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Bankruptcy Law in United Arab Emirates

Preventive Composition Under Bankruptcy Law in the UAE

The number of commercial businesses facing financial trouble will likely increase as they struggle with rising inflation and interest rates, supply chain restrictions, and labor market issues. Due to the problem of petitioning courts for bankruptcy, companies’ financial difficulty in the UAE was resolved through lengthy negotiations with creditors. However, the relatively recent preventative composition method created under the Bankruptcy Law may provide some much-needed respite when talks with creditors prove unsuccessful. This post will look at preventive composition as a way to carry out a successful restructuring approach and other crucial ideas.

What is the Meaning of Bankruptcy?

As defined by the Bankruptcy Law system, “bankruptcy” refers to the following legal processes:

  • Formal restructuring: In this process, a court-appointed expert is given control over a bankrupt firm to save it;
  • An insolvent liquidation: It concentrates on closing the business and distributing the assets (if any).

Commercial entities formed in the UAE are subject to the Bankruptcy Law regime for insolvent businesses (as opposed to financial free zones like the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), which have their bankruptcy regimes.

Read More: Liquidating a Company and Filing Bankruptcy in UAE

The Definition of Insolvency

It’s common to use the words “bankruptcy” and “insolvency” interchangeably. The Definition of insolvency under Bankruptcy Law is absent. However, it uses the phrase to usually refer to businesses whose assets are insufficient to satisfy their debts. Such companies may be declared insolvent after being approved by the UAE courts. Only liquidation of a firm declared insolvent in line with bankruptcy law is permitted.

The terms “bankruptcy” and “insolvency” used in the context of the Bankruptcy Law regime should not be confused with those used in the Insolvency Law or the rules for dissolving a business under different company regulations or laws when such a firm is a solvent. Insolvency is defined as “standing existing or foreseeable financial problems that leave the debtor unable to pay its obligations” under the Insolvency Law, which only applies to natural individuals (as opposed to companies).

The Conditions for a Preventative Composition Process and the Application of the Bankruptcy Law

The Bankruptcy Law applies to all onshore commercial entities and government-owned businesses that have chosen to participate in the Bankruptcy Law, except for the incorporated companies in free zones such as DIFC. Only the debtor’s corporation may request to start the preventative composition process with the court under the Bankruptcy Law. Furthermore, the procedure is impossible when a corporation has previously been subject to a preventative composition process or has initiated bankruptcy proceedings. Timing is thus critical, and management should take action before the firm finds itself passing any of the insolvency criteria listed above.

Procedure for Preventative Composition

  1. Filing of an Application:

The procedure for requesting a preventive composition procedure entails filing an application with the court along with the necessary documents regarding the company’s financial situation and its creditors, assets, debtors, and employees, as prescribed by the law.

  1. Appointment of Trustee

The court appointed the trustee to keep an eye on the company’s strategy after the application was approved. It might be one of the experts listed in the experts’ roster, or if one on the roster is not acceptable, another expert. Notably, notwithstanding the trustee’s appointment, the firm’s current top management continues to run the company with the trustee’s approval. However, the trustee is also given broad authority and may impose actions to protect the interests of the company’s creditors.

  1. Drafting of Preventive Composition Plan

If the application is approved, the appointed trustee will inventory the company’s assets, compile a list of creditors and their obligations, and collaborate with the company to develop a preventive composition plan.

The corporation and the trustee must also prepare and submit to the court a drafted preventive composition plan within 45 days of the application’s approval.

The court must assess the proposed restructuring plan within ten working days. If the restructuring plan is approved, the trustee will meet with all eligible creditors to vote on it. In contrast, if the court rejects the plan, it may either ask the trustee to submit an updated plan or may immediately start bankruptcy proceedings in accordance with the Bankruptcy Law.

While a plan is being implemented, the bankrupt company continues to operate, but the court-appointed trustee has specific powers to protect the firm’s assets. The court must authorize any actions that might have an impact on secured creditors. If the company’s responsibilities under the plan have been met, the plan will end. If the firm doesn’t follow the conditions of the plan, the court may throw out the plan and change the case so that the company’s assets are liquidated.

How Can HHS Lawyers and Legal Consultants Assist?

A firm may strike an arrangement with its creditors following a court-supervised plan via the Bankruptcy Law’s preventive composition method, which offers a time-bound and transparent approach. It may be challenging for individuals at any level of a company to “approach the court for restructuring.” Still, it can also be considered a valuable tool for a firm that does not necessarily mean the end of the company’s operation.

Brands may recover from hardship and come out on the other side more resilient than ever with the correct restructuring approach. In reality, in the current corporate climate, preventative composition practices could be a vital skill. A troubled firm that wants to use this instrument shouldn’t wait for formal restructuring or liquidation to be required by insolvency tests; instead, it would be excellent to use the court-driven composition processes to help the company’s financial recovery. The choice to utilize preventative composition techniques, however, requires a thorough assessment of the numerous advantages and costs placed on the organization; as a result, the decision to go forward should be carefully addressed with competent advisors.

Please get in touch with our lawyers in Dubai, if you require help, more information about the preventative composition process, or other alternatives that could be available under the Bankruptcy Law. Please note that this document does not constitute legal advice or a thorough explanation of the relevant laws.

Read More: New UAE Bankruptcy Law: Increasing a Hope for Businesses

Hassan Humaid Al Suwaidi., LL.B. is a Senior Partner in HHS Lawyers. He has 20 years of experience dealing with high-value and complex cases. Frequently featured in local and international legal directories and commended for his ability to attain favorable outcomes for clients, Hassan has been involved in some of the largest legal settlements. A major part of his work is providing expert legal advice on UAE legislation and acting for individuals and businesses during disputes and litigation. Read more