© 2017  by of Intra Group. 

HQ Address: Office 303, Al Mezan Building, Muhaisnah 4, Beirut Street, Dubai, UAE

Call us: 042206244

Fax us: 042206877

E-mail: info@intra.ae

Careers: careers@intra.ae

Bankruptcy

The Federal Bankruptcy Law issued under the federal decree No. (9) for 2016 on various bankruptcy cases. The law identifies different ways to avoid bankruptcy cases and the liquidation of debtors’ assets, including consensual out-of-court financial restructuring, composition procedures, financial restructuring and the potential to secure new loans under terms set by the law.

The law stipulates the role of the “Committee of Financial Restructuring”. The UAE Cabinet will decide on the number of members and entities that will represent the committee, and will administer the committee’s law and its procedures. The Committee is responsible for: overseeing the procedures of any consensual out-of-court financial restructuring, preparing an approved list of bankruptcy experts, appointing Trustees in Financial Restructuring procedures, who will also be available for all court proceedings. The Committee is also responsible for establishing as well as maintaining a national electronic database of individuals who have had bankruptcy rulings against them, including restrictions set by the court or loss of eligibility.

The law is implemented on: companies that were established under commercial company laws, companies that were not established under the commercial company law, semi or fully owned companies by the federal or the local government with legislative for establishment that fall under this law, companies and institutions established in free zones and which do not have provisions to regulate composition procedures or restructuring bankruptcy according to the Federal law No. (8) of 2004 concerning financial free zones, any trader or civil licensed company.

Key things to know

  • Repeal of current regime: Chapter V of the Commercial Code, which sets out the UAE's current insolvency regime, will be expressly repealed, together with various bankruptcy-related crimes set out in the Penal Code. 

  • Wider application: The New Law applies more widely than the current Commercial Code provisions, covering companies governed by the UAE Commercial Companies Law (CCL), most free zone companies, sole establishments, and civil companies conducting professional business, not just to "commercial traders".  Government-owned companies not established under the CCL, for example, companies formed by Emiri decree, may "opt-in" to the provisions of the New Law by express provision in their constitutional documents.  There are still some carve-outs, in particular for companies in the financial free zones (DIFC and ADGM) which have their own insolvency provisions.  In contrast to the 2011 Draft, there are no provisions addressing individuals acting in a private capacity.

  • Administration: a "Financial Restructuring Committee" is to be formed by Cabinet Resolution under the authority of the Ministry of Finance.  The Committee will maintain an approved list of insolvency experts and a register of insolvencies.

  • New insolvency test: the Commercial Code provisions apply to businesses which cannot pay their debts (essentially, a "cash-flow test").  The New Law introduces an alternative "balance sheet" test, where the assets of the business are insufficient to cover its liabilities.

  • Processes and procedures: The New Law sets out three main procedures for a business in financial difficulty:

    • Protective composition: this is a debtor-led, court-sponsored process, designed to facilitate the rescue of a business which is in financial difficulty but not yet insolvent.  The scheme requires the approval of both a majority in number and two-thirds by value of the unsecured creditors.  The scheme must be implemented within three years of court approval, which may be extended for a further three years with creditor approval. 

    • Insolvency with restructuring: where a debtor is insolvent but the court determines that the business is capable of rescue, it may approve a restructuring scheme.  Such a scheme is similar to the protective composition described above, requiring the same levels of creditor approval, but a longer period of five years (extendable by a further three years) is allowed for implementation.

    • Insolvency and liquidation: where a protective composition or restructuring scheme is not appropriate or approved or is terminated, or a debtor is acting in bad faith to evade its financial obligations, the court will order the insolvent winding-up of the business.                                           

In each case, a "trustee", who must be independent of the debtor, is appointed to manage the process.  The New Law includes strict time limits for making filings and lodging objections, and it is expressly provided that the relevant process continues while the court considers any objections.  This is important, as time-consuming proceedings may otherwise prove to be a practical obstacle to using the procedures under the New Law. 

Although the drafting is more modern and streamlined, the procedures under the New Law are not substantially different from those currently available under the Commercial Code.  In particular, unlike the 2011 Draft, the New Law does not include provisions for an out-of-court financial restructuring procedure.  It is possible that this may be addressed by the Financial Restructuring Committee in future.

  • Removal of offence of "bankruptcy by default": under the current regime, a trader which is unable to pay its debts must apply to be declared bankrupt within 30 days.  Failure to do so constitutes the criminal offence of "bankruptcy by default", and may result in fines and potential imprisonment.  Although not actively prosecuted, the risk of imprisonment may encourage a business owner in financial difficulty to abscond (or even expedite bankruptcy) rather than attempt to restructure the business.  One of the key changes under the New Law is to decriminalise this behaviour.  A debtor which fails to repay due debts for over 30 business days, or which is insolvent on a balance sheet basis, is required to initiate insolvency procedures.  Failure to do so may result in a disqualification order against the debtor in certain circumstances - but it is not a criminal offence.                                            

  • Bounced Cheques: potential criminal liability for the signatory of a bounced cheque applies in respect of non-UAE nationals under the Penal Code.  This feature of UAE law is often cited as another key reason why so many traders in financial difficulty flee the country.  The New Law provides for proceedings in respect of bounced cheques issued by the debtor to be stayed once a protective composition or restructuring scheme has been initiated, provided that the cheque in question was written prior to the application.  The stay continues until the relevant procedure is completed and the holder of the cheque is treated in the same way as the debtor's other creditors, with settlement in accordance with the scheme discharging the debt and potentially rectifying the criminal breach.  This is a particularly helpful change which is likely to encourage debtors to take proactive steps to address their financial difficulties.                                                                                                                               

  • Creditors: Under the Commercial Code, any creditor regardless of amount may apply to have a trader declared bankrupt.  The New Law introduces some specific new requirements in this regard.  Before filing insolvency proceedings against the debtor, a creditor or group of creditors must now hold debts of at least AED 100,000, and must first notify the debtor in writing to discharge the debt(s) allowing 30 consecutive business days for repayment.                                                                                                  

  • New financing: provisions are included allowing priority to new finance following the commencement of a protective composition or restructuring scheme, with safe-guards for existing secured creditors. 

Intra is registered and approved as Bankruptcy Experts and have already handled a few cases.

 

Contact us today if you would like to inquire further.

Contact Us