How to file for bankruptcy in UAE can be a daunting question for many individuals and businesses facing financial distress. The UAE’s bankruptcy law provides structured procedures for those who are unable to meet their debt obligations, offering both debtors and creditors legal protection and guidance. The law focuses on finding a balance between restructuring debts and liquidation, allowing businesses to reorganize and continue operations where possible. Filing for bankruptcy involves navigating complex regulations and requires a thorough understanding of the legal requirements and processes, making it crucial to approach the situation with expert legal assistance.
Legislations covering Bankruptcy in UAE
The UAE’s legal framework governing bankruptcy, restructuring, and insolvency is primarily outlined in Federal Law No. 18 of 1993 (the “Commercial Code”) and Federal Law No. 2 of 2015 (the “Companies Law”). Additional relevant provisions can be found in Federal Law No. 5 of 1985 (the “Civil Code”), Federal Law No. 3 of 1987 (the “Penal Code”), and Federal Law No. 11 of 1992 (the “Civil Procedures Law”). When it comes to the liquidation of banks or financial institutions, Federal Law No. 10 of 1980 is applicable.
Currently, a new insolvency law is in draft form and is expected to provide more detailed regulations on bankruptcy and liquidation matters. However, without the finalized version of this law, the exact scope of the new regulations remains uncertain. This guide outlines the steps for filing for bankruptcy, the actions of the court, the timeframes involved, the required documents, and the associated fees.
1. Understanding Bankruptcy in the UAE
- Bankruptcy is a legal process designed to assist debtors who cannot meet their financial obligations. It involves the liquidation of assets to repay creditors and provides a structured way to address insolvency.
2. Circumstances in Which a Trader May Be Declared Bankrupt
Under the Federal Decree-Law No. (51) of 2023, specific conditions dictate when a trader can be declared bankrupt in the UAE. Here are the key circumstances:
- Suspension of Debt Payments: Any trader who has suspended payment of their commercial debts due to financial instability or poor credit may be declared bankrupt. This includes businesses or individuals engaged in trade whose financial situation deteriorates to the point where they can no longer meet their debt obligations.
- Indicators of Financial Instability: If a trader engages in abnormal or illegal commercial practices, which signal financial distress, they are deemed to have suspended payment, indicating the onset of bankruptcy.
- Initiation of Bankruptcy:
- A trader may initiate the bankruptcy process voluntarily within 30 days of suspending payment of commercial debts. Failure to do so within this period could result in criminal charges, specifically for bankruptcy by negligence, against the trader or its directors.
- Creditors may also file for a trader’s bankruptcy if they can demonstrate the suspension of commercial debt payments. A creditor can petition for bankruptcy in respect of:
- A debt that has become due.
- Money owed that is not yet due but where the trader has fled the UAE.
- Contingent debts under specific conditions.
- Postponement of Bankruptcy Declaration: The court holds the discretion to postpone declaring a trader bankrupt for up to one year if the trader’s financial condition is likely to improve or if postponement is in the best interest of the national economy. During this time, the court can issue necessary orders to safeguard the trader’s assets.
3. Steps to File for Bankruptcy
A. Initiation of Proceedings
- Submission of Application:
- The debtor (individual or business) must submit an application to the Bankruptcy Department within 60 days of ceasing payments or realizing the inability to pay debts. This application should include detailed information about the debtor’s financial status and supporting documents as outlined in Article 22 of the law.
- Application by Creditors:
- Creditors may also initiate bankruptcy proceedings if the debtor defaults on payments. A notice must be served to the debtor 30 days before submitting the application (Article 16).
B. Required Documents for filing Bankruptcy in UAE
- For Debtors:
- A detailed statement of assets and liabilities
- Commercial or industrial licenses
- Financial statements for the last three fiscal years
- A list of ongoing legal proceedings
- Nominations for the Trustee role (if applicable)
- For Creditors:
- Proof of debt, including supporting documents and any existing guarantees
4. Court Actions and Timeframes
A. Court Timeline
- Application Review:
- The court will typically review the application within 10 days of submission.
- Decision on Bankruptcy:
- A decision on whether to admit or dismiss the bankruptcy application is usually made within 10 days after the review period.
B. Duration of Proceedings
- Suspension of Claims:
- Once the bankruptcy proceedings begin, claims against the debtor are suspended for up to three months, with a possible extension of an additional month if necessary (Article 59).
