces his expenditure and also prevents the case from lingering in the courts for an endless duration. On the whole, the law will enhance the image of UAE as a modern nation with a transparent and business friendly legislation,” said Valecha.
The has been adopted taking into consideration the pros and cons of such a law and the implications it will have on the banking sector. Bankers in general were concerned about the implications of legal protection for debtors on the asset quality of banks
“Ninety per cent of our borrowers are expats. If they borrow here, declare bankruptcy, get protected here, they can go home and can start again there,” said as banker.
However, the provisions of the new law take a humane approach to debt settlement that will be acceptable to all parties.
“Ensuring the engagement of debtors to stay in the country and deal with their debts instead of potentially exiting the country is beneficial for all levels of our economy. This is a great step forward for the UAE market, and if coupled with appropriate regulations and input from experienced insolvency practitioners to facilitate usable enactment will be the next step to a more transparent and usable regulatory framework,” said Wall.