The UAE Bankruptcy law 2024. Here are the key takeaways.
The introduction of Federal Law Decree No. (51) of 2023 concerning Financial Restructuring and Bankruptcy, colloquially dubbed the “New Law,” has ushered in a transformative era for the United Arab Emirates’ insolvency regime. Slated to take effect on May 1, 2024, this legislative overhaul repeals its predecessor, Federal Decree-Law No. 9 of 2016 on Bankruptcy, while retaining specific regulations and resolutions until their eventual replacement. This comprehensive guide delves into the intricacies of the New Law, illuminating its pivotal features and the profound implications they hold for businesses operating within the UAE’s dynamic economic landscape.
Here’s a complete guide to the old UAE insolvency law.
Scope and Applicability
Akin to its antecedent, the New Law’s jurisdiction extends to companies governed by the UAE Commercial Companies Decree Law, entities partially or wholly owned by federal or local governments, and licensed civil companies engaged in professional activities. However, it excludes establishments within free zones adhering to distinct insolvency regulations, such as the Dubai International Financial Center (DIFC) and the Abu Dhabi Global Market (ADGM). Additionally, the New Law encompasses individual traders as defined by the Commercial Transactions Law and companies subject to the provisions of Federal Law No. 8 of 2004 on Financial Free Zones, provided they lack specific guidelines governing protective composition procedures, financial restructuring, or bankruptcy.
Crystallizing Conceptual Clarity
The New Law introduces a series of refined and expanded definitions, fortifying the conceptual underpinnings of the UAE’s insolvency framework. Terms like “cessation of payments,” “debtor’s assets,” “related party,” “ranking of creditors,” and “required majority” have been elucidated, fostering a more cohesive understanding of the legislation’s nuances. For instance, the definition of “debtor’s assets” now explicitly encompasses all movable and immovable properties owned by the debtor, both domestically and internationally, providing a broader scope for asset identification and recovery.
Establishment of Bankruptcy Court
A pivotal development under the New Law is the creation of a dedicated Bankruptcy Court, vested with jurisdiction over bankruptcy-related matters. This specialized tribunal will assume oversight of all pending insolvency actions initiated under the Prior Law, effective May 1, 2024. The Bankruptcy Court’s establishment underscores the UAE’s commitment to streamlining the adjudication of insolvency proceedings, enhancing efficiency and ensuring consistent application of the New Law’s provisions.
Preventive Settlement: A Novel Approach
Recognizing the limitations of the Prior Law’s “preventive composition” mechanism, the New Law introduces a more user-friendly alternative: the “Preventive Settlement.” This court-supervised process empowers debtors to initiate restructuring efforts aimed at continuing commercial operations and fulfilling debt obligations through a negotiated settlement proposal with creditors. Notably, the debtor retains control over business management and asset administration during these proceedings, without the appointment of a trustee.
Furthermore, the Preventive Settlement affords debtors a moratorium period of three to six months from the petition’s acceptance date, granting them a crucial respite to explore settlement terms with creditors. This innovative approach underscores the New Law’s commitment to facilitating consensual restructuring while preserving the debtor’s operational continuity.
Restructuring and Bankruptcy Procedures
In addition to the Preventive Settlement, the New Law retains the restructuring and bankruptcy procedures established under the Prior Law, albeit with notable enhancements. The restructuring process, designed for intricate restructurings requiring extended implementation periods, enables debtors or creditors to initiate proceedings within 60 days from the “cessation of payment” date. Significantly, the New Law introduces a moratorium period commencing upon the initiation decision and concluding upon the restructuring plan’s ratification by the Bankruptcy Court, subject to potential extensions with creditor consent.
Conversely, the bankruptcy or liquidation route empowers debtors and creditors to initiate proceedings, culminating in the court-appointed trustee assuming control over the debtor’s business management and asset liquidation.
Voting Dynamics and Creditor Classes
The New Law establishes a unified creditor class for voting purposes, encompassing privileged creditors (e.g., government dues), unsecured creditors (including unsecured portions of secured debts), and secured creditors authorized by the Bankruptcy Court (if their rights are affected by the plan). While the legislation references creditor classification, specific guidance on cross-class cramdowns remains pending within the Implementing Regulations.
To approve a restructuring plan, creditors holding 66 2/3% of the “Required Amount” (creditors representing 50% of approved claims for voting purposes) must vote in favor. Notably, the Bankruptcy Court retains the discretion to ratify plans that fail to secure the requisite majority, provided they meet the New Law’s fairness standards.
Facilitating New Financing
The Bankruptcy Court wields the authority to approve new financing arrangements that grant priority status over unsecured debts, secure unencumbered assets, or establish second-ranking security over encumbered assets. Remarkably, the New Law permits the creation of first-ranking security over encumbered assets, contingent upon the consent of existing first-ranking security beneficiaries. This provision enhances the debtor’s ability to access vital funding during restructuring processes, fostering a more conducive environment for successful turnarounds.
