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Procedure Of Corporate Restructuring In The UAE

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Staff Writer, TLR

Published on July 14, 2023, 17:41:00


Corporate Restructuring,  Corporate Restructuring In The UAE

The process of reorganizing a company's legal, proprietary, operational, or other structures for better commercial results is known as company restructuring. The grounds for a reorganization may be financial, technical, or organizational to reduce liabilities, improve financial performance, leverage technology knowledge, better protect shareholders' interests, or streamline management.

Laws related to Corporate Restructuring
Corporate restructuring is a legal means resorted by companies to significantly modify the operational aspects of the distressed company.

UAE Federal Laws governing bankruptcy, restructuring, and insolvency are incorporated under the following legislation:
• Federal Law No. 18 of 1993 (the “Commercial Code”)
• Federal Law No. 2 of 2015 (the “Companies Law”)
• Federal Law No. 5 of 1985 (the “Civil Code”)
• Federal Law No. 3 of 1987 (the “Penal Code”)
• Federal Law No. 11 of 1992 (the “Civil Procedures Law”)
• Federal Law No. 10 of 1980 (related provisions concerning bank liquidation and other financial institutions)

Procedure for Corporate Restructuring

Corporates have an option of doing restructuring either through Bankruptcy or Liquