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New UAE bankruptcy law to ensure safer business ecosystem

The new law repeals an earlier law introduced in 2016

The new bankruptcy law coming into effect on May 1, 2024 in the UAE is expected to lead to more successful restructuring of insolvent businesses, ensuring a safer and more vibrant entrepreneurial ecosystem in the UAE.

The latest law per Federal Decree-Law No. 51/2023 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.

The new law repeals an earlier law introduced in 2016 but all regulations and resolutions issued under the previous law remain in force until they are replaced with new regulations and resolutions.

Sunil Ambalavelil, partner of Dubai-based NYK Law Firm, said the revamped bankruptcy law provides for three processes like the previous law — preventative settlement, restructuring, and bankruptcy/liquidation. Other enhancements to the bankruptcy framework include the establishment of a dedicated bankruptcy court, and increased liability for management.

“The preventative settlement procedure, replacing the “preventative composition” procedure under the old law is aimed at lighter touch restructurings which can be completed within a short period of time. As per this procedure, there is no requirement that a debtor must file within a prescribed period unlike a feature of the preventative composition procedure, which provided that an application must be made within 30 days of a debtor ceasing to make payments,” Ambalavelil said.

As per the new law, the preventative settlement procedure, to be supervised by the bankruptcy court, only the debtor is entitled to make an application to enter into the preventative settlement procedure. The debtor will also remain in operational control, managing its business affairs throughout the proceedings.

The restructuring process is intended for more complex restructurings which will take time to implement. As per the new process, there is no requirement to file within a prescribed period. An application may be made within 60 days from the date of “cessation of payment”. Failure to submit the application within the prescribed period, however, does not result in the rejection of the application. The term “cessation of payment” is now defined. While the debtor or any of its creditors may open restructuring proceedings supervised by a court-appointed trustee the debtor remains in control.

The proposed restructuring plan may include the sale of the entire business of the debtor as an “existing and practicing activity.”

According to legal consultants, unlike the previous law, upon the issuance of a final judgment pertaining to opening preventive composition plan, restructuring plan, or bankruptcy, the court should determine in the judgment a date of debtor’s ceasing payments.

The new 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. According legal experts, 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.

All bankruptcy court’s decisions and judgments will be considered as writ of execution and enforceable under the new law. Bankruptcy courts will have the power to issue precautionary decisions and issue decisions to suspend ongoing claims against the debtor(s) prior to the issuance of a final judgment opening preventive composition plan, restructuring plan, which was not the case under the previous law, they explained. All decisions and judgments issued from the bankruptcy court will be subject to appeal within 30 days from the date of issuance of the relevant decision or judgment, which was not the case under the previous law

Before the enactment of the first bankruptcy law in 2016, business owners and managers could be criminally penalised, including possible jail terms, for business failure. It resulted in many people fleeing the country and leaving debts and unpaid loans in their wake, legal experts said. “In the past, there were in fact many articles of law that dealt with issues of insolvency but they were better suited to smaller companies. And other than liquidation, there were few other options for businesses facing bankruptcy. This in turn led to poor outcomes – for the business owner, the creditor, and the economy in general,” they added.