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.

UAE's new bankruptcy law an advantage for business

U.A.E businessmen will no more have to face arrest or legal prosecution for unpaid debts, nor do they have to flee the country - as many had done in the past- to avoid jail term following the implementation of the landmark UAE insolvency law, legal experts and analysts said.

However, since the law, which came into effect by end-2016, is applicable only to commercial firms, government-owned companies and individual traders, non-trader individuals who are unable to repay their debts will not get protection from arrest under the law. In other words, insolvent individuals will not be able to resort to the new bankruptcy law to avoid criminal prosecution. As a result, cases of personal bounced cheques will remain subject to the general rules under the UAE Civil Code, experts said.

The new legislation, which applies to all onshore and free-zone companies in the UAE - with the exception of companies in the financial free zones - will offer protection for employees, shareholders and directors of companies undergoing court-led insolvencies, experts said at a "Technical seminar on UAE's new bankruptcy law".

The seminar was organised by The Institute of Chartered Accountants of India (ICAI) - Dubai.

The new bankruptcy law contains 230 articles and offers creditors and debtors increased flexibility in dealing with financial distress while ensuring certainty and security for business owners and investors, who can rely to some extent on protection for their businesses during a restructuring. It will also enable them to effectively negotiate with their creditors, they said.

Following the implementation of the law, there is no need to set up special tribunals as in the past to deal with the insolvencies of large companies.

"With proper insolvency regulations, businessmen will no more have to face arrest or legal prosecution for unpaid debts nor do they have to flee the country to avoid arrest as many had done in the past," experts said.

Legal experts said the new law, which repeals much of the previous bankruptcy regime laid down in the Commercial Transactions Code (CTC) which was in existence since 1993, primarily involves four new procedures, each of those supervised by the court. These include a 'light touch' rehabilitation process for solvent debtors facing financial difficulties called "the preventative composition;" a more substantial rehabilitation process for insolvent debtors - the restructuring scheme; an end-of-the-line insolvent liquidation process, and a framework for the financial restructuring of financial institutions.

As per the new law, criminal proceedings in connection with dishonoured company cheques drawn by the debtor prior to the commencement of the relevant process stay once a preventative composition or restructuring scheme has been initiated. "However, misuse of this protection may result in criminal liability for a fraudulent insolvency offence."

Dr Habib Al Mulla, chairman of Baker & Habib Al Mulla, who was a keynote speaker at the seminar, said criminal actions filed for dishonoured cheques would be suspended if a "preventive composition plan" or "debt restructuring plan: is initiated. In this case, the cheque holder becomes one of the unsecured creditors.

"This may encourage distressed businesses to initiate composition plans and potentially consider filing for bankruptcy and debt restructuring rather than prompting a member of the management to abscond and exit the UAE."

"Under the new system, the ability to seek new financings is reinforced. Provisions in the new law are more flexible compared to those the CTC. More powers are attributed to bankruptcy trustees who are nominated by debtors under the new regime. "This may potentially reduce the court' involvement and lead to a smoother and more efficient process," said Dr Al Mulla.

He said the much-needed federal bankruptcy law has indeed brought a level of modernisation and reform, although it has its shortfalls. "However, real assessment of the successful impact of these laws will depend on how they are used and how much they will improve the business and investment climate in the UAE."

Christian Saunders, the partner of Allen & Overy LLP, who was also a speaker at the seminar, said the new law is focused very much on rehabilitation. For the first time workable 'cram down' processes that allow courts to modify loan terms are available.

"Likewise, the new law imposes mandatory timelines for the completion of the processes. While the new law is not perfect in every respect, it represents a significant improvement on the existing legal framework."

Only a debtor can apply to the court for a preventative composition. This procedure appears to be intended to be used at the early stages of financial distress to provide breathing space to a debtor facing initial financing difficulties. The aim of the process is rehabilitation supervised by the court.

A restructuring process may be commenced by a debtor where it has failed to meet its debts as they have fallen due for a period of more than 30 working days as a result of financial difficulties or where such debtor is balance sheet insolvent. The process may also be commenced by an unsecured creditor owed a debt of more than Dh100,000 that is more than 30 working days overdue following a formal demand by the creditor.

In the case of a court ordering an insolvent liquidation, the debtor (or presumably its board if it is a company) may no longer participate in any commercial activity. An official or insolvency trustee shall be appointed by the court to manage the debtor or its business. The court-appointed official or insolvency trustee is tasked with determining the indebtedness of the debtor and monetising the debtor's assets under the court's supervision.

"The new law represents 'evolution not revolution', but constitutes a significant improvement on the existing framework. Implementation will be critical, however - whether the new law is a success or not will depend almost entirely on the approach taken to it by the local courts - will they abide by the spirit of the law, and bring in best international practice," said Saunders.

