Tim Elliot: Welcome once again to another edition of Lawgical. I’m Tim Elliot, once again at the Jumeirah Lakes Towers District with Ludmila Yamalova, Managing Partner at the law firm, Yamalova & Plewka here in Dubai. In this episode, we are going to consider the new insolvency law here in the United Arab Emirates. Our legal expert, Ludmila, good to see you.
Ludmila Yamalova: Good to see you too, Tim. Thank you for being here.
Tim Elliot: This is the new law, just released, Insolvency for Natural Persons Law #19. Let’s just start at the top, a rundown of the announcement, Ludmila.
Ludmila Yamalova: Sure. The announcement is very recent, on November 19th, that is, the U.A.E. Ministry of Finance issued a new decree which is Decree #19 of 2019 on the Insolvency for Natural Persons. It is very new and hot off the press. The law addresses issues of insolvency and restructuring of individual debt obligations in the U.A.E. and it will come into effect in January of 2020. The law was issued in November, but it will actually come into effect in January of 2020.
Tim Elliot: Let’s look at what we know about the law. It is a federal law. It does not apply to companies. Bankruptcy is generally associated with companies, insolvency with individuals. But it is a law that affects both citizens and expatriates in the U.A.E. equally.
Ludmila Yamalova: Yes, indeed. The law applies to both categories of residents in the U.A.E. alike, expatriates or locals. The effect is to allow individuals in particular either to restructure their obligations or to liquidate or file for liquidation.
Tim Elliot: How will the law address the insolvency of individuals? In many jurisdictions, debt is dealt with in one of two ways, essentially pay or become insolvent and work out a deal.
Ludmila Yamalova: Well, the biggest issue in the U.A.E. and why this law is a very welcomed development is that until this law, at least as far as individuals were concerned, announcing or filing for insolvency would lead to criminal penalties, so in a way being insolvent or being bankrupt was a criminal offense. Now with this new law, we are moving away from criminalizing insolvency and allowing, in fact, offering options to the individuals to help them with their debts or the change or the challenges in their financial situation. On the one hand, the law allows individuals either to help them restructure their obligations. On the other hand, if that is not possible it allows them to file for liquidation and go through the whole liquidation of funds and assets in order to settle whatever debts they may have to whatever proportion that their current assets may cover.
Tim Elliot: You mention restructuring there. I think that is an important point because this law would apparently allow, and this is court depending, but it would apparently allow a person to be able under the law to take out a structured loan which essentially is akin to a consolidation loan and in the U.A.E. a consolidation loans are albeit available, but they are rare at this point.
Ludmila Yamalova: Indeed, and especially rare, if not in the past it would have been impossible for someone who find himself or herself in financial distress, and in fact failing on covering their existing obligations. In those cases, banks or any other financial institutions in the U.A.E. would not even entertain offering any kinds of lines of credit to help those who are in distress. With the introduction of this law, although we still have to see exactly how it will play out, there is a provision in the law that allows for debtors to request or apply for a loan at the bank as long as the court approves it. That is the caveat, and based on the drafting of that particular provision it suggests, as you said, that there may be an option for debtors to apply for a loan to the bank in order to facilitate repayment of their preexisting or ongoing obligations.
Tim Elliot: So it is an attempt to decriminalize the issue of being in debt, Ludmila. But what does the law actually allow? What is the structure here? How is it done?
Ludmila Yamalova: That is a good question because there is in fact a structure that is now expressly provided for in the law. In no particular order, but the structure goes in the following way: Let say somebody finds themselves in financial distress and they need to restructure their financial obligations, they must file an application with the court. It is not that I just declare, okay, I cannot pay my creditors and I ask them to restructure my obligations by virtue of showing them the law. That is not the process. The process is that you are required to file a court application asking the court to help settle financial obligations or restructure obligations of the debtor. Then, the court would appoint an expert or a number of experts to assist them during the proceedings. This is for obvious reasons. Depending on the debtor’s personal circumstances, you need to appoint the right kind of expert, and sometimes it may be multiple experts, to help the court identify the existing obligations and perhaps a way forward in helping restructure those obligations. In the law, there is a provision of about 22 days plus or minus for the experts then to provide a plan or devise a plan as to how they may propose for the courts to consider and to help the debtor restructure their obligations. After that, once the plan is prepared, then this plan has to be given out for a vote to the creditors. Again, this is all done under the supervision of the court, but the creditors will have an opportunity to review the plan ahead of time and comment. Then once they have had a chance to review the plan, then there will be a meeting at the court with the expert and the judge and between the debtor and the creditor for them to go over the plan together and identify a plan that is more or less acceptable to all and a plan for its execution. All of that has to be done under the court supervision from the beginning until the end.
Tim Elliot: Any thoughts on how long that may take?