- Finalization:
- The entire bankruptcy process, including the liquidation of assets, may take several months to over a year, depending on the complexity of the case and the assets involved.
| Step | Description | Timeframe |
|---|---|---|
| 1. Initiation of Bankruptcy by Trader | The trader must initiate bankruptcy within 30 days of ceasing payment of debts to avoid negligence charges. | Within 30 days after debt payment suspension |
| 2. Submission of Bankruptcy Application | Debtor submits application with financial details to the Bankruptcy Department. | Within 60 days of realizing inability to pay debts |
| 3. Creditor Application | Creditors may file after serving a 30-day notice if the debtor defaults. | 30 days’ notice required before filing |
| 4. Court Review of Application | The court reviews the application. | Typically within 10 days of submission |
| 5. Court Decision on Bankruptcy | The court issues a decision on admitting or dismissing the bankruptcy application. | Within 10 days after application review |
| 6. Suspension of Claims | Once proceedings begin, claims against the debtor are suspended. | Up to 3 months, with an additional 1-month extension |
| 7. Appointment of Trustee | The court appoints a trustee to oversee the process and liquidate assets. | Immediately after the declaration of bankruptcy |
| 8. Asset Liquidation | The trustee liquidates assets to settle debts. | Several months to over a year, depending on complexity |
| 9. Creditors’ Claims Submission | Creditors must submit their claims against the debtor. | Within 10 days (30 days for non-residents) after adjudication |
| 10. Public Announcements | Bankruptcy must be published in a daily newspaper, inviting creditors to register their claims. | Within 15 days of bankruptcy declaration |
| 11. Finalization of Bankruptcy | The process is finalized after assets are liquidated and debts are settled. | Several months to over a year |
5. Fees Involved
- Court Fees:
- The initial filing fees depend on the total debts or assets of the debtor. Fees for the appointment of a Trustee and other administrative costs are also included.
- Trustee Fees:
- The Trustee’s fees are determined by the Bankruptcy Court based on the complexity and duration of the proceedings (Article 51).
- Miscellaneous Costs:
- Additional costs may include legal representation, document processing, and public announcements.
6. Court Orders Following a Bankruptcy Petition for a Trader
Upon receiving a petition for the bankruptcy of a trader, the court has the authority to issue necessary orders to protect the trader’s assets. Here is an overview of the steps and measures taken by the court following such a petition:
- Appointment of an Expert: The court may appoint an expert to assess the trader’s financial status and investigate whether the trader has suspended payment of its debts. The expert will also examine the reasons behind the suspension of debt payments.
- Declaration of Bankruptcy: If the court is satisfied with the findings and determines that the trader should be declared bankrupt, it will issue an order of adjudication declaring the trader bankrupt. Alongside this declaration, the court will appoint a trustee in bankruptcy to manage the bankruptcy process and administer the trader’s assets.
- Fixing the Date of Cessation of Payment: Upon declaring bankruptcy, the court will set a provisional date marking when the trader ceased paying its debts. This date may not exceed two years prior to the date of the insolvency judgment.The court may also order that the place of business be sealed as part of the process of securing the trader’s assets.
- Notifications and Public Announcements: Once the bankruptcy order is issued, a copy is provided to the Ministry of Economy, the relevant Commercial Register, and the UAE Central Bank. The trustee in bankruptcy must publish a summary of the bankruptcy adjudication in a daily newspaper within 15 days, as directed by the court. This publication will also invite creditors to register their debts within the bankruptcy proceedings.
- Amending the Date of Cessation: The court may amend the provisional date for ceasing debt payments upon its own accord or upon a request made by the trustee in bankruptcy or interested parties. However, the revised date must not be later than 10 days after the trader’s debts have been verified. Any amendments to the date must also be published in a daily newspaper specified by the court.The trustee in bankruptcy is responsible for realizing the trader’s assets, which includes pursuing claims against third parties on behalf of the trader. The trustee must also act to settle disputes or objections raised by creditors concerning debts or collateral.
- Submission of Claims by Creditors: After the bankruptcy adjudication is published, creditors must submit a statement detailing their claims against the trader. If claims are not submitted within 10 days (or 30 days for non-residents), the trustee must issue a second notice in the same newspaper and notify known creditors. After this notice, creditors again have 10 days to submit claims (or 30 days for non-residents).The trustee can object to any claims or collateral held by creditors. In response, creditors have 10 days (or 30 days for non-residents) to provide supporting evidence.
- Recording and Verification of Claims: The trustee in bankruptcy will compile and deposit a list of creditors with the court. This document will detail the claims, securities, and any objections raised by the trustee.Creditors have 10 days (or 30 days for non-residents) to challenge the list or any objections. Afterward, the court will issue a final ruling on the admissibility of claims.
