How the UAE's new insolvency law will help residents in chronic debt

Legislation set to go live in January 2020 will see debtors able to clear bad debts over three years

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A new insolvency law to help UAE residents clear bad debts will ease the burden of heavy liabilities as the threat of criminal sanctions is removed, according to analysts.

The federal law, passed by the UAE Cabinet on Sunday, protects Emiratis and residents in debt from legal prosecution and decriminalises their financial obligations, offering them an opportunity to work to resolve their financial dilemma while still supporting their families.

“As the UAE advances its positioning as a regional economic hub and financial safe haven, regulations too will evolve to support the financial wellbeing and stability of local entrepreneurs and business owners,"  says AbdulAziz Al Ghurair, chairman of the UAE Banks Federation.

"I commend the Ministry of Finance for taking such a crucial step in supporting individuals in their time of need, and improving the ease of doing business in the country. The regulation will undoubtedly prove mutually beneficial to both the business community and the banking sector, offering individuals an opportunity to restructure their finances while helping local lenders reduce their cost of bad debt”.

Adrian Low, banking & finance partner at law firm Clyde & Co in Dubai, says debtors no longer need to fear being "jailed for bad debts".

It helps take away some of the fear from the borrowers' minds, especially those being harassed by debt collection agencies who resort to threats and intimidation.

“It will strengthen the banking sector by providing more certainty of recovery," he adds. "If it also means banks are able to improve the amounts they recover from a bankruptcy individual — because they stay in the country and keep paying something towards their debts rather than fleeing, or being jailed, and paying nothing — this will be a good thing."

The law, which will come into effect in January 2020, will see debtors able to resolve their liabilities through court-appointed advisers who will liaise with lenders on their behalf to reach a settlement. The full details of the draft law have not yet been released.

There are 6.5 million credit facilities such as loans, credit cards, mortgages and overdrafts in the UAE, with about three million active borrowers, according to November 2018 data from Al Etihad Credit Bureau.

Matthew Dyson, an associate at law firm Pinsent Masons, says defaulting on debt has long been seen in a very negative light, widely punishable with criminal sanctions.

"The Federal Government have wisely acted through this new law as they realise that taking a commensurate and proportionate level of risk is the key to true entrepreneurialism and it is entrepreneurialism at both an individual and corporate level as well as access to credit that drives economies," he says.

Keren Bobker, a financial adviser at Holborn Assets and a panellist on The National's debt panel says "this is a sea change in attitude and is a new step in the region".

“This will allow people in financial difficulties to work with the banks without the threat of imprisonment," she says.

Here, The National explains why this new law will help those struggling with chronic debt.

What does the new law help those in debt?

The law is designed to protect Emiratis and residents with existing or anticipated financial difficulties who are unable to settle their debts. It will then reschedule their liabilities with an option to receive “new concessional loans”.

Ambareen Musa, founder and chief executive of financial comparison site, says this will take the form of court-approved repayment plans that come with more relaxed terms, possibly through the lowering of interest rates.

A lack of insolvency guidelines to date forced struggling borrowers to take extreme measures to deal with debt default, she adds.

"They were either caught in a debt spiral taking on expensive credit card debt to repay existing loans, or borrowing from illegal money lenders at extremely unfair terms, or worse still fleeing the country and leaving their debts behind," says Ms Musa, adding that the new legislation is a "much-needed intervention".

"It helps take away some of the fear from the borrowers' minds, especially those being harassed by debt collection agencies who resort to threats and intimidation and insist on being repaid every penny without leaving any scope for negotiation."

Will those unable to repay debts still face criminal courts?

No. According to a statement on state-run news agency Wam, the new law “will protect the debtors from legal prosecution, decriminalise the financial obligations of insolvent persons, and offer them an opportunity to work, be productive and provide for their families”.

Mr Low says debtors will be given up to three years to work off their debts with their creditors.

“It will enable them to continue to work and therefore provide an income to help support not only their families but also to be able to continue to pay their creditors," he says.

How will the debts be resolved?

Debtors will settle their financial obligations through a court-appointed expert. The expert will co-ordinate between the debtor and creditors to come up with a plan, lasting no longer than three years. During this period, the debtor will be prevented from taking on any new credit until the court decides — upon the request of the expert, the debtor or any of the creditors — that the liability has been settled.

The law contains special provisions which require swift completion of any legal procedures and a reduction on the fees charged for restructuring debts to ensure a fair compromise for both creditors and debtors.

“Lower fees mean that outstanding debts should not spiral by the application of additional interest and fees, as we have frequently seen,” says Ms Bobker.

Emirati lawyer Diana Hamade, managing partner at law firm Attorneys at Law, says the experts the court will use “usually come from an accountancy background”. “For the purpose of this law, experts will need to be more experienced in insolvency procedures,” she adds.

