New UAE Bankruptcy Law – Key Features You Need to Know

On 31 October 2023, Federal Law No. 51 of 2023 Promulgating the Financial and Bankruptcy Law (the Bankruptcy Law) was published in the United Arab Emirates (UAE) Official Gazette, repealing the prior federal law on bankruptcy (Federal Law No. 9 of 2016, the Prior Law) and significantly developing the bankruptcy regime in the UAE. The Bankruptcy Law enters into force on 1 May 2024 (six months following the date of its publication in the Official Gazette) allowing entities operating in the UAE several months to adjust to the new framework and ensure compliance with the new regime. While the Bankruptcy Law repeals the Prior Law, all regulations and resolutions issued under the Prior Law remain in force until they are replaced with new regulations and resolutions. The Bankruptcy Law introduces important enhancements to the UAE’s bankruptcy framework, including the establishment of a dedicated Bankruptcy Court, a new preventive settlement procedure, and increased liability for management. Set out below are key features of the new Bankruptcy Law.

Key Features of the New Bankruptcy Law

Scope of the Law and New Definitions:

The scope of the Bankruptcy Law is similar to the Prior Law, whereby companies subject to the provisions of the UAE Commercial Companies Law, any natural persons having the capacity of a trader, and licensed civil companies of a professional nature, are all caught under the Bankruptcy Law. As with the Prior Law, certain entities are excluded from the scope of the Bankruptcy Law, such as companies established in freezones (e.g., the Dubai International Financial Center) that are subject to special provisions regulating bankruptcy proceedings.

Helpfully, the Bankruptcy Law has clarified and expanded certain definitions, such as “cessation of payments” and “debtor’s assets”, and introduced new definitions, such as “related party”, “ranking of creditors”, and “required majority”. For example, the definition of debtor’s assets now explicitly includes all movable and immovable properties owned by the debtor inside and outside the UAE and the definition of “discontinuance of claims” expressly carves out labour and personal status actions from the scope of any moratorium.

New Bankruptcy Court and Enforceability of Decisions:

A significant development under the Bankruptcy Law is the establishment of a new Bankruptcy Court with jurisdiction to adjudicate on bankruptcy related matters. All existing actions pending before UAE courts arising under the Prior Law shall be transferred to the new Bankruptcy Court on 1 May 2024. The Bankruptcy Law provides for the appointment of experts and auditors to assist the Bankruptcy Court in its decision making.

Significantly, judgments rendered by the Bankruptcy Court are immediately enforceable, with no requirement to be served. The Bankruptcy Law dictates that decisions from the Bankruptcy Court are immediately enforceable as writs of execution. Challenges or stays to enforcement are only possible if the Bankruptcy Court reverses or stays the decision, either sua sponte or upon request by a debtor or creditor, or if the decision is contested in the Court of Appeal.

Replacement of Preventive Composition with Preventive Settlement:

The Prior Law established a mechanism called preventive composition, which has proven to be difficult to implement due to its stringent conditions. The Bankruptcy Law replaces preventive compositions with a new “Preventive Settlement” mechanism, which is a court-supervised process aimed at enabling the debtor to continue operating its business and paying off its debts. Key features of the new preventive settlement mechanism include:

1. • A debtor may apply for preventive settlement proceedings in certain prescribed circumstances, such as where it has defaulted or has reason to believe it is unable to repay all or any of its debts as they fall due.
   • Once the preventive settlement proceedings begin, a debtor retains the ability to manage its business and assets, including obtaining new financing pursuant to the Bankruptcy Law, provided its actions are not harmful to creditors' interests. Activities beyond "normal business" require approval from the Bankruptcy Court.
   • The decision to initiate preventive settlement proceedings results in a three-month suspension of claims, extendable up to a total of six months by the Bankruptcy Court following the date of the decision.
   • A creditors' committee (comprising representatives from the various groups of creditors) must be formed within 10 days from the initiation decision, and the debtor is required to submit details of the committee to the Bankruptcy Court.
   • Debtors must file a preventive settlement proposal with the Bankruptcy Court within three months from initiation decision, the content of which is prescribed under the Bankruptcy Law.
   • The Bankruptcy Law outlines a comprehensive list of information required to be submitted alongside the application, the procedures for calling a meeting of the creditors to approve the proposal, the corresponding voting requirements, the actions to be taken following the vote, and the circumstances for early termination of the proceedings (e.g., if the debtor commits a "serious error" in dealing with its property or fails to adhere to the terms of the preventive settlement proposal).

Notably, the other restructuring and bankruptcy procedures under the Prior Law have been retained under the Bankruptcy Law.

Liability of Directors and Senior Management:

The Bankruptcy Law extends potential liability from members of the board of directors and managers to also include any person responsible for the actual management of the company and those in charge of the liquidation. If a company is declared bankrupt, the Bankruptcy Court may find the aforementioned persons liable for prescribed acts committed within two years before the company’s cessation of payment. If proven, the individuals may be required to pay an amount proportional to their mistakes, which will be used to repay the company’s debts. For example, if the company’s assets are insufficient to pay 20% of its debts and the relevant individual’s actions led to the financial deterioration, then they may be held liable.

