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UAE Bankruptcy Law: New rules hold managers, directors more accountable

Senior associate, Bassel Boutros, recently spoke to Arabian Business about the new UAE Bankruptcy Law, providing further details on the major changes set to take effect in May 2024. 

What were the key amendments made to the UAE’s bankruptcy law?
Bankruptcy law was first introduced in 2016, during more than 7 years of practice said law was amended several times due to the practical situations presented to courts. Further during recent years, the importance of bankruptcy law and its impact on many economic sectors within the state was noticed, COVID situation led giant entities to file for bankruptcy aiming for restructuring the business or liquidate it. The newly issued bankruptcy law aims to enhance bankruptcy proceedings and ensure its effectiveness, with its primary goal to assist debtors facing financial distress and protecting the creditors interest at the same time. The new bankruptcy law includes amendments pertaining to – amongst other things - i) preventive composition plan where a debtor can ask for court’s assistance without appointing a trustee if he is able to operate the business, ii) the court should determine a date of debtor’s cessation of payment, iii) moratorium which is now open at the restructuring phase, iv) required creditor’s majority for approving a restructuring plan, v) possibility of ratifying a restructuring plan despite being rejected by the creditors, vi) decisions and judgments will be subject to grievances and appeals.

How significant is the change that allows debtors to now ask courts to approve a restructuring plan even if creditors reject it? What kinds of businesses/cases do you see benefiting most from this?
Pursuant to the creditors refusal to proceed with the proposed restructuring plan, debtors will have the right to petition the bankruptcy court requesting the ratification of said restructuring plan. The bankruptcy court may ratify the plan after taking into consideration the trustee’s opinion and examining the creditors objections, under the condition that the creditors rights under the plan will not be less than their rights in the event of declaring bankruptcy and liquidation of the debtors’ assets. Hence, debtors will still have a chance to apply a restructuring plan if the creditors objections to the plan are not justified or if the creditors are acting in bad faith.

What challenges might this pose for creditors? How might they need to adjust their strategies and negotiations now?
Creditors enter the proceedings aiming to recover their full debts, which is almost impossible as normally debtors will be facing financial distress, business operation problems and their assets does not cover all liabilities. Therefore, the debtors right to petition the court requesting the ratification of the rejected restructuring plan should not be considered as a challenge towards the creditors, on the contrary it should be considered as a reason for the creditors to act reasonably and in good faith in order to reach the most favourable outcome with the least damages. 

How much more power and oversight do you see the courts having after these changes? What types of cases will this expanded authority likely be used for?
Bankruptcy courts powers under previous law were wide and affect other ongoing legal proceedings, and the new law provisions grants bankruptcy courts additional powers such as the power to take precautionary measures and issue decisions to suspend ongoing claims against the debtors prior to the issuance of a final judgment opening preventive composition plan, restructuring plan, or bankruptcy. However, reasons behind issuing said measures should be clarified by the court. Further, all bankruptcy court's decisions and judgments will be considered as writ of execution and granted the exequatur, unless the bankruptcy court revoked the decision and decide to suspend its enforceability or if the court of appeal rendered a decision to stay its execution. This will assist the court in taking urgent actions pertaining to matters affecting debtors’ business operation, for example, for the benefit of the bankruptcy file and the rights of all parties. 

For businesses in the middle of restructuring negotiations prior to May 2023, how might these new rules impact their cases?
Ongoing matters which are not yet adjudicated or are not reserved for the pronouncement of a judgment will be transferred to the newly established bankruptcy court, and provisions of the new bankruptcy law will be applicable on said matters. Therefore, parties involved in ongoing restructuring matters should take into consideration all potential scenarios that may affect their situation in light of the new law. 

How does expanding personal liability for managers/directors up to 2 years prior change the mindset of business leadership? What kinds of actions do you advise them to avoid?
Under the previous law there was no determined delay for unlawful actions committed by managers, board members, (a delay of 2 years was determined for actions committed pursuant the decision of opening bankruptcy proceedings). Hence, under the new law managers, board members, actual managers, liquidators, will be personally liable for unlawful actions committed within 2 years from the date of debtors’ cessation of payment. 

Managers, board members, auditors, liquidators, should keep records of all books and financials pertaining to the business and should present the same upon courts or trustee’s request. Further, all relevant persons shall refrain from using commercial methods of ill-considered risks, fulfilling any of the creditors' debts with the intent to cause damage to other creditors, etc.

For creditors, debtors and their legal teams, what are the main things they need to be aware of and prepare for with these updated rules coming into effect?
There were no major amendments to general principles adopted by the previous bankruptcy law. However, creditors, debtors and their legal advisors should study the nature of the business and obtain a professional opinion on whether the debtor’s business can be restructured or not and based on that examine the file and prepare all legal requirements to submit the application before the bankruptcy court taking into consideration all potential scenarios. 

What advice would you give to businesses who may be considering restructuring debts - should they try to finalize agreements before May or operate under the new rules?
Businesses who are facing financial distress should not finalize agreements with creditors outside bankruptcy proceedings unless they have approvals from all creditors, as executing settlement agreements during that phase should be justified and reasonable. Hence, said settlements should be executed under the trustee’s supervision and court’s approval to avoid any potential dispute from other creditors.

Overall, do you see these amendments as positive or negative for the UAE business environment? 
In the legal field development is always a result of problems and difficulties faced by the parties before courts, the new bankruptcy law adopted new solutions to solve said problems and difficulties, and it shall lay the ground for future practice. In my personal opinion bankruptcy law should include a part where the trustee has an obligation to investigate debtors’ transactions and submit a report showing his opinion on the reasons that led the business to bankruptcy and whether the actions of the managers (including actual managers), board members, during the period of cessation of payments were in line with the applicable laws.

The full article can be read here: UAE Bankruptcy Law: New rules hold managers, directors more accountable

This article was written by litigation lawyer Bassel Boutros and focuses on the new UAE Bankruptcy Law. 

BSA is a regional Law Firm in the Middle East with offices in the UAE, Oman and Saudi Arabia. As a full-service law firm our practice areas include litigation, arbitration and corporate services, including M&A, banking & finance, Intellectual Property, TMT, Fintech, employment and insurance.

Published on 27 December, 2023.

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