The new bankruptcy law has boosted startups and struggling businesses in the UAE. Furthermore, the filing bankruptcy services in the UAE have been simplified since Federal Law Decree No 9 of 2016. Bankruptcy is a legal proceeding carried out once the individual or business cannot fulfil its obligations towards debt repayment, and a business may go bankrupt for various reasons.
Who can avail benefits from the Bankruptcy law?
- Companies entirely or partially owned by the government
- Free zone companies that are under the provisions of Federal Law No 8 of 2004
- A ‘trader’ under the commercial transactions law
- Licence civil companies carrying out professional activities
The procedure for filing bankruptcy in the UAE?
As per Article 6 of the Federal Law Decree No 9 of 2016, only the debtor has the right to apply for the Protective Composition Procedure. A protective composition procedure of legal means for a debtor to reach settlements with its creditors under the supervision of the court and appointed trustee. Protective Composition procedure application is accepted by the court only when the debtor has completed a minimum of 30 days of non-payment towards its creditors due to financial hardships and that the debtor is not over-indebted.
A draft of the Protective Commission Plan is to be submitted to the court within 45 business days from the date of the commencement order. The draft includes
- The extent to which the debtor can revive the business to be profitable once again
- Any business activities of the debtor that are suspended or terminated
- Terms and conditions of the liabilities that are to be settled
- Securities are required to execute the Protective Commission Plan and are available for the purchase of debtors’ assets and grace periods & discounts on the debtor’s payments.
- Possible conversion of debt into equity, resale offer for consolidation, sale or replacement of any securities.
- The draft of the Protective composition plan is to be approved by voters, and if any creditor faces any grievances, they should report the same with an order for rejection within three working days.
- The debtor must pay the court the sum of money or a bank guarantee as stated by the court to allocate the costs of the composition procedure. It includes the fees of the trustee and the panel of experts if appointed by the court.
Appointment of a panel of experts
A panel of experts determines the validity of the protective composition application requested by the debtors by assessing the debtor’s assets. The acceptance of application protective composition is determined within five working days from the time of application or when the panel expert has submitted their report.
Appointment of the trustee
- The court appoints a trustee as a mediator between the debtor, the court and creditors. There can be no more than three trustees appointed for the protective composition procedures. They may have to coordinate among themselves concerning the legal and financial matters of the debtor. A trustee can be a part of the panel of experts or an external person not concerning the debtor, as a family member or creditor. The trustee also must have a clear track record free from any criminal offence.
- Upon the trustee’s appointment under Article 22, the trustee carries out an inventory of the debtor’s assets, listing the same to the court along with the meeting minutes held with the debtor. The court then decides on the behest of the trustee to seal or unseal the debtor’s assets. A register is prepared by the trustee of all the creditors known to the debtor. Based on the trustee’s report and application, the court also determines the continuation or suspension of any debtor’s business.
- A trustees report states the possibility of restructuring the debtors’ business and whether the debtor is willing to continue the company to make it profitable. A complete evaluation of the debtor’s concern concerns the debtor filing for bankruptcy and the possibility of liquidation of the debtor’s assets.
Appointment of Controllers
The creditors can appoint controllers to supervise the implementation of the protective composition. The controller may represent themselves through their legal employee or representative. Similarly, they should be unrelated to the creditor, such as a family member or related to the fourth degree. The court has the right to the assignment and removal of the controller in case of deliberate or gross negligence.
Application for Opening Bankruptcy Procedure
Following Article 69 of the Federal Law decree No 9 of 2016, any creditor holding an ordinary debt of not less than AED 100,000 can appeal to the court to commence the bankruptcy proceedings if the debtor has failed to pay the sum within 30 successive business days after providing a written notice.
In case of a debtor or the competent supervisory authority applies for bankruptcy, the application must include the below documents:
- A brief memorandum of the debtors economic and financial position, the debtor’s assets and a detailed account of the debtor’s employees
- A valid trade licence or commercial registration issued by the governing authority
- A report including the debtor’s cash flow, profit and loss projections for up to twelve months following the application of bankruptcy
- A list or register of creditors and the respective entitlements or securities, if any, The list of creditors is to be published upon finalisation in local newspapers both in English and Arabic. It gives creditors a window of 20 business days to raise any concerns by submitting an application to the court with the relevant documents.
- A detailed statement of the debtors moveable and immovable assets, the value of each purchase at the date of applying, and the list of the various owners of the assets.
- A report issued by the Credit Bureau Authority
- A bank guarantee or deposit of AED 20,000 can be revised further based on the debtor and fees required for the appointment of the various parties involved, such as the trustee and the expert panel.
Acceptance of Application of Bankruptcy and liquidation
In the following cases, the court issues a judgment favouring the debtor’s bankruptcy application in the following claims.
- The Court Orders termination of Protective Composition Procedure if the debtor wants to file for the provision of liquidation
- The court-appointed a trustee to undertake the bankruptcy and the liquidation of the debtor’s assets if there is no restructuring or protective composition.
- The trustee instructs the credits to submit their claims ten business days after the debtor is bankrupt.
- The trustee liquidates all of the debtor’s approved assets under the provision of the law.
- If the debtor inherits any assets, the trustee has to make known about the same under the disclosure of the debtors and the trustee will liquidate the inherited asset.
- The trustee must sell the debtors’ assets in an auction as instructed by the court. Any surplus gained by the trustee is to be handed over to the debtor.
- The trustee is to inform the court of the progress of the liquidation of assets within every fixed period.
- Once the court has declared the debtor and the business bankrupt, all the debt and debts secured by lien are bound to lapse.
- Under Article 153 of the same decree, the recovery clause states that any assets or goods under the possession of the debts on trust, sale, stock are to be recovered from the seller or debtor. If the goods are sold to the debtor, they are set off by creating a current account between the debtor and the purchaser.
- If there are commercial documents or Sukuk deliverables to the debtor as a part of the assets are to be recovered, unless the commercial documents and Sukuk belong to one of the debtor’s creditors.
You may also like to read : Liquidating a Company and Filing Bankruptcy in UAE
Can a bankrupt debtor apply for procurement of new finance in the UAE?
Upon the court’s approval permit, the debtor can procure new financing with or without security. Further debt repayment has a priority on the current debt of the debtor. Only unencumbered assets are to be used as mortgage security for the new financing options for the debtor. The court may also permit a protective composition or restructuring option to obtain new financing against the security offered by the debtor’s assets.
The bankruptcy procedure in the UAE has been simplified through the latest amendments. Even though there are various ways to determine whether a company and individual can be declared bankrupt, any misinformation or manipulated reporting of the financials can lead to strict action by the court. It may also lead to a fine of a million dirhams and even imprisonment if the debtor is found accused of fraud, embezzlement, or laundering. It is not always wise to depend on the known eyes who manage your finances. A third eye view of external auditors always plays a vital role in determining the course of the business.
HHS Lawyers have helped several companies across all emirates, especially in Dubai, Sharjah & Abu Dhabi, confidently providing their financials to the court and legal authorities. Expert financial advisors have helped companies seek assistance and mitigate bankruptcy through various percussion measures. Redesign the way you manage your finances today with our experienced team of financial advisors. Click here to contact us today.