Ludmila Yamalova: Well, it depends really on the personal circumstances of the debtor, but the idea is to help expedite for all parties concerned the resolution to this particular dilemma, if you will, because all parties concerned need to have some sort of certainty in terms of what time they need to help them modify their expectations. In that regard, there is a very specific date that is mentioned in the law that requires for the parties to resolve this within a specific date. There are dates for the experts, they have about 22 days or more, for example, to come up with a plan. Then the parties have up to 10 days or more to review the plan and have their first meeting, but there are always provisions in the law that allow for other eventualities that ultimately are based on the individual person’s circumstances. There is not a specific limitation or timeframe, but there are guiding principles to help parties at least plan something along the way, but it is really difficult to tell, and by the same token, to even expect for this law to address something like this because it can be highly complex.
Tim Elliot: Clearly it does depend, but you can see how quickly the time can go by. The reason I ask that is because if you look at the time scale there, that is a four to five week minimum time scale. What happens once you file at the court any payments that you are due to make or any obligations you might have, what happens in that interim period, everything just stops?
Ludmila Yamalova: There are different things that can happen. One of the biggest things that happens with regards to debtors in the U.A.E. is that in most cases when you have a loan, for example, let’s say it is a mortgage. You bought a property and you have done this in your own individual capacity and now you cannot pay that loan. As part of the mortgage system or structure in the U.A.E. the bank takes ultimately two guarantees, one being the property and the other one is checks. These are postdated checks. When you take a mortgage, you have given to the bank a number of signed checks, but they are usually undated and there is no amount mentioned, so they are blank checks, but signed. That, the banks in the past have required as a guarantee for obtaining a mortgage. Now, in that case, let’s say, you thought you stopped paying your mortgage because you are not in a position to pay a mortgage anymore. You have lost your job or what have you. The banks still have the checks, and these checks in the U.A.E. are actually a separate legal right and that is a right that is separate from the agreement or perhaps commercial transaction under which they were issued. But in legal terms, they are treated as separate. So now let’s say, you have gone through this. You have now applied to the court to help to restructure your current obligations, but now because you have not been paying to the bank, the bank has gone out and cashed some of the guaranteed checks that you have issued to the bank and any check now that is above 200,000 dirhams is still criminal. In that case, even though you have gone through the proceedings with the court, those elements of your obligations run their own course. There is no automatic freezing of those obligations. Therefore, the bank can still cash the checks and then file a case with the police and that is a criminal case that will be attached to the check, not so much to the breach of your repayment obligations for the mortgage, but rather a breach of the dishonored check. However, with this law the one introduction that it has offered is for the parties to request for the court to freeze the criminal proceedings. In other words, there will still be a criminal case and perhaps there will be other repercussions related to having a criminal case attached to your name, but at least the authorities will not proceed on it if you have requested and that is if (1) you have a case filed with the court for restructuring of the obligations and (2) you requested the court to communicate with the authorities to help freeze at least, for example, the criminal proceedings of the case. In that case, at least as far as criminal proceedings, you may be able to get the authorities involved to help you freeze them.
With regard to other types of obligations, for example, let’s say there is no checks involved. You just owe somebody money because you borrowed, let’s say 10,000 dirhams for a credit card loan but you borrowed from a friend. There is an agreement in place, but there is no specific guarantee. If you have filed a case with the court for restructuring of the obligations, then that particular obligation will now be frozen until the courts have come up with a restructured plan. In other words, anything civil or commercial in nature will be frozen and anything criminal you need to ask the court specifically to potentially freeze the proceedings until the final plan on restructuring of obligations.
Tim Elliot: So there is effectively a breathing space there allowed for in the law.
Ludmila Yamalova: For sure. That is a huge relief for anyone who has lived in this country for long enough and has had financial difficulties. Until the introduction of this law, and once again, we don’t know exactly how the law will be implemented, but until at least we have seen this law in print, there was not any such breathing room under the previous system.
Tim Elliot: No. This is the point, isn’t it? Getting into debt is hard enough, not just financially. It is also an emotional time, something to deal with. I guess one of the positive aspects of this is it does attempt to address the human side of the debt issue.
Ludmila Yamalova: For sure, that is one, but also it addresses perhaps the discrepancy or the divide between the laws and the objectives and goals of this country, and the very human elements of businesses and people not doing as well in their lives as they perhaps once were or they were hoping to do. It brings the law closer to bankruptcy and insolvency laws that have existed in other countries for much longer.
