In the UAE, when a business entity fails the ability to pay its debts to its creditors, it can opt to file for bankruptcy or liquidation of the company. The Article no. 65 of the UAE bankruptcy law 2016 (chapter 11) states, the procedure in this chapter shall regulate:
- The restructuring of the debtor: assisting the debtor in implementing a plan to restructure the debtor’s business.
- The declaration of bankruptcy.
- Carrying out a fair liquidation procedure of the debtor’s assets to cover the liabilities.
The bankruptcy law was last amended in 2020. The amendments were introduced in the context of the Covid-19 pandemic in 2020 and its effect on several businesses. The amendment ensures that the debtor’s integrity is protected. Moreover, facilitate them with an ability to control their finances and reduce their economic strain. Before introducing new amendments to bankruptcy law, most corporate bankruptcies in the UAE have been settled through the consensual rebuilding of the indebted person or organization’s liabilities. The new Bankruptcy Law is a significant step forward and derives inspiration from the elements of various bankruptcy law systems in multiple jurisdictions and international standards.
Below are some of the highlights of the UAE Bankruptcy Law after the amendment of 2020:
- Extend the ‘stay’ on judicial proceedings where a Commencement Order has been made against the debtor under either
- Protective Composition Proceedings (PCP); or
- Restructuring-in-Bankruptcy (RIB) proceedings
In either case, it overrides the right of creditors to make an application to the Court to lift the stay.
- Clarify the position of preferential creditors where distributions are made under formal bankruptcy procedures; and
- Introduce a new procedure in circumstances where the debtor’s obligation to file for bankruptcy under Part 4 (RIB or formal bankruptcy) is deferred because of an ‘Emergency Financial Crisis.’
There are two ways to file for bankruptcy during regular times and Emergency Financial Crisis.
How to file a bankruptcy in the UAE?
Under the UAE Bankruptcy Law, the filing and the procedure to bankruptcy can be done in three ways:
1. Preventive measures
Preventive composition is the first step that considers the pre-bankruptcy pathway. It enables the debtor a breathing space to reach a settlement with the creditors when in the early stages of financial distress. The option becomes only available if the debtor has not defaulted on any debts for more than 30 days.
Debtors can make an application to the court; if the court approves, it will appoint a trustee that facilitates the debtor to enter into a settlement plan with the creditors. The plan is called Preventive Composition Plan, which requires to be approval from the creditors. Implementing the preventive composition plan may not take more than 3 years unless the extension is approved by the creditors having two-thirds of the outstanding debts. The appointed trustee foresees the plan once the court approves it.
2. Formal Restructuring
The following participants can make the application for a bankruptcy declaration:
- the debtor
- a court
- the public prosecutor
- a creditor or a group of creditors who currently possess not less than AED 100,000 of unpaid debt, which has at least remained unpaid for thirty consecutive business days.
After submitting the bankruptcy application, if the court approves the application, it can suspend all the executive proceedings against the company (application filed by the creditors who may have a judgment against you). The court-appointed trustee then prepares a report about the debtor’s financial condition. He observes whether the restructuring will help and whether the debtor’s current assets are sufficient to cover the whole process’s cost. After the office finishes the preparation of the report, he will submit it to the court, and the court will decide whether the necessary conditions are met to accept the application and proceed further to the process or not. If the debtor is not convenient with the restructuring procedure, the court may declare your company bankrupt. In accordance with Article 124(3) of Bankruptcy Law 2016, the court shall declare the debtor bankrupt and order the liquidation of assets, under the following circumstances:
- if the debtor is not comfortable with the restructuring procedure or
- the trustee’s report confirms the impossibility of restructuring.
In case the court approves the application and decides to initiate proceedings, the debtor is placed under the supervision of a court-appointed trustee who takes control of the company’s management. The court grants the expert a wide range of powers to meet the requirements and achieve the purpose of the procedure. The expert may also suggest preparing a restructuring scheme like Restructuring Plan.
The final restructuring report requires a vote by the creditors, where most of the creditors must vote in favor of the arrangement. The majority should represent at least two-thirds of the total debt value.
In case the court nullifies the Prevention Composition Plan or restructuring procedure or terminates them, the court proceeds with a formal bankruptcy process. The debtor and creditor can apply directly for bankruptcy proceedings.
The court appoints the bankruptcy trustee to supervise the procedure. The trustee oversees the process of liquidating the business’s assets and paying the creditors. During the procedure, all scheduled disbursals or debts will become immediately due. The appointed trustee has the power to terminate any contract to facilitate the liquidation process. Unlike the prevention composition and restructuring, the law does not provide any specific protection to the debtor during the bankruptcy process.
How to file for bankruptcy during Emergency Financial Crisis?
Several businesses in the UAE have suffered because of the global pandemic. For such cases, the amendment introduced a new chapter (Chapter 15) to part 4 of Bankruptcy Law, termed “Emergency Financial Crisis.”
It is defined as “A general condition that affects trade or investment in the state, such as an epidemic, natural or environmental disaster, war, etc.”
The UAE Cabinet Ministers has the power to declare the existence and duration of an Emergency Financial Crisis, based on the recommendation of the Minister of Finance. The cabinet also has the final authority to extend any of the time limits or dates set out in Chapter 15 bis.
Bankruptcy Proceedings during an Emergency Financial Crisis
The Bankruptcy Law requires the debtor to meet the Bankruptcy Test to initiate the proceedings. However, during the Emergency Financial Crisis period, the debtors are protected from certain legal actions. Specifically, they impose a suspension on:
- The debtor’s obligation to commence bankruptcy proceedings provided that the debtor’s cash flow or balance sheet losses are during the Emergency Financial Crisis.
- Applications filed by creditors (or groups of creditors) to place debtors into bankruptcy during an Emergency Financial Crisis.
The suspension applies irrespective of the cause for the debtor’s default. The court can refuse to hear bankruptcy proceedings initiated by the creditors.
The measures aim to limit the spur of bankruptcy filing during a financially turbulent period. The debtors can still file for bankruptcy if they believe it is in the best interest of all the stakeholders to file for liquidation. The court can approve the application if the debtors’ balance sheet and cash flow losses reflect that the Emergency Financial Crisis causes the loss. The court has more flexibility in controlling the bankruptcy procedure as:
- there is no requirement to appoint a trustee or an expert.
- the court can grant the debtor an extension to negotiate the settlement with creditors (not exceeding 40 business days). However, the debtor must make an offer to settle the debt in 12 months, and the creditors must approve it.
Once the court approves the debtor’s bankruptcy application during an Emergency Financial Crisis, it cannot take preventive measures against the debtor’s assets.
No country encourages its businesses to file for bankruptcy proceedings unless it is the last resort. There have been incidents where the court has delayed the bankruptcy proceedings if they believed it could be detrimental to UAE’s economy. The amendment in the bankruptcy law is widely praised by attorneys and legal experts for its positive impact on the lives of business entities suffering financial losses. The amendments are also expected to speed up growth and make it much easier for people to avoid serious legal complications and possible imprisonment.
If you believe bankruptcy is the only way left for your business, don’t hesitate to contact our bankruptcy and insolvency lawyers in Dubai, Sharjah, and Ajman. The bankruptcy and restructuring procedures are complex, and it is challenging to go through the bankruptcy process. We have the experience and experience to deal in legal matters related to bankruptcy and insolvency.