The UAE Bankruptcy Law is viewed as an improvement over the prior insolvency laws (as outlined in the Commercial Transactions Law), insofar as the Bankruptcy Law:
1. allows companies in financial difficulty the opportunity to reorganize their affairs in order to remain viable;
2. or in the absence of the ability to remain viable, allows for an orderly liquidation process; and
3. provides relief from the most onerous effect of criminal penalties that had previously been in force, that were being imposed against the directors and officers of companies in debt.
The Bankruptcy Law, however, is not without its perils, and includes restrictions upon bad faith filings as well as those where the available assets do not reach a statutory level, both of which may leave the debtor’s directors and managers open to both criminal and civil liability.
The Bankruptcy Law applies to :
1. UAE companies established under the Commercial Companies Law,
2. companies partly or fully owned by the UAE or individual Emirates’ government,
3. free zone companies that are not governed by existing bankruptcy laws (i.e.: not including the DIFC and ADGM),
4. individuals who are classified as a “trader” under Federal Law No. 18 of 1993 relating to commercial transactions, and
5. civil companies.
Under Title 3 of the Bankruptcy Law, Court supervised composition procedures are available, with the aim of assisting the debtor to reach an agreement with creditors pursuant to a plan of composition. Broadly, these procedures allow for a voluntary agreement between the debtor and its creditors, under which the creditors may accept a settlement or part payment for the debts owed. A debtor can submit a request for composition of bankruptcy if it is facing financial difficulties which require assistance to reconcile with creditors. The debtor must not have ceased to pay debts for a period of more than 30 consecutive days
in order for this to be accepted.
A composition of bankruptcy must be submitted to the Court, which may appoint an expert selected from a list approved by the Committee of Financial Reorganization, to determine whether the debtor’s assets are sufficient for composition. If the request for composition of bankruptcy is accepted, the Court will then appoint a trustee to prepare a record containing all the debtor’s creditors. During a scheme of composition, the debtor may continue to manage its business, subject to supervision by the appointed official. The Court may appoint one or more inspectors from among the creditors to supervise execution of the scheme of composition. Any scheme of composition must be approved by the majority of creditors representing two-thirds of the total debt, and must be approved by the Court. This process must be completed within 3 years, although an extension is available if the creditors consent.
Title 4 of the Bankruptcy Law also provides for both a more formal reorganization process and liquidation procedures where a scheme of composition is not viable, and may be sought by either a creditor or debtor. As per Article 68, a debtor “shall” make the request if the debtor has “ceased to make payment of the Debtor’s Debts on their respective due dates for more than thirty (30) consecutive Business Days due to the Debtor’s distressed financial condition, or if the Debtor is in a state of Over-indebtedness”.
A creditor may seek initiation of bankruptcy procedures if they have an ordinary debt of at least 100,000 AED
, if the creditor has already warned the debtor in writing to fulfil the debt and the debtor has not fulfilled this debt within 30 consecutive working days from the date of the warning. If the Court accepts the request it will appoint a trustee, who shall prepare a report on the debtor’s business, regarding the possibility of restructuring or selling the business. Restructuring procedures, or bankruptcy declaration and liquidation if the company cannot be restructured, may be subsequently ordered by the court. A restructuring must be concluded within 5 years, and is subject to approval of creditors holding two-thirds of the total debt.
If the Court declares bankruptcy and liquidation commences, the rights of secured creditors shall rank in preference to those of ordinary creditors. Statutory preferential claims include judicial fees or charges, end of service payments, unpaid wages for a maximum period of 3 months, and any amounts due to governmental bodies.
The Bankruptcy Law also provides that criminal prosecution for company cheques dishonored prior to the initiation of the proceedings, may not proceed, while the proceeding is ongoing (assuming no fraud is involved). This is a significant change from prior law and provides individuals who executed corporate cheques protections that were heretofore not available.
Importantly, please note that if the debtor’s assets are insufficient to satisfy at least 20% of the debts, the Court may obligate members of the board or managers to pay these debts
, in cases where their responsibility for the company’s loss is evident, pursuant to the provisions of law. Also, the directors or managers may face criminal prosecution in the event that their company is insolvent, and they deliberately avoid a bankruptcy filing
(noting the “shall file” language of Article 68), or otherwise attempt to avoid payment of the company debts by filing a misleading Bankruptcy petition.
Finally, notwithstanding a successful Court discharge in bankruptcy, the directors and officers of any company that proceeds down this path may find difficulty conducting business in the UAE thereafter. This is because the stigma of a business failure leading to bankruptcy may dissuade any counterparty from commercially dealing with the principals of a failed debtor.
In summary, the positives of a Bankruptcy filing are as follows:
1. At least temporary relief from creditors;
2. Stay of certain specified criminal actions until process is complete;
3. Opportunity to wipe away debts and potentially avoid personal liability;
4. Avoidance of liability for failure to file for Bankruptcy; and
5. Possibility to rehabilitate company if circumstances warrant.
The primary drawbacks are as follows:
1. Possibility of rejection and criminal prosecution in the event of fraud or other bad faith (as the case may be);
2. Subject to a 20% payment threshold – if this is not reached, the individual directors, shareholders, and managers may be personally liable; and
3. Bankruptcy “stigma”.
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Article authored by Michael Kortbawi
, Partner and Adam Tighe
, Senior Associate at BSA.