Significantly, the Bankruptcy Law imposes a two-year limitation period (from the issuance of the judgment declaring the entity bankrupt) for proceedings to be initiated against the aforementioned persons. Such individuals may not be found liable if they can demonstrate that they took all precautionary measures that a reasonable person could take to reduce the potential losses or if they had documented their objections to the relevant action.

Claw Back:

Whereas the Prior Law provided for certain transactions to be unwound if performed within two years prior to the initiation of bankruptcy proceedings, the Bankruptcy Law narrows this to six months prior to the date of cessation of payment, which may be extended to two years if the transaction was executed with a related party.

The Bankruptcy Law provides for an exception to certain transactions where there are “commercial considerations” that justify the prescribed acts. The Bankruptcy Court has discretion to order that any disposition carried out by the debtor is unenforceable if the court considers it to be harmful to creditors.

New Bankruptcy Department:

The Bankruptcy Law introduces a new Bankruptcy Department (established at the Bankruptcy Court’s headquarters) with broad powers, such as the power to receive and register applications received under the Bankruptcy Law, to serve relevant notices, and to discuss with creditors matters before the Bankruptcy Court.

The Bankruptcy Law also outlines the powers of the Financial Restructuring and Bankruptcy Unit within the UAE Ministry of Justice, including providing opinions on applications filed under the law and establishing a bankruptcy register to record applications filed under the Bankruptcy Law.

Timing For Initiating Proceedings:

Under the Bankruptcy Law, a debtor must submit its preventative settlement or bankruptcy application to the Bankruptcy Department no later than 60 days from the date of ceasing payments or becoming aware of information confirming that it would be unable to pay its debts as they fall due (unless any creditor or regulatory authority has already submitted an application). Following the submission of a bankruptcy application, the debtor is prohibited from disposing of its property.

Alternatively, the Bankruptcy Law provides that an ordinary creditor or a group of creditors may apply to initiate bankruptcy proceedings if a debtor defaults on any debts owed to them, provided the debt is “unconditional, undisputed and payable”, the applicant has served notice to the debtor of the necessity to pay the debt, and the debtor has not repaid the debt within 30 days of notice.

Any UAE regulatory authority may also apply to initiate bankruptcy proceedings in respect of any debtor subject to its supervision, provided the debtor has been notified and 30 days has lapsed since such notification.

The Bankruptcy Law clarifies that if multiple applications are submitted, the applications shall be combined into a single action. Comprehensive detail regarding the required content of an application by the debtor or creditor are set out in the Bankruptcy Law.

Setting Off Debts and Enforcement of Security:

In line with the Prior Law, the Bankruptcy Law prohibits setting off debts after the decision to initiate insolvency proceedings has commenced, unless it is based on the implementation of the preventive settlement proposal, a restructuring plan, or the bankruptcy court’s decision (following a motion by a trustee or creditor). The Bankruptcy Law goes further than the Prior Law in confirming that (i) a set-off agreement shall be considered final and effective in accordance with its terms and may not be suspended, and (ii) the provisions of Federal Law No. 10 of 2018 on Netting shall apply to matters not addressed in the Bankruptcy Law.

Furthermore, the Bankruptcy Law expressly allows creditors with secured debts, with permission of the Bankruptcy Court, to initiate enforcement proceedings against the secured assets (even if bankruptcy proceedings have been initiated), where the sale of the asset will be made through the trustee and eliminate the need for separate proceedings.

Trustee and Controller Appointment:

The Bankruptcy Law sets out the procedure for appointing a trustee (a natural or legal person appointed to carry out the bankruptcy proceedings pursuant to the Bankruptcy Law under the supervision of the Bankruptcy Department) or controller (the person responsible for supervising the preventive settlement process and bankruptcy declaration measures) and determining the scope of their responsibilities.

Importantly, all actions taken in connection with the management of the debtor’s assets and business must be recorded and available for review by the creditors. Creditors may also request copies of certain documents available to the trustee and file an objection before the Bankruptcy Court to the trustee’s proposed activities.

Implications and Next Steps

The repeal of the Prior Law is an important development in the UAE’s insolvency regime. With the Bankruptcy Law due to enter into force on 1 May 2024, any bankruptcy matters after this date will need to be conducted in compliance with the Bankruptcy Law. The amendments to the bankruptcy procedures, significant discretion afforded to the bankruptcy courts and the comprehensive requirements set out in the Bankruptcy Law serve to develop a more user-friendly insolvency regime in the UAE. The Bankruptcy Law further includes procedures applicable to small debtors, proceedings for preventive settlement or bankruptcy during emergency financial crises, and the mechanisms for dealing with grievances under the Bankruptcy Law.

The introduction of a new specialist court with jurisdiction over bankruptcy matters, strengthening of the ability of creditors to protect their rights, and streamlined enforcement procedures, together with clarification in respect of important matters such as claw back, set-off, and moratorium periods, will enhance confidence in the UAE insolvency framework. The widening of management liability may also encourage more responsible management and serve to hold senior management accountable for their actions.

Compliance with the Bankruptcy Law is critical for those operating in the UAE because the law establishes criminal penalties for certain actions committed by a debtor, such as concealing assets with the intention of causing damage to creditors.

Executive regulations supplementing the Bankruptcy Law will be issued in due course, and until such time the regulations and resolutions issued under the Prior Law shall remain in full force and effect (to the extent there is no contradiction with the provisions of the Bankruptcy Law).