- Impact on the Trader: Once declared bankrupt, the trader is prohibited from continuing business operations, paying off debts, or recovering amounts owed to them. All such actions fall under the responsibility of the trustee in bankruptcy.
- Moratorium on Claims : Once bankruptcy is declared, creditors (except those holding mortgages, liens, or with special court permission) are prohibited from pursuing remedies against the trader’s estate. However, if the estate lacks sufficient funds to cover the trustee’s expenses, the bankruptcy may be terminated, allowing creditors to individually pursue the trader.
7. How Are Creditors Paid: Ranking of Creditors
The ranking of creditors in UAE bankruptcy proceedings determines the order in which debts are settled once the assets of a bankrupt trader are liquidated. The Federal Decree-Law No. (51) of 2023 outlines the hierarchy for how creditors are paid, giving priority to specific categories of claims:
1. Employee Wages
- The wages of the trader’s employees for the 30-day period prior to the declaration of bankruptcy are given the highest priority. These payments are made before any other creditors, ensuring that employees receive compensation for their labor leading up to the bankruptcy.
2. Lien Holders
- Property Owners: The owners of property leased to a bankrupt trader have a lien on the property for a period of two years. This lien allows the property owner to claim unpaid rent or other obligations from the bankrupt trader during this period.
- Government Liens: The government has a lien for unpaid taxes during the two-year period before the bankruptcy order. These liens ensure that the state is compensated for unpaid taxes before other unsecured creditors.
3. Public Funds
- Public funds that are used to cover the cost of the bankruptcy are given priority over all other creditors. These costs, such as those associated with the trustee’s work and administrative expenses, are covered from the first cash proceeds that enter the bankrupt estate.
4. Liquidation Expenses
- In cases of liquidation, the expenses of the liquidator also have priority over other debts. This includes costs incurred during the process of asset liquidation and administration of the bankruptcy estate.
5. Secured Creditors
- Enforcement of Security: Creditors holding secured interests in the trader’s assets may enforce their security independently, often through the sale of secured assets at public auctions. These sales typically occur outside the formal bankruptcy proceedings, allowing secured creditors to recover their debts from the sale proceeds.
- Foreign Ownership Restrictions: It is important to note that restrictions on foreign ownership of certain types of property may limit the pool of potential buyers, potentially impacting the sale price of secured assets. This can affect the amount recovered by secured creditors.
6. Lack of Clear Rules on Secured Creditors
- The priority between secured creditors is not explicitly governed in UAE insolvency proceedings, which creates some ambiguity. Creditors with competing claims over the same asset may face challenges in determining whose claim takes precedence. In some cases, possession of the asset plays a critical role in resolving such disputes, as having physical control over the asset can effectively block others from securing rights over it.
- Certain assets, such as aircraft and real estate, are subject to specialized security registers, which help regulate claims and liens related to those specific types of assets.
Filing for bankruptcy in the UAE under the 2023 law is a structured process that requires careful preparation and adherence to legal protocols. By understanding the necessary steps, timelines, and documentation, debtors can navigate the process more effectively, ensuring that their financial difficulties are addressed systematically and legally.
FAQ on Bankruptcy in UAE
1. What is bankruptcy in UAE?
Bankruptcy in UAE refers to a legal process that provides structured procedures for individuals and businesses that are unable to meet their financial obligations. The UAE’s bankruptcy law allows for debt restructuring or liquidation of assets to pay off creditors. It offers both debtors and creditors legal protection and guidance, balancing the need to help businesses reorganize and continue operations, where possible.
2. What laws govern bankruptcy in UAE?
Bankruptcy in UAE is governed by a combination of federal laws, including:
- Federal Law No. 18 of 1993 (Commercial Code)
- Federal Law No. 2 of 2015 (Companies Law)
- Federal Law No. 5 of 1985 (Civil Code)
- Federal Law No. 3 of 1987 (Penal Code)
- Federal Law No. 11 of 1992 (Civil Procedures Law) For banks and financial institutions, Federal Law No. 10 of 1980 applies. A new insolvency law has also been drafted, which is expected to provide more detailed regulations in the future.
3. Who can file for bankruptcy in UAE?
Both individuals and businesses can file for bankruptcy in UAE. However, traders (individuals or businesses engaged in trade) are the primary focus of the bankruptcy law. Creditors may also initiate bankruptcy proceedings if the debtor has defaulted on payments or is insolvent.
4. What are the circumstances under which a trader can be declared bankrupt in UAE?
A trader can be declared bankrupt if:
- They suspend the payment of commercial debts due to financial instability.
- They engage in abnormal or illegal commercial practices indicating financial distress.
- A creditor can also request bankruptcy if they can prove the debtor has suspended payments.