There is one other aspect of this law. You can apply to the court either to help you restructure your obligations if you believe or perhaps the court will ultimately believe that you can restructure your obligations and that is a provision that has existed in many other countries for many years and it has been highly successful because if you not only give people the breathing room, but also help them with the right parties involved to restructure and monitor their financial obligations, then it is a win-win all around. However, let’s face it, there are plenty of cases where that is not possible perhaps because the debts are too great or because the underlying model upon which these debts arose was flawed from the beginning. Therefore, it is not possible to restructure, so you ultimately have to go into liquidation. That is the other application that you can request from the court and that is an application for liquidating your assets. Once again, you have a formal court filing, a court proceeding where you are asking the court to get involved and help work with the other creditors to help you liquidate what you have of value and redistribute the remainder of it amongst the many creditors that you may have. Again, that is done through an application and only certain kinds of cases would qualify. In other words, you need to have been in default for more than 50 consecutive days. It is not like I lost my job today and tomorrow I cannot pay my mortgage payment, for example. That is not good enough. You need to have been in default for at least 50 days and then creditors or debtors may request for a liquidation of funds under special conditions. Once again, the court will appoint an expert and a secretary and then sort of a team of experts, if you will, to help assess the debtor’s portfolio and all of the debtor’s assets. As part of it, the debtor also has to submit proof and a list of assets that may exist outside of the U.A.E. because, once again, this is for the purpose of the court studying what the debtor potentially may have of value and figuring out a way of liquidating all of those assets and redistributing the proceeds amongst all of the creditors. That is again all done under the court’s control and supervision. That is an application that is different from an application to help restructure your financial obligations. That is actually an application for bankruptcy, if you will, in other jurisdictions, but in this country in particular bankruptcy is more associated with corporate bankruptcy, but if we are individuals it is liquidation. But ultimately what it means is I have gone bankrupt. I have no more money to pay. Please help me settle whatever obligations I have, even if it is 10 cents to a dollar, but at least in that way everybody has been paid, even if it is partially, and individuals who have gone through this liquidation can now move forward and continue to, I guess, live life and potentially build new opportunities.
Tim Elliot: So when it comes to procedure in the court, obviously the court needs to ensure that the truth is told, both by the debtor and by the creditor.
Ludmila Yamalova: Indeed. There are specific provisions in the law that make it very clear that, for example, from the perspective of the debtor they cannot be asking for the court’s guidance and assistance in helping them restructure their obligations if they want to be able to buy themselves some sort of a luxury item or go on a cruise somewhere. In other words, there has to be some good faith request and good faith objective in helping and seeking the court’s involvement. Therefore, the courts will not approve of any request that perhaps would lead to the debtor’s luxurious lifestyle or request to restructure payments in favor of one party over the other, for the benefit of one party and to the loss of the other. For example, I have a yacht and I am falling behind on my yacht payments, so now I am asking for the court to help me repay my yacht obligations so that I can continue to use the yacht and that would be to the detriment of perhaps another party to whom I owe money. Let’s say I have a personal website and I owe money to that party or to even my local store where I may have a line of credit because of my good relationship with someone. I can’t basically request the court to help me or to sponsor my high lifestyle to the detriment of other parties or other creditors. The creditors have to be treated equally. To that end, there are specific provisions in the law that require for the debtors to be truthful to the court. Any misrepresentation or misstatements can be quite heavily penalized by virtue of fines, anywhere from 20,000 dirhams to 100,000 dirhams, for example, including potentially criminal sanctions and imprisonment, and it is ultimately because you would be lying to the court. Similarly, there are certain provisions in the law that regulate that same expectation of honesty from the perspective of the creditors because it’s also possible that certain creditors will come forward and claim that they are owed much more money than thy truly are.
I will tell you, in one particular case I can see this play out. For example, when you take that same mortgage from a bank or a car loan, the checks that you write to the car company or to the bank for the car, in fact, can be for much greater value than what you owe the bank. That is just how the system here works. Let’s say one of the checks that you would write to the bank for a car loan is for the entire value of the loan. However, if you are in year three of a five-year loan, you will have already paid a good portion of that loan, so for the bank to present the check for the full amount of the loan would be a misstatement and would be inappropriate. In cases like this, I can see that this provision in particular is very useful because it will require the creditors to be honest with the court as well and equally so there are penalties, from monetary to criminal, that apply to creditors as well who are being dishonest before the court in these proceedings.
Tim Elliot: Federal insolvency law #19. That is another episode of Lawgical. In a future podcast, we will be covering company bankruptcy laws. Check back soon for that. Ludmila Yamalova is the Managing Partner of the Dubai based law firm, Yamalova & Plewka. As ever, Ludmila, thank you.
Ludmila Yamalova: Always a pleasure, Tim. Thank you very much.
Tim Elliot: That’s another edition of Lawgical. We can’t cover every aspect of the U.A.E.’s legal framework in each episode but if there is a legal problem, issue, conundrum you would like answered, get in touch via Lylawyers.com or any of the social channels, and we will try to answer that in a future episode of Lawgical. For a legal consultation, hit the Contact button at Lylawyers.com or WhatsApp direct on 00971 52525 1611.