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Restructuring and Insolvency law in the UAE

A worldwide commercial center that draws many businesses from all over the world is the United Arab Emirates. The number of international companies has grown during the last several years. Due to Dubai's reputation as one of the world's most business-friendly nations, these tendencies are understandable.

Additionally, global businesses and start-ups benefit from the UAE's strategic position. However, if you run a business in the UAE, they will have authority over you. Consequently, it's crucial to be well-versed in Dubai's restructuring and insolvency rules.

Principal Laws Regulating Insolvency and Restructuring in the UAE

UAE lawmakers passed a Restructuring and Insolvency Law in 2016. Most businesses in the United Arab Emirates and several free zones are covered under Bankruptcy Law No. 9 of 2016. The Abu Dhabi Global Markets and the Dubai International Finance Center are two examples. The UAE Cabinet adopted a further amendment known as Law no. 21 of 2020 ( New Amendment Law) to Federal Law Number. 9 of 2016 (the Corporate Bankruptcy Law). The Corporate Bankruptcy Law was last modified in 2019 and is now subject to the Amendment Law (according to Federal Law No 23 of 2019).

You may want to know: What Happens When Someone Declares Bankruptcy in UAE

Corporate Bankruptcy Law under Financial Free Zone 

In the UAE, in addition to the Corporate Bankruptcy Law, the financial free zones Abu Dhabi Global Market ('ADGM') and Dubai International Financial Centre ('DIFC:') each have their own autonomous bankruptcy rules that apply to businesses operating in those jurisdictions.

Law No. 1 of 2019, or the DIFC Insolvency Law, is a recent law. On May 30th, 2019, new bankruptcy legislation was passed, and on June 6th, 2019, it became effective.

The legislation establishes two new administrative procedures: 

  1. a new debtor-in-possession bankruptcy system that is consistent with worldwide best practices; and
  2. a new administration process if there is proof of management failure or wrongdoing. Additionally, the bill strengthens the regulations regulating wind-up processes. It adopts the UNCITRAL Model Law on cross-border insolvency proceedings with a few amendments acceptable to the DIFC.

Types of Restructuring and Insolvency Procedure

In the UAE, restructuring and insolvency law may take many different forms. These comprise:

PREVENTATIVE COMPOSITION 

Businesses do not always pass the official Bankruptcy Test in the UAE. However, the board could believe that their debt restricts the company's operations. The preventative composition allows the directors to submit an application to the court outlining how their financial struggles impact the company's trading situation.

The court's approval would enable the directors to carry out their preventive composition strategy. After the procedure is implemented, they may continue running their regular commercial activities if they are to pay off their obligations. The company's debts are suspended whenever the court grants such an application.

However, the court appoints trustees to monitor the corporation's development. Additionally, they guarantee that the directors run the business following the court's orders.

Read more about - Top Reasons Why You Need an Insolvency Lawyer in UAE

BANKRUPTCY

There are two forms of insolvency and structure under bankruptcy. As follows:

  1. Formal Restructuring

The first step in the court's analysis of a bankruptcy petition is determining if the firm can be restructured to pay off its debts and return to profitability. The business will often work with trustees appointed by the court to assess its financial standing and compile a list of all creditors.

The trustee takes on an executive role in the business if the court and other relevant parties are satisfied with the company's stance and business plan. They are crucial to carrying out the restructuring plan as instructed by the court.

  1. Insolvent Liquidation

Insolvency and restructuring law may be challenging at times. If reorganizing is not possible, the court may declare the business bankrupt. The court will therefore mandate the liquidation of the company's assets.

Once again, trustees are chosen by the court to liquidate the company's assets and pay off creditors. The stockholders get whatever money is left over after asset sales.

What constitutes bankruptcy under the law in the United Arab Emirates?

  1. Bankruptcy Test

The "Bankruptcy Test" used to determine bankruptcy under the Bankruptcy Law considers cash flow and balance sheet factors. The balance sheet test determines if the firm's assets are more significant than its obligations. In contrast, the cash flow test determines whether the company has been unable to pay its bills when they become due for more than 30 consecutive business days. Directors and management of a firm must file for bankruptcy if it fails either limb of the bankruptcy test.

  1. Creditors

When a creditor or group of creditors files a bankruptcy petition against a debtor, they must demonstrate that:

(1) The debtor has been in default for 30 consecutive business days following the creditor's written notice of the debt's overdue status; and

(2) The value of debt must be at least AED 100,000.

Find detail about - Company Liquidation and Division of its Assets under New Bankruptcy Law Commercial Companies Law, UAE

How to initiate Bankruptcy or Restructuring proceedings?

  1. Briefly stated, Preventative composition and bankruptcy are the two main choices Bankruptcy Law offers to enterprises experiencing financial difficulties.
  2. An application to the court is the first step in both procedures.
  3. As opposed to bankruptcy proceedings, which can either involve a rescue procedure or a liquidation, preventative composition is a process started by the debtor to ask the court's assistance in settling debts with its creditors with the ultimate goal of working through the financial hardship to recover the business.
  4. When the business fails the bankruptcy test, the directors are required by bankruptcy law to file for bankruptcy cases on behalf of the company.

How may HHS Lawyers and Legal Consultants assist you with Corporate Bankruptcy?

We help manage our customers' exposure to insolvency administration, help protect the value of their distressed assets, and control their credit risks. We do this by drawing on our expertise in complicated transactions. Commercially savvy, we consider legal requirements while ensuring client matters are handled effectively, quickly, and for the best possible result. When forming solutions, we identify legal issues affecting solvency as early and proactively as possible.

Our team includes lawyers with full access rights to all UAE courts and tribunals and seasoned business, banking, and regulatory attorneys.

Hazim Darwish

Hazim Darwish, is a Senior Partner of HHS Lawyers in UAE. Practicing law for almost a decade, he has in-depth knowledge on UAE legislation with particular expertise on legal drafting, contract drafting, labor disputes, family law, and regulatory compliance for business organizations. Hazim Darwish also provides counsel on legal rights and obligations in the UAE to clients, including individuals and businesses subject to investigation or prosecution under Criminal Law by major regulators.