5. What are the steps to file for bankruptcy in UAE?
The process of filing for bankruptcy in UAE involves:
- Initiating proceedings: A trader must voluntarily file for bankruptcy within 30 days of ceasing payments. Failing to do so can result in criminal charges.
- Submitting an application: The debtor must submit an application to the Bankruptcy Department, providing detailed financial information and documents.
- Court review: The court reviews the application, appoints a trustee if bankruptcy is declared, and takes necessary actions to protect assets and creditors’ interests.
- Asset liquidation: The appointed trustee liquidates the assets to repay creditors.
6. What documents are required to file for bankruptcy in UAE?
For a debtor, the required documents include:
- A detailed statement of assets and liabilities.
- Commercial or industrial licenses.
- Financial statements for the last three fiscal years.
- A list of any ongoing legal proceedings. For creditors, proof of debt and related documents must be submitted.
7. What is the role of a trustee in UAE bankruptcy proceedings?
The trustee, appointed by the court, plays a crucial role in managing the bankruptcy process. The trustee oversees the liquidation of the debtor’s assets, collects debts owed to the bankrupt party, verifies creditors’ claims, and ensures that the proceeds from asset liquidation are distributed to creditors according to the established ranking.
8. How long does the bankruptcy process take in UAE?
The duration of bankruptcy proceedings in the UAE varies depending on the complexity of the case. Typically, the process can take several months to over a year. The suspension of claims may last for up to three months, with a possible one-month extension.
9. What happens if a trader fails to file for bankruptcy within the required time?
If a trader fails to initiate bankruptcy proceedings within 30 days of ceasing payment of debts, they may face criminal charges for bankruptcy by negligence. This can result in penalties against the trader or the business’s directors, including potential imprisonment.
10. What court actions follow a bankruptcy application in UAE?
After the bankruptcy application is submitted, the court will:
- Review the application within 10 days.
- Make a decision to admit or dismiss the application.
- If admitted, appoint a trustee to oversee the bankruptcy process.
- Issue orders to protect the debtor’s assets during the proceedings.
11. Can a creditor initiate bankruptcy proceedings in UAE?
Yes, creditors can initiate bankruptcy proceedings if the debtor defaults on payments or suspends payment of commercial debts. Creditors must provide sufficient proof of the debtor’s inability to pay and serve a notice 30 days before filing the bankruptcy application.
12. What fees are involved in filing for bankruptcy in UAE?
Bankruptcy-related fees in UAE typically include:
- Court fees, which depend on the total debts or assets involved.
- Trustee fees, determined by the court based on the complexity and duration of the proceedings.
- Miscellaneous costs, such as legal representation, document processing, and publication of notices.
13. How are creditors paid during bankruptcy in UAE?
Creditors are paid according to a ranking system, with priority given to certain categories of claims:
- Employee wages: Employee wages for the 30-day period prior to bankruptcy have the highest priority.
- Secured creditors: Creditors with secured interests in assets can enforce their security and recover debt through the sale of assets.
- Government liens: The government has a lien on property for unpaid taxes during the two years before bankruptcy.
- Liquidation expenses: Costs incurred in liquidating assets and administering the bankruptcy estate are prioritized over other debts.
14. What is the impact of bankruptcy on the debtor in UAE?
Once declared bankrupt, the debtor (trader) loses the right to continue business operations. All business-related actions fall under the responsibility of the trustee. The debtor is also prohibited from paying off debts or recovering money owed to them. Additionally, all claims by creditors are temporarily suspended, allowing the bankruptcy proceedings to take place without interference.
15. How are bankruptcy proceedings published in UAE?
After a bankruptcy declaration, a summary of the adjudication is published in a daily newspaper. The publication also serves as a formal invitation to creditors to register their claims against the debtor. Non-resident creditors typically have 30 days to submit their claims.
16. What is the role of the court in suspending claims during bankruptcy?
When bankruptcy proceedings begin, the court suspends claims against the debtor for up to three months, with a possible one-month extension. This allows the trustee to manage the liquidation of assets and settle creditors’ claims in an orderly manner.
17. Can the court postpone declaring bankruptcy in UAE?
Yes, the court has the discretion to postpone the declaration of bankruptcy for up to one year if it believes that the trader’s financial situation may improve or if postponing the bankruptcy would be beneficial for the national economy.
18. Are there criminal implications for bankruptcy in UAE?
In certain circumstances, traders or business directors may face criminal charges for bankruptcy by negligence or fraud. If bankruptcy is declared due to reckless financial management or fraudulent practices, the individuals responsible may be prosecuted under UAE law.