How will this benefit the legal system?

This will ease the burden on criminal courts, says Ms Hamade, which currently deal with debt cases, as well as the workload for the police and prosecution.

“A common frustration in the UAE exists with personal insolvencies due to its time-consuming nature and significantly low recovery rates,” she says.

Ms Bobker says the law will reduce the threat of imprisonment hanging over people’s heads when they are in serious debt and behind with repayments.

“We know that a significant number of people leave the UAE when they get behind to avoid police and court cases and potential imprisonment so this may lead to a people staying to face the music," she says. "Where people really do want to repay what they have borrowed they should be able to do so while keeping their job in the UAE.”

Lawyer Diana Hamade says special courts for insolvency may be set up to handle cases. Courtesy: Diana Hamade
Lawyer Diana Hamade says special courts for insolvency may be set up to handle cases. Courtesy: Diana Hamade

Which courts will be used to settle cases?

Ms Hamade said she believes civil courts will now handle civil debt cases, “unless special courts for insolvency are to be set up for this purpose”.

Mr Dyson says there will be some initial challenges around ensuring the debtors have disclosed all relevant financial circumstances and upskilling advisers and those tasked with monitoring the restructure process as well putting in place the court infrastructure to deal with the new insolvency process.

How can debtors apply for insolvency?

While the full details of the draft law have not been released, Ms Hamade says the law will have its implementing regulation, which will stipulate how it should work.

“It may copy the Federal Law No. 9 of 2016 on Bankruptcy (the "Bankruptcy Law") to a certain extent where an application will need to be filed with the court within a frame of time,” says Ms Hamade.

An application will be filed with the court before it then decides to appoint one of the experts enrolled with the "roster of experts" to render a report on the financial status of the debtor, Ms Hamade adds.

Will decriminalising debt reduce the number of bounced cheques?

Not necessarily. Mr Low says if it is easier to avoid the consequences of writing a bad cheque more may be written.

In 2017, Dubai Courts announced it would issue fines instead of jail sentences for bounced cheques with a value of Dh200,000 or below. In the rest of the UAE, however, bouncing a cheque is still a misdemeanour under UAE law that is punishable either by jail or a fine, depending on the nature of the case and the amount.

Habib Al Mulla, chairman and managing partner at Baker & McKenzie Habib Al Mulla, says it is not clear in the new law "how to deal with criminal penalties resulting from the issuance of cheques, as the imposition of criminal punishment on the drawer of cheques undermines the purpose of the legislator to enact the law".

Mr Low adds: "What is important is to try and distinguish between people who write cheques with no intention of them being honoured (so fraud) and those who write cheques who can't meet them because their best plans didn't work out."

Ambareen Musa of says court-appointed repayment plans are a standard debt relief measure in other markets around the world. Photo:
Ambareen Musa of says court-appointed repayment plans are a standard debt relief measure in other markets around the world. Photo:

How does the new law compare to processes in other countries?

Ms Musa says court-appointed repayment plans are a tried and tested debt relief measure in various markets around the world.

"In the UK, for example, you can opt for the individual voluntary arrangement (IVA), which allows you to make affordable repayments against your debts, over a period of five-to-six years. At the end of your IVA any remaining unsecured debt is written off," she says.

"In the US, Chapter 13 bankruptcy allows you to restructure overwhelming debt under the legal protection of a federal court. This provision lets you set up a court-approved repayment plan spanning a period of three to five years."

Mr Dyson says removing the automatic criminalisation of certain defaulting on debts "brings the UAE regime to parity with other major financial centres", he says. "The ability to engage through a formal and court-approved process has many similarities to insolvency regimes in Western jurisdictions."

It also builds on some of the developments already seen in the UAE’s insolvency regime over the last few years, he adds, including the Insolvency Law for companies from 2016.

What challenges are ahead? 

Mr Low says any insolvency law must strike a balance between protecting creditors who want to maximise their recovery with the ability for the insolvent individual to be able to rebuild their lives after a financial failure.

“You don't want a system that is too easy on the debtor but you also don't want them to have long-term impacts on their lives," he says. "You also need to distinguish between the reckless and the unfortunate — you don't want to encourage people to run up large debts with no chance of ever being able to pay it back and them being easily rehabilitated into the financial system only for them to do it all again.”

Another key challenge says Mr Dyson will be whether this leads to banks tightening credit approvals.

“The new law will require banks to engage with struggling debtors in a constructive way but, indirectly, the law will also make banks look at their credit approval processes in light of the fact that the 'stick' of criminal sanctions may no longer be available to them when considering how creditworthy a potential customer is,” he says.