Pankaj Mundra, chairman, ICAI UAE (Dubai), said the new law embodies a sea-change in the method to the treatment of debtors in the UAE and presents significant implications for the administration of the procedures set out in the Law.

"The removal of the criminal offence of bankruptcy by default, provisions for bounced cheques and new requirements for creditor-initiated insolvency proceedings are likely to be helpful."

The previous insolvency regime, which was set out in the CTC, was largely untested and much criticised by practitioners and market participants.

"In short, it was regarded as cumbersome and unsuitable for a modern dynamic economy with prevalent sophisticated financial products and institutions. It appeared to serve neither the goal of prompt and efficient liquidation nor the goal of corporate rehabilitation," Allen & Overy legal experts said.

The World Bank has calculated that on average an insolvency process in the UAE results in a recovery for creditors of less than 30 cents on the dollar, takes 3.2 years with a cost of the estate of 20 percent of the estate. If you compare that to, say Singapore or the United Kingdom with figures for recovery of 88.7 and 88.6 cents on the dollar, taking 0.8 and one year, with a cost of four and six per cent. 

Sheikh Khalifa U.A.E President issued federal bankruptcy law by decree

Sheikh Khalifa, the President, on Monday issued the long-awaited new federal bankruptcy law by decree, according to the state news agency Wam.

The law, which contains elements of bankruptcy protection laws from jurisdictions including France, Germany and the Netherlands, provides, for the first time, a comprehensive legal framework to help distressed companies avoid bankruptcy and liquidation.Under the terms of the federal constitution, the new law will come into effect three months from its publication in the country’s official legal gazette.

A senior official at the Ministry of Finance, who asked to remain anonymous, said that the new law had already been published in the gazette, and would come into effect in late December or early January. A copy of the new law seen by The National dates the law’s approval by the president from September 20.

The new law contains provisions to safeguard the rights of both creditors and debtors in insolvency situations, including measures that prioritise secured creditor rights and enable companies to restructure without unanimous creditor approval.

The law applies to companies established under the commercial company’s law, companies that are partly or fully owned by the federal or the local government, and companies and institutions established in free zones that are not governed by existing bankruptcy provisions. It does not apply to companies registered in the DIFC and the Abu Dhabi Global Market, or to private individuals.

The law will establish the Committee of Financial Restructuring (CFR), a new regulatory body which will oversee the procedures of financial restructuring outside the scope of the courts, have responsibility for the appointment of experts in the field of financial restructuring, and establish and maintain a national electronic database of individuals who have had bankruptcy rulings against them.

 

UAE Bankruptcy Law

Creditors will be able to initiate insolvency proceedings against companies or traders in cases where debts of Dh100,000 or more are unpaid for more than 30 days.

Insolvent companies will be able to avoid liquidation via four pathways set out in the new law, namely financial reorganisation, a pre-emptive settlement, financial restructuring and the raising of new funds.

The law also contains provisions blocking creditors from applying criminal charges against executive of insolvent companies for bounced cheques, when the company is undergoing a court-mandated restructuring process.

The approval of the new law drew praise from the country’s legal community.

"The law is a very important step for the creation of a healthy, transparent commercial environment in the UAE," said Essam Al Tamimi, senior partner at Al Tamimi and Company.

"In a nutshell it says that companies and traders have to pay what they owe or face consequences, while also giving them options for rescue and restructure where there is a realistic and constructive plan in place."

Mark Beer, chief executive of the DIFC Dispute Resolution Authority, said the approval of the new law was evidence of the efforts and commitment of the leadership of the UAE in ensuring that the country’s laws reflected the needs of a dynamic business environment.

"Working with the DIFC Courts and the Dubai World Tribunal, which also have the benefit of excellent restructuring regimes, I have seen first hand the benefits of a trusted and effective restructuring law in ensuring creditors are paid, jobs are protected and a business has the protection it needs to thrive," Mr Beer told The National.

"May I applaud all those who have worked so hard to bring the new federal law to this stage."

UAE bankruptcy law effective from 2017

In a media round table, the UAE’s Ministry of Finance (MoF) today shared details of the federal bankruptcy law which was recently approved by the UAE Cabinet on September 4.

The federal bankruptcy law falls under the directives of His Highness Sheikh Khalifa bin Zayed Al Nahyan, UAE President, and His Highness Sheikh Mohammad bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE, and Ruler of Dubai.

The new law works on identifying different ways to avoid bankruptcy cases and liquidation of the debtors’ funds, a comprehensive financial restructuring outside the scope of the court, composition procedures and the possibility to get new loans under terms set by the law.