Bolstering Judicial Capacity
Recognizing the intricate nature of the New Law and the imperative to safeguard the rights of debtors and creditors, the legislation fortifies judicial capacity through the establishment of the Bankruptcy Department within the Bankruptcy Court’s headquarters. Overseen by a senior Court of Appeal judge, this dedicated division assumes pivotal responsibilities, including processing applications, notifying parties of court decisions, ensuring compliance with informational and documentation requirements, overseeing the debtor’s business management during proceedings, facilitating creditors’ meetings, and summoning relevant parties for inquiries.
Moreover, the Financial Restructuring and Bankruptcy Unit, formerly the Financial Restructuring Committee, has been revitalized under the New Law. Its expanded mandate encompasses overseeing the Bankruptcy Register online platform, endorsing the roster of trustees and experts, supervising the training of judges and experts, and assisting the Bankruptcy Court in determining trustees’ fee ranges.
Discretionary Powers and Judicial Oversight
The Bankruptcy Court wields substantial discretionary powers under the New Law, underscoring the importance of judicial oversight and expertise in exercising such authority. The court’s purview extends to adjudicating the acceptance of restructuring or bankruptcy applications, ratifying restructuring plans that fail to secure the required majority, appointing trustees, determining trustees’ powers concerning specific issues, authorizing debtors to borrow new funds, identifying voting-eligible creditors, amending plans before resubmission for voting, and declaring transactions unenforceable if deemed detrimental to creditors.
To bolster the court’s decision-making prowess, the New Law mandates the appointment of experts and auditors, funded by the competent judicial authority, to provide guidance and support. This collaborative approach aims to foster informed and judicious rulings, safeguarding the interests of all stakeholders involved in insolvency proceedings.
Moratorium Periods and Claim Exclusions
The New Law introduces a nuanced approach to moratorium periods, balancing the need for operational continuity with the protection of stakeholder interests. During Preventive Settlement proceedings, a three-month automatic stay on creditor claims commences upon the initiation decision, with the possibility of extensions up to a total of six months, subject to the Bankruptcy Court’s approval.
Conversely, in restructuring proceedings, the moratorium period extends from the initiation decision until the restructuring plan’s ratification by the Bankruptcy Court, without a predefined time limit. However, the restructuring plan must be submitted within six months of commencement, with the Bankruptcy Court retaining the discretion to grant extensions contingent upon the consent of the required majority of creditors.
Notably, the New Law excludes labor and personal status claims (excluding succession-related claims) from the moratorium’s scope, a departure from the Prior Law’s approach. This exemption aims to protect the rights of workers and uphold personal obligations while facilitating the debtor’s operational continuity during insolvency proceedings.
Secured Creditor Rights and Asset Enforcement
Contrary to the Prior Law’s constraints, the New Law affords secured creditors the right to enforce against secured assets through the Bankruptcy Court and appointed trustee during bankruptcy proceedings, eliminating the need for separate enforcement proceedings. This provision streamlines the process, fostering a more efficient resolution of secured creditor claims within the overarching insolvency framework.
De Facto Company Bankruptcy
Introducing a novel concept, Article 20 of the New Law establishes the principle of “de facto company bankruptcy.” Under this provision, partners of a de facto company (an entity operating without legal recognition) will be treated akin to partners in partnership companies, subjecting them to joint liability pursuant to Article 244 of the New Law. This measure aims to extend the bankruptcy regime’s reach and ensure equitable treatment of stakeholders, regardless of the entity’s legal status.
Enhanced Accountability for Management
The New Law fortifies the accountability measures for board members, managers, liquidators, and de facto managers responsible for the actual management of the company, including controlling shareholders. While retaining the two-year period for considering actions leading to bankruptcy, the New Law outlines four scenarios that may trigger their liability, including instances where the company’s assets are insufficient to cover at least 20% of its debts due to evident negligence in management.
Furthermore, the New Law establishes a two-year limitation period from the bankruptcy declaration date to initiate liability proceedings against these individuals. Exculpatory provisions allow for exemption from liability if the individuals can demonstrate that they took all reasonable precautions or documented their objections to the actions in question.
These enhancements reflect a more robust approach to holding company leadership accountable, encouraging responsible business practices and decision-making while safeguarding creditors’ interests.
Restructuring Security Interests
Articles 66 and 108 of the New Law, applicable to both Preventive Settlement and Restructuring regimes, introduce the possibility of unifying, establishing, dissolving, selling, or replacing security interests, contingent upon the secured creditor’s consent. This provision empowers debtors to explore restructuring options that may involve modifying security arrangements, while simultaneously preserving the secured creditor’s right to consent to such modifications.
Scrutinizing Transactions and Insider Dealings
The New Law adopts a more vigilant stance towards potentially prejudicial transactions and insider dealings, introducing a multifaceted approach to examining debtor transactions within specified timeframes. While the Prior Law focused on a two-year period preceding the initiation of insolvency proceedings, the New Law primarily targets a six-month window preceding the date of cessation of payment, which may extend up to two years preceding the initiation decision date.
Notably, for transactions involving insiders or related parties, the New Law extends the scrutiny period to two years preceding the cessation of payment date, potentially spanning up to four years preceding the initiation decision. This heightened vigilance towards insider dealings underscores the legislation’s commitment to transparency and fairness.
Furthermore, the New Law introduces “commercial considerations” as a valid justification for certain transactions, indicating a more flexible and business-oriented perspective. This addition suggests that transactions executed in the ordinary course of business, even if they fall within the examined period, may be defensible under this new criterion, fostering a more balanced approach to transaction evaluation.
Debtor Actions and Operational Continuity
Recognizing the need for operational continuity during insolvency proceedings, the New Law adopts a pragmatic approach to debtor actions, departing from the Prior Law’s broad restrictions. Initially prohibiting debt settlement after bankruptcy proceedings commence, the New Law introduces practical exceptions, allowing for the payment of workers’ rights, essential business materials, and necessary living expenses for the debtor and their family, subject to the Bankruptcy Court’s approval.
This balanced approach acknowledges the necessity of maintaining critical business operations and personal welfare amid insolvency proceedings, providing a crucial lifeline for clients navigating financial distress while preserving the integrity of the insolvency process.
Set-Off and Netting Provisions
Akin to the Prior Law, the New Law prohibits setting off debts arising after the commencement of insolvency proceedings, unless the set-off is based on the execution of the Preventive Settlement proposal, restructuring plan, or Bankruptcy Court’s decision (upon the trustee’s or creditor’s request). However, the New Law incorporates the provisions of Federal Decree Law No. 10 of 2018 on Netting, introducing a new dimension to the set-off dynamics within the UAE’s insolvency framework.
Post-Bankruptcy Settlement
The New Law introduces detailed provisions governing post-bankruptcy settlements that may be concluded between the debtor and creditor(s) after the declaration of bankruptcy via a final judgment. This addition underscores the legislation’s commitment to facilitating consensual resolutions and promoting equitable outcomes for all stakeholders involved in insolvency proceedings.
Fostering Economic Resilience
The introduction of the New UAE Bankruptcy Law represents a pivotal stride towards refining the nation’s insolvency regime, fostering economic resilience, and bolstering investor confidence. From the establishment of a dedicated Bankruptcy Court and the introduction of the Preventive Settlement mechanism to the enhanced accountability measures for management and the scrutiny of potentially prejudicial transactions, the New Law reflects a comprehensive overhaul of the UAE’s approach to financial restructuring and bankruptcy.
As the UAE continues to solidify its position as a global economic powerhouse, the New Law’s provisions aim to create a more conducive environment for businesses to navigate financial challenges, access vital funding, and pursue successful turnarounds. By fortifying judicial capacity, streamlining enforcement procedures, and promoting transparency, the New Law underscores the UAE’s commitment to upholding the highest standards of corporate governance and safeguarding the interests of all stakeholders involved in insolvency proceedings.
While the Implementing Regulations are eagerly awaited to provide further guidance on the practical implementation of the New Law, the legislation’s overarching principles and provisions herald a new era of economic stability and resilience in the UAE. As the nation continues to embrace innovation and adapt to the ever-evolving global business landscape, the New UAE Bankruptcy Law stands as a testament to the UAE’s unwavering dedication to fostering a thriving and sustainable economic ecosystem.
Key Differences Between the 2019 UAE personal Insolvency Law and the 2024 UAE Bankruptcy Law
- Scope and Framework:
- 2019 UAE Insolvency Law: Focuses on establishing insolvency proceedings, emphasizing debtor protection and restructuring.
- 2024 UAE Bankruptcy Law: Expands and refines the framework, introducing clearer definitions and new procedures.
- Procedural Enhancements:
- 2019 UAE Insolvency Law : Basic structure for insolvency and preventative composition.
- 2024 UAE Bankruptcy Law:: Adds detailed procedures for preventative settlement and streamlined restructuring processes.
- Role of Courts and Trustees:
- 2019 UAE Insolvency Law: Courts supervise and trustees manage insolvency cases.
- 2024 UAE Bankruptcy Law:: Introduces a specialized Bankruptcy Court with enhanced authority and trustee roles, including approval for new financing.
- Creditor and Debtor Balance:
- 2019 UAE Insolvency Law: Strong emphasis on debtor protections.
- 2024 UAE Bankruptcy Law:: Balances protections for debtors with fair treatment and rights for creditors.
- Moratoriums and Voting Requirements:
- 2019 UAE Insolvency Law: Initial introduction of moratoriums.
- 2024 UAE Bankruptcy Law:: Clarifies and expands moratoriums and voting requirements for settlements and restructuring plans.