The UAE's New Bankruptcy Law: What You Need to Know

 The UAE's new Bankruptcy Law isn't a specific section within another law. It's a standalone law called Federal Law No. 51 of 2023 on Financial Restructuring and Bankruptcy

. It repeals the previous bankruptcy law (Federal Law No. 9 of 2016) and introduces a completely new framework for dealing with financial insolvency in the UAE.

This new law comes into effect on May 1, 2024. Here are some key areas the law focuses on:

Key Features

• Scope: The law applies to most companies, individual traders, and licensed professional firms in the UAE, with some exceptions like free zone companies.
• New Definitions: The law clarifies and expands on key terms like "debtor's assets" and introduces new ones like "related party."
• Dedicated Bankruptcy Court: A new court will handle all bankruptcy-related matters. Decisions from this court are immediately enforceable.
• Preventive Settlement: This new option allows businesses in trouble to propose a plan to repay creditors under court supervision while continuing to operate.
• Increased Management Liability: Directors, managers, and others responsible for a company's finances can be held personally liable for bankruptcy if they act negligently.
• Claw Back: The law allows unwinding certain transactions made before bankruptcy to protect creditors.
• New Bankruptcy Department: This department will handle applications and other administrative tasks related to bankruptcy proceedings.
• Timing: Debtors and creditors have specific timeframes to file applications under the new law.
• Setting Off Debts and Enforcement of Security: The law clarifies rules on offsetting debts and allows secured creditors to enforce their rights under court supervision.
• Trustee and Controller Appointments: The court will appoint a trustee or controller to manage the debtor's assets during bankruptcy or preventive settlement.

Benefits of the New Law

• More Business-Friendly: The new procedures aim to be more efficient and user-friendly for businesses facing financial challenges.
• Stronger Creditor Protections: The law strengthens creditor rights and simplifies enforcement procedures.
• Increased Transparency: Clearer rules and a dedicated court should improve transparency in bankruptcy proceedings.
• Enhanced Accountability: Potential personal liability for management may encourage more responsible business practices.

The procedure to apply for bankruptcy in the UAE: depends on whether you are the debtor (the company or person filing for bankruptcy) or a creditor. Here's a breakdown for both:

For Debtors:

Timing: You must submit your application to the Bankruptcy Department no later than 60 days from the date you stopped making payments or became aware of your inability to pay debts.

Application: The Bankruptcy Law outlines the required information for the application, including details about your financial situation, assets, and creditors.

Preventive Settlement (Optional): You can propose a restructuring plan under court supervision to repay creditors while remaining operational. Submit the plan with your application.

Court Decision: The Bankruptcy Court will review your application and decide whether to initiate bankruptcy proceedings or approve your preventive settlement proposal (if applicable).

For Creditors:

Eligibility: You can initiate bankruptcy proceedings against a debtor if they owe you an "unconditional, undisputed and payable" debt and haven't repaid it within 30 days of a written notice demanding payment.

Application: Submit a bankruptcy application to the Bankruptcy Department with details about the debt owed to you by the debtor.

Court Decision: The Bankruptcy Court will review your application and decide whether to initiate bankruptcy proceedings.

Additional Points:

A dedicated Bankruptcy Department receives and registers applications.

Any UAE regulatory authority can also apply to initiate bankruptcy proceedings against a debtor under their supervision.

Multiple applications might be combined into a single action.

The Bankruptcy Law details the process for appointing a trustee or controller to manage the debtor's assets during bankruptcy or preventive settlement.

Important Resources:

While this is a general outline, the actual application process can be complex. Here are some resources for further information:

Full Text of the Law (Arabic): You can find the official legal text of Federal Law No. 51 of 2023 on Financial Restructuring and Bankruptcy on a legal information website ([invalid URL removed] *This site is in Arabic).

Consulting a Lawyer: It's highly recommended to consult with a lawyer specializing in UAE bankruptcy law for specific guidance on your situation and navigating the application process.

 Companies and individuals operating in the UAE should familiarize themselves with the new law to understand their rights and obligations in case of financial difficulties. Further regulations are expected to be issued soon to provide more details on the law's implementation.

 Liability of Directors and Senior Management:

The new UAE Bankruptcy Law introduces stricter liability for directors, senior management, and anyone responsible for a company's actual management (including those in charge of liquidation). Here's a breakdown of the key points:

Potential Liability:

The Bankruptcy Court can hold these individuals liable for prescribed acts committed within two years before the company's cessation of payment.

These acts could include mismanagement, negligence, or actions that significantly contributed to the company's financial difficulties.

Basis for Liability:

The individuals can be required to pay an amount proportional to their mistakes, which will be used to repay the company's debts.

For example, if the court finds their actions led to a situation where the company's assets are insufficient to cover at least 20% of its debts, they may be held liable for that portion.

Avoiding Liability:

These individuals can defend themselves by demonstrating they took all reasonable precautionary measures to prevent losses or documented their objections to any actions deemed harmful to the company.

Additional Points:

There's a two-year limitation period from the bankruptcy judgment to initiate proceedings against these individuals.

The law aims to encourage responsible management practices by holding senior figures accountable for their actions.

It's important to note:

This is a simplified explanation. The Bankruptcy Law goes into more detail about specific actions and the process for holding individuals liable.

Consulting a lawyer specializing in UAE bankruptcy law is highly recommended if you have any concerns about potential liability.

Setting Off Debts and Enforcement of Security:

The new UAE Bankruptcy Law introduces some key changes regarding setting off debts and enforcement of security interests in bankruptcy proceedings. Here's a breakdown:

Setting Off Debts:

General Rule: In line with the previous law, the Bankruptcy Law generally prohibits setting off debts after the decision to initiate bankruptcy proceedings has begun. This means a company cannot use money owed to them by a creditor to reduce their own debt to that creditor once bankruptcy starts.

Exceptions: There are a few exceptions where setting off debts might still be allowed:

Approved Restructuring Plan or Proposal: If a court-approved restructuring plan or preventive settlement proposal allows it, then setting off debts might be permitted.

Court Decision: The Bankruptcy Court can grant permission for setting off debts upon a motion from a trustee or creditor, under specific circumstances.

Enforcement of Security:

Secured Creditors: The law offers some relief to secured creditors (creditors with a claim on specific assets of the debtor as collateral for a loan).

Court Approval for Enforcement: Secured creditors can, with permission from the Bankruptcy Court, initiate enforcement proceedings against the secured assets even if bankruptcy proceedings have already begun.

Sale Through Trustee: However, the sale of the secured asset will be made through the trustee appointed by the court during bankruptcy, ensuring a controlled and transparent process. This eliminates the need for separate enforcement proceedings outside the bankruptcy framework.

Key Takeaways:

Setting off debts after bankruptcy generally isn't allowed unless specifically permitted by a court-approved restructuring plan or the Bankruptcy Court itself.

Secured creditors have a clearer path to enforce their claims on secured assets during bankruptcy proceedings, but the sale will be managed by the court-appointed trustee.

Additional Points:

The Bankruptcy Law references Federal Law No. 10 of 2018 on Netting for matters not addressed in the Bankruptcy Law related to setting off debts. It's recommended to consult this law for a more comprehensive understanding of netting provisions.

Please note: This is a general summary, and you should consult with a legal professional for specific advice.