Overview of the New UAE Bankruptcy Law
The UAE has come up with a new bankruptcy law, Federal Law Decree No. (51) of 2023, applicable from May 1, 2024, replacing the previous Federal Decree-Law No. (9) of 2016 on Bankruptcy. The purpose of the new bankruptcy law is to provide a wider legal framework for financial distress and insolvency processes, thus making the whole process much more efficient and effective not only for businesses but also for individuals. Here is a brief overview of the main features of the new UAE Bankruptcy Law.
Key Features of the New Bankruptcy Law
- Preventive Settlement
One of the major changes brought about by the new law is the introduction of the “Preventive Settlement” mechanism. It replaced the old “Preventive Composition” tool that had stringent conditions to be complied with and became reductant. The preventive settlement mechanism is Court supervised, and it focuses on procedures initiated by the debtor for continuing commercial activities and meeting debts through an approved settlement proposal with creditors.
This new regime allows the debtor to run business and the assets normally, while looking into terms of settlement with creditors, and without the appointment of a trustee. This mechanism affords a moratorium period of 3 to 6 months where terms of settlement can be sought without the appointment of a trustee.
- Bankruptcy Court
The new law provides for the existence of the Bankruptcy Court. All bankruptcy cases shall be dealt with by that court. The Bankruptcy Court may entrust expertise services to a sufficient number of experts and auditors to be chosen through the competent judicial authority. The experts and auditors shall exercise expertise in respect of every matter for which the court commissions an expert.
Experts and auditors will be granted remunerations proportionate to the functions assigned to them by the Bankruptcy Court. Such remunerations shall be determined based on a report drawn up by the competent judicial authority, taking into account the report that the competent judicial authority will submit to the Bankruptcy Court regarding the work done by experts and auditors. Remunerations shall be paid from the budget of the competent judicial authority.
- Expanded Definitions
The law has introduced updated definitions clarifying the very key concepts. For example, all the movable and immovable properties owned by the debtor have been included as “debtor’s assets,” both domestically and internationally. Other updated definitions are “related parties,” “bankruptcy register,” and “cessation of payment.”
- Restructuring and Liquidation
The new law maintains the restructuring and liquidation channels of the old law but with improvements. It allows for further flexibility, and there are more choices for debtors and creditors in reaching an agreement. The new law is very keen on a consensual out-of-court financial restructuring to avoid a case of bankruptcy and liquidation.
- Increased Liability for Management
The new statute imposes increased liability on company management in case a company goes bankrupt. For example, it holds the managers and directors liable for fraudulent activities or mismanagement that caused the financial stress. The provision aims at responsible corporate governance and protection of the interests of creditors.
Procedures Under the New Bankruptcy Law
- Filing for Bankruptcy
A debtor can file for bankruptcy if they are unable to liquidate debt. The application should be filed in the Bankruptcy Court that will hear the case and make a decision on whether to accept the petition. Upon acceptance, the court appoints a trustee to preside over the proceeding.
- Moratorium Period
An automatic three-month stay on creditor claims, starting from the date when the decision to open the proceeding was reached. One or more extensions are available to the debtor with permission from the Bankruptcy Court, considering that the total moratorium period does not exceed six months. It will afford sufficient time for the debtor to focus on restructuring and settlement negotiations.
- Settlement Proposal
The debtor should submit a plan of settlement on how the debt will be paid to the court. This has to be accepted by both the creditors and the court. Once agreed, the debtor can continue to operate its business activities as stipulated by the terms.
- Liquidation
If the debtor’s settlement proposal is not accepted or if the debtor fails to meet the set terms, the court orders the liquidation of the assets of the debtor. The resulting proceeds from the liquidation process will be used to repay the creditors.
Benefits of the New Bankruptcy Law
- Stronger Legal Framework
The new law provides a much stronger legal framework to deal with financial distress and potential insolvency. It therefore provides very clear guidelines and procedures for debtors and creditors regarding fair and transparent processes.
- Support for Businesses
The law attempts to help business enterprises in a state of financial distress. Mechanisms like Preventive Settlement and out-of-court restructuring help companies avoid bankruptcy and continue operating. The general stability of the UAE economy has contributed in that respect.
- Protection for Creditors
Provisions under the law are also made to protect the interests of the creditors. The law works towards ensuring that there is a role for creditors in deciding on the settlement process and that their claims are appropriately valued. The increased liability to management further acts towards safeguarding the interests of the creditors by promoting responsible corporate governance.
Conclusion
The new UAE Bankruptcy Law therefore marks a significant step forward in providing a comprehensive legal framework in the area of dealing with financial distress and insolvency, all aimed at preventive settlement, a dedicated bankruptcy court, increased management liability, support for businesses, protection of creditors, and further promotion of economic stability.
How HHS Lawyers in Dubai Can Assist You
The new bankruptcy law is not easy to navigate. HHS Lawyers has experienced legal professionals to guide and advise. Be it a business facing financial distress or a creditor seeking protection for their interests, our lawyer can help you understand all possible options based on your needs, assisting you to make strategies for interest protection. Contact us today and learn how we can help you.
