New Insolvency or Bankruptcy law for individuals has recently received quite a lot of attention from foreign expatriates living in UAE. The Cabinet of UAE has lately sanctioned a federal law to explicitly govern the cases of bankrupt individuals within the country. The law has been issued to safeguard the business interest of UAE residents, enhancing conditions of insolvent individuals and to ensure healthy competition among businesses.
Understanding bankruptcy laws in the UAE and DIFC in the context of COVID-19-related financial pressures.
Recent court service suspensions announced in the UAE – albeit temporary – as part of the government's response to COVID-19 will undoubtedly have an impact on efficacy of debt recovery options available to creditors, at least in the near short term. These measures come at a time when payment default rates are only expected to increase rapidly and creditors will be looking at what actions they can and should take to protect their position, including short and medium term strategies.
With the significant strain placed on market participants as a result of the combined impacts of the global COVID-19 pandemic, the oil price war and the ensuing liquidity and credit crunches, we expect that a number of enterprises in the United Arab Emirates ("UAE") will either be forced to carry out restructurings or otherwise undergo formal court-supervised insolvency processes.
The UAE Cabinet recently approved Decree-Law No. (19) of 2019 on the Insolvency of Natural Persons concerning natural person’s inability to pay debts due to insolvency and debt default. This new law is aimed at enhancing the competitiveness of the UAE, ease of doing business and at facilitating more favorable conditions for individuals facing financial difficulties and protecting those unable to meet debt obligations from going bankrupt.
Why are bankruptcy laws needed?
Over the past couple of years, there have been a wave of new insolvency and bankruptcy laws introduced in the GCC. With the exception of Qatar and Kuwait, all other GCC countries have now introduced new bankruptcy laws. As for Oman, its new bankruptcy law is due to come into effect on 1 July 2020.
The UAE has issued by Decree Federal Law No. (10) of 2018 on Netting (theUAE Netting Law), with the aim of strengthening the regulatory framework for the settlement of obligations arising from qualified financial contracts. Parties to a contract previously relied on Article 183 of Federal Law No. (9) of 2016 on Bankruptcy (the Bankruptcy Law) to settle debts agreed to under a contract, provided that it is within the context of insolvency and that such contract does not fall within the claw-back provisions (Article 168 of the Bankruptcy Law).
In yet another example of the Dubai International Financial Centre (DIFC) making its company and insolvency law even more versatile, the DIFC has introduced a mechanism which will operate in a similar manner to a scheme of arrangement under English law. The law came into effect on 12 November 2018.
Key terms
The New UAE Netting Law
Netting is a standard mechanism used in banking and financial markets for the settlement and payment of competing rights or interests between counterparties. This occurs through an agreed process of termination and evaluation of such rights or interests and consolidation to one single (or ‘net’) payment from one party to another, minimising the overall credit and settlement risk.
Introduction
When a limited liability company goes into liquidation, its creditors are faced with considerable uncertainty, not least over their rights to securities on loans made to the defaulter. In such cases, a number of questions arise, including the following: