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New UAE bankruptcy law explained: How debtors, creditors can settle claims amicably

Law encourages amicable settlements and expands the scope for debtors seeking protective composition, focusing on resolving financial difficulties through negotiation

A new UAE Bankruptcy Law has been issued, which contains several new provisions to maintain the vitality of the national economy, preserve creditors' rights, and assist debtors in settling their debts to prevent declaring bankruptcy, if possible.

The law is a game changer for both debtors and creditors as it equally balances the interest of the creditors for the debt owed to them and the debtor having substantial control over the running of the business with the court's approval.

Here is what we know based on excerpts shared by regional law firm BSA, Navandeep Matta, senior associate at Kochhar & Co, Dubai, and Areen Jayousi, partner at Horizons & Co., about the new law:

When will the law come into effect?

The UAE Bankruptcy Law was published in the UAE Gazette on October 31, 2023, and will come into effect on May 1, 2024.

What is the purpose of this new law?

The new law overhauls the restructuring and insolvency legal framework and streamlines the process to further improve investor trust. The law recognises the need to balance the interests of various stakeholders, including creditors, employees, and spouses, for a smooth and effective restructuring.

Does the law encourage amicable settlements?

Yes. The law encourages amicable settlements and expands the scope for debtors seeking protective composition, focusing on resolving financial difficulties through negotiation.

Will there be new bankruptcy courts?

Yes. The UAE will have special courts which will deal with bankruptcy cases. Currently, a dedicated section of the Court is led by a Court of Appeal judge, which is responsible for overseeing bankruptcy and restructuring matters. A unit under the name of “Financial Reorganisation and Bankruptcy Unit shall be formed, which will have an administrative work team to assist it in carrying out its tasks related to preventive settlement, restructuring, or bankruptcy procedures.

What is new for creditors and debtors?

The new law protects and streamlines the process and avoids separate enforcement proceedings for creditors. The court can impose a moratorium on creditors' actions from the commencement of judicial and execution measures against debtors until the restructuring plan is ratified without a specified time limitation. The law also emphasises avoiding potential damage to the bankruptcy estate during restructuring, a notable feature of the law.

How long moratorium can last?

The issuance of the decision to open preventive settlement procedures shall result in the claims moratorium for three months following the date of issuance of the decision. The Bankruptcy Court may, upon the debtor’s request, extend the claims moratorium period for one or more times, provided that it does not exceed one month each time, and in all events, the claims moratorium period shall not exceed six months. The Bankruptcy Administration shall, upon the debtor’s request, provide it with a certificate of claims moratorium and the duration thereof. During the claims moratorium period, the debtor shall exercise the necessary care to ensure that its creditors vote to approve the preventive settlement proposal. It shall also provide the creditors with all documents, information, and data that will enable them to decide on the preventive settlement proposal and shall respond to any inquiries submitted to it by creditors.

Will the moratorium remain open until ratification of restructuring?

The moratorium following the issuance of the decision to open restructuring proceedings will not be limited, as it was under the previous law, and will remain open until the ratification of the restructuring plan. However, employment claims and personal status matters (except inheritance matters) are exempted from the moratorium, which will contribute to preserving employees', spouses', and children’s rights.

Can the debtor request new financing?

In the event of accepting the debtor's request to initiate preventive settlement and restructuring procedures under Article (252) of the new law, the bankruptcy court may grant the debtor's permission to obtain new financing, with or without collateral, under certain conditions. They are: (a) Priority shall be given to the new financing over any existing ordinary debt owed by the debtor on the date of the decision to initiate proceedings; (b) The possibility of securing the new financing with a lien on any of the debtor's unencumbered funds; (c) The possibility of securing the new financing by ranking a lien on the debtor's encumbered funds, evaluated at a value exceeding the secured debt in the previous lien. In this case, the new lien shall have a lower priority than the lien existing on the same funds unless the secured creditors agree in cash on the lien's position that the new lien should have an equal or higher ranking than the existing lien on the same funds. (d) If the secured creditor is a licensed financing entity, pledging the same funds is permissible even if they are evaluated at a value equal to the secured debt in the previous lien, with a value not exceeding (30%) of the value of that fund. The bankruptcy court may issue a decision approving that the new lien has an equal or higher ranking than the existing lien on the same funds, especially if the purpose of the new financing is to obtain materials or services necessary for the debtor's continued operations to generate returns to help settle its due debts.

Can a court determine the date of the debtor(s) ceasing payments?

Unlike the previous law, upon the issuance of a final judgement about opening a preventive composition plan, restructuring plan, or bankruptcy, the court should determine in the judgement a date of debtor(s) ceasing payments, which will have important consequences on certain acts executed by the debtor(s) in the past.

Will the bankruptcy court’s verdicts be considered writ and executed?

Yes. All bankruptcy court’s decisions and judgements will be considered as a writ of execution and enforceable under the new law.

Can bankruptcy courts suspend claims against debtors before final judgement?

Bankruptcy courts will have the power to issue precautionary decisions to suspend ongoing claims against the debtor(s) before issuing a final judgement opening a preventive composition plan or restructuring plan, which was not the case under the previous law.

Can the bankruptcy court ratify the restructuring plan after considering the trustee’s opinion and the creditor’s objection?

Pursuant to the creditor(s) refusal to proceed with the proposed restructuring plan, the debtor(s) will have the right to petition the bankruptcy court to request the restructuring plan's ratification. The bankruptcy court may ratify the plan after examination of the trustee’s opinion, and the creditor(s) objections may ratify the restructuring plan under the condition that the creditor(s) rights under the plan will not be less than their rights in the event of bankruptcy. Under the previous law, if the creditor(s) rejected the restructuring plan, it would lead automatically to declaring the debtor’s bankruptcy.

Will managers and officials be considered personally liable if they commit particular actions, such as using commercial methods of ill-considered risks?

As for the managers (including persons who are actually involved in the management), board members, and liquidator, they will be considered personally liable if they commit particular actions such as using commercial methods of ill-considered risks, fulfilling any of the creditors’ debts with the intent to cause damage to other creditors, etc. The said liability is similar to the provisions of the previous law; however, it is clearly mentioned under the new law that it applies to actions committed two years before the date of cessation of payment. In addition, the claim against managers, board members, and liquidators should be filed within two years of a judgement declaring the company's bankruptcy. Needless to mention, said persons will also be criminally liable if they commit crimes specified under the new law.

What is the preventive settlement procedure?

The debtor may submit an application to open preventive settlement procedures if its business is viable, in the following cases: (a) If it has stopped payment or there are reasons that make it expect or fear an inability to pay all or some of its debts when they fall due; (b) If its creditors had previously rejected a proposal for a preventive settlement or a restructuring plan, or the Bankruptcy Court had refused to ratify any of them, even if that was for other debts of the debtor for which the application was not submitted, after the expiry of 3 months from the date of the creditors’ meeting or the Bankruptcy Court's decision; (c) If a decision or judgement had previously been issued by the Bankruptcy Court to terminate preventive settlement procedures or restructuring procedures, even if that was for other debts of the debtor for which the application was not submitted, after the expiry of 3 months from the date of issuance of the decision or judgement of the Bankruptcy Court; (d) If a final judgement has previously been issued adjudicating the debtor's bankruptcy, after his rehabilitation under the provisions of this Law.

Are bankruptcy decisions subject to appeal?

All decisions and judgements issued from the bankruptcy court will be subject to appeal within 30 days from the date of issuance of the relevant decision or judgement, which was not the case under the previous law as only judgements about accepting and rejecting the claim were subject to appeal in addition to other judgements about accepting or rejecting a certain debt.

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