Regulations will also prevent individuals from bypassing the law as there are a number of punishments, including a five-year prison sentence, as well as fines up to Dh1 million, the Ministry said in a media statement today.

The final draft of the law, which is considered an important addition to the UAE legislative system, was reviewed by Obaid Humaid Al Tayer, Minister of State for Financial Affairs.

The bankruptcy law sets up a new regulatory body the “Committee of Financial Restructuring”.

The UAE Cabinet will decide on the number of members and entities that will represent the committee, and will administer the committee’s law and its procedures.

The committee is in charge of: overseeing the procedures of financial restructuring outside the scope of the court, appointing experts in the field of financial restructuring, establishing an electronic record of individuals issued against them a bankruptcy ruling, by either imposing restrictions as ordered by the court or the loss of eligibility under the provisions of the law.

The committee is also responsible for organising and sponsoring initiatives that raise awareness among the public on the specification and objectives of the law, submitting periodical reports on the achievements, suggesting amendments to any provision of the law and determining any fees incurred, as well as any other tasks or mandates stated by the law or the UAE Cabinet.

Al Tayer highlighted that the Ministry sought to implement a law that is based on modern legislative and economic principles, while taking into consideration the global developments and changes taking place in the economic and business sectors.

These efforts have led to implementing the bankruptcy law, and distinguishing it from other laws on a regional level as well as in developed countries.

The law was set to match various bankruptcy cases, determine all legal tools to restructure the debtor’s business in accordance with specific terms and conditions as well as a legislative framework.

“Mature economies have proven the need to implement a bankruptcy law in each country that wishes to strengthen its economic status. The bankruptcy law is considered as one of the most important pillars for the local economy, as it provides protection for all parties, in addition to its pivotal role in attracting capital, in a safe and attractive investment environment and providing a protection legislation and legal acts,” Al Tayer added.

The law includes raising credit levels and financial guarantee within its legislative priority to strengthen the confidence among investors and boost the economy by enabling the financially distressed businesses to restructure, and pay their debts and obligations without disrupting the production process in accordance with transparent legal framework.

This makes it the only law which includes those specifications in the Arab region.

Which businesses are covered by the law

The law is implemented on:

-Companies that were established under commercial company laws, as well as the companies that were not established under the commercial company law

-Semi- or fully-owned companies by the federal or the local government where their establishment legislatives are under this law

-Companies and institutions established in free zones and which do not have provisions to regulate composition procedures or restructuring bankruptcy according to the Federal law No. 8 of 2004 concerning financial free zones
Any trader and licensed civil company
Al Tayer added: “We are delighted to adopt the final draft of the bankruptcy law, to encourage entrepreneurs who seek a secure investment environment to direct their investments in the country, while strengthening their trust in the legislative and legal infrastructure in the UAE that implements clear and transparent laws preserving their rights and achieving balance between the creditor and the debtor as well as prioritise creditors with guarantees over the ones without guarantees.

“The bankruptcy law will contribute in supporting the strategic plans adopted by UAE to develop its economic, financial and legislative structure.

"The law will also raise the UAE’s competitiveness levels in international reports, which will support the sustainable economic growth and enhance the national economy, which in return support the sustainable economic growth and promote the national economy on a global level.”

UAE Cabinet approves final draft of federal bankruptcy law

The final draft of the federal bankruptcy law has been approved by the UAE Cabinet, Sheikh Mohammed bin Rashid, Vice President and Ruler of Dubai, said on Sunday.

The legislation aims to "promote our economy’s attractiveness for investments and to facilitate business", according to a tweet from Sheikh Mohammed.

Last week the economy minister said that the law was needed to help owners of small- and medium-sized enterprises weather a slowing economy and rising levels of bad debt.

Sultan Al Mansouri said that he expected the law to be finalised within a matter of months but that it would need to be approved by the Federal National Council before it becomes law.

The law will put a moratorium on sending people to jail for bounced cheques until a restructuring plan for business owners has been agreed with creditors, a senior government official told Over the past two years a number of small business owners in the UAE have fled the country leaving unpaid loans in their wake in fear of being jailed for defaulting on debt and other financial obligations.

For years, observers have urged the government to put in place a raft of legislation to make it easier for SMEs, the lifeblood of the economy, to thrive.

Earlier this year, consultancy firm KPMG recommended in a report on small businesses that the most urgent of those changes is the implementation of a comprehensive bankruptcy law to make it easier for SMEs to cope with insolvency in ways other than fleeing the country.

Abdul Aziz Al Ghurair, the chief executive of Mashreq and head of the UAE Banks Federation, said in November that some small business owners had skipped town, leaving about Dh5 billion of unsettled loans.

In May, however, Mr Al Ghurair said the potential fallout from rising levels of SME bad debt had been contained as banks work with business owners to restructure debt.