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.

The UAE Bankruptcy Law, officially known as Federal Decree-Law No. 9 of 2016, undergone new changes

 The UAE Bankruptcy Law, established under Federal Decree-Law No. 9 of 2016, sets the legal framework for handling financial distress and insolvency within the country. It offers varied tools and procedures for both debtors and creditors, focusing on:

 Restructuring: Struggling companies can seek to reorganize their debts and restore solvency under court supervision. 

Liquidation: When restructuring isn't viable, the law provides a clear and structured process for winding down companies and distributing assets to creditors. 

Personal Bankruptcy Protection: Individuals burdened with debt can file for personal bankruptcy and find relief from creditor claims. 

Key Features of the Law: 

Initiating Proceedings: Both debtors and creditors can initiate the process.

Debtors are obligated to file if they: Fail to pay debts for 30 consecutive business days.

Have assets insufficient to cover liabilities.

Creditors can file if the debtor: Fails to settle a debt exceeding AED 100,000 within 30 days of a written demand.

Restructuring Options: The law offers several options, including:

Preventive Restructuring: Debtors can propose a restructuring plan to creditors before formal proceedings begin.

Restructuring by Agreement: Creditors and debtors can agree on a restructuring plan outside of court.

Court-Supervised Restructuring: If no agreement is reached, the court can oversee a restructuring process with a restructuring practitioner appointed.

Liquidation: If restructuring fails, the court orders liquidation of the debtor's assets to satisfy creditors. A court-appointed liquidator oversees the process.

Personal Bankruptcy: Individuals can file for personal bankruptcy if they cannot repay their debts. The court appoints a trustee to manage assets and distribute them to creditors. The debtor may be discharged from remaining debts after meeting specific requirements.

Recent Amendments:

The law has undergone revisions since its implementation, with the most impactful changes in 2021 and 2023, aiming to:

 Clarify Director and Manager Liability: The amendments made it harder for creditors to hold directors and managers personally liable for insolvency unless they engaged in specific misconduct.

Empower Secured Creditors: Secured creditors now have more control over their assets during proceedings and can enforce their rights directly through the bankruptcy court.

Streamline Procedures: The revisions aimed to make bankruptcy proceedings more efficient and timely.

Impact of the Law: The UAE Bankruptcy Law has significantly improved the legal framework for dealing with financial distress and insolvency in the country. It provides various options for resolving financial problems, promoting a more transparent and efficient system for creditors to recover debts.

 The UAE Bankruptcy Law has undergone several important changes in recent years, with the most notable ones coming in 2021 and 2023. Here's a summary of the key new developments:

 Changes in 2021:

Clarification of directors' and managers' personal liability: The amendments addressed concerns about the automatic liability previously faced by directors and managers of insolvent companies. Now, personal liability only applies if the court can prove they committed specific acts that contributed to the company's insolvency (Article 147).

Enhanced rights for secured creditors: Secured creditors, like banks, now have greater control over their assets during bankruptcy proceedings. They can enforce their rights directly through the bankruptcy court without needing separate legal action.

New options for restructuring: The Law introduced a "reorganization" process, allowing financially distressed companies to restructure their debts and stay operational under court supervision.

Streamlined procedures: The amendments aimed to make bankruptcy proceedings quicker and more efficient.

Changes in 2023:

Further clarification of directors' and managers' liability: Clarify the personal liability of directors and managers: The amendments narrowed the scope of personal liability for directors and managers, making it more difficult for creditors to hold them responsible for the company's insolvency unless they have committed specific acts of misconduct.

Enhance the rights of secured creditors: Secured creditors now have greater control over their assets during bankruptcy proceedings and can enforce their rights directly through the bankruptcy court.

Focus on training and implementation: The Ministry of Finance is working with judicial authorities to develop training programs and refine procedures for the effective implementation of the new law.

Current situation:

The amended Bankruptcy Law is still relatively new, and its practical implications are evolving.

Businesses and individuals involved in potential bankruptcy situations should seek legal advice from experienced professionals familiar with the latest developments. 

The Financial Restructuring Committee is continuing to work on improvements and refinements to the bankruptcy framework. 

Key Features of the UAE Bankruptcy Law: 

Initiating Bankruptcy Proceedings: Both debtors and creditors can initiate bankruptcy proceedings. Debtors are obligated to file if they are unable to pay their debts for 30 consecutive business days or their assets are insufficient to cover their liabilities. Creditors can file if the debtor fails to settle a debt exceeding AED 100,000 within 30 days of a written demand. 

Restructuring Options: The law offers various restructuring options, including: 

Preventive Restructuring: A debtor can propose a restructuring plan to creditors before formal bankruptcy proceedings commence.

Restructuring by Agreement: Creditors and the debtor can agree on a restructuring plan outside of court.

Court-Supervised Restructuring: If agreement is not reached, the court can supervise a restructuring process, involving the appointment of a restructuring practitioner.

Liquidation: If restructuring fails, the court will order the liquidation of the debtor's assets to satisfy creditors' claims. The liquidation process is overseen by a liquidator appointed by the court. 

Personal Bankruptcy: Individuals can file for personal bankruptcy if they are unable to repay their debts. The court will then appoint a trustee to manage the debtor's assets and distribute them to creditors. The debtor may be granted a discharge from their remaining debts after fulfilling certain requirements. 

Conclusion: The UAE Bankruptcy Law is a complex and evolving piece of legislation. If you are facing financial difficulties or have questions about the law, it is important to seek legal advice from a qualified professional.

Bankruptcy proceedings in the U.A.E, are directors and mangers liable?

 Bankruptcy proceedings in the UAE are governed by the Federal Decree-Law No. 9 of 2016 on Bankruptcy (the Bankruptcy Law). The Bankruptcy Law provides a framework for the rehabilitation or liquidation of insolvent companies and individuals.

 Partners and managers' liability

 Partners and managers of a bankrupt company may be held personally liable for the company's debts in certain circumstances. Under Article 144 of the Bankruptcy Law, a court may order partners and managers to pay all or part of the company's debts if:

Partners:

Partners in a general partnership are jointly and severally liable for the debts of the partnership. This means that each partner is personally liable for all of the partnership's debts, even if their contribution to the partnership is less than the total amount of the debts.

 Partners in a limited partnership have limited liability for the debts of the partnership. This means that their liability is limited to the amount of their capital contribution to the partnership. However, a limited partner may become personally liable for the debts of the partnership if they participate in the management of the partnership business.

• The company's assets are not sufficient to pay at least 20% of its debts; and
• The partners or managers committed any of the acts listed in Article 147 of the Bankruptcy Law, such as:
• Mismanaging the company's assets or engaging in reckless business practices;
• Breaching their fiduciary duties to the company; or
• Intentionally or negligently causing the company to become insolvent.

In addition to civil liability, partners and managers of a bankrupt company may also face criminal liability under the Bankruptcy Law. For example, Article 198 of the Bankruptcy Law provides that partners and managers who conceal or destroy the company's assets or records may be sentenced to imprisonment for up to five years.

 Recent developments

 In October 2021, the Dubai Court of First Instance issued a landmark ruling in the Marka case, holding the directors and managers of a bankrupt public joint stock company personally liable for the company's outstanding debt of AED 450 million. The court found that the directors and managers had mismanaged the company's assets and engaged in reckless business practices, which led to the company's insolvency.

 Shortly after the Marka ruling, the Bankruptcy Law was amended to clarify the circumstances under which partners and managers may be held personally liable for a company's debts. The amended law now requires the court to prove that the partners or managers committed one of the specific acts listed in Article 147 of the Bankruptcy Law before ordering them to pay the company's debts.

 The Marka ruling and the subsequent amendments to the Bankruptcy Law demonstrate that the UAE courts are willing to hold partners and managers personally liable for their misconduct, particularly when it leads to the insolvency of a company.

 Conclusion

Partners and managers of companies in the UAE should be aware of the potential risks to their personal liability if the company becomes insolvent. It is important to take steps to avoid mismanagement and reckless business practices, and to comply with all applicable laws and regulations.

How to file Debtor-based bankruptcy case in the U.A.E

 Bankruptcy proceedings in the UAE are governed by Federal Decree-Law No. 9 of 2016, known as the Bankruptcy Law. The law provides for a number of different restructuring and bankruptcy procedures, depending on the specific circumstances of the debtor.

Debtor-led bankruptcy filings in the UAE are on the rise. In 2021, there were over 1,000 debtor-led bankruptcy filings, which was an increase of 20% from the previous year. This trend is expected to continue in 2023, as the UAE economy recovers from the COVID-19 pandemic.

 There are a number of reasons why debtor-led bankruptcy filings are on the rise in the UAE. One reason is that the UAE government has made it easier for businesses to file for bankruptcy. The UAE Bankruptcy Law, which was introduced in 2016, provides several options for businesses that are struggling to repay their debts. These options include financial restructuring, composition procedures, and liquidation.

 Another reason for the rise in debtor-led bankruptcy filings is the increasing cost of doing business in the UAE. The cost of rent, labor, and other expenses has been rising in recent years, making it difficult for some businesses to turn a profit.

 The COVID-19 pandemic has also had a negative impact on many businesses in the UAE. The pandemic caused a sharp decline in economic activity, which led to a decrease in sales and revenue for many businesses. As a result, many businesses have been unable to keep up with their debt repayments.

 The rise in debtor-led bankruptcy filings in the UAE is a positive development. It shows that the UAE government is committed to providing businesses with the support they need to recover from financial distress. It also shows that the UAE Bankruptcy Law is working effectively.

 Here are some of the benefits of debtor-led bankruptcy filings in the UAE:

•  It allows businesses to avoid liquidation and continue operating.
• It gives businesses a chance to restructure their finances and become more profitable.
• It protects businesses from creditors and other legal action.
• It allows businesses to negotiate new terms with their creditors.
• It provides businesses with a fresh start.

If you are a business owner in the UAE and you are struggling to repay your debts, you should consider filing for bankruptcy. It is important to seek legal advice from a qualified bankruptcy lawyer to ensure that you understand the process and to choose the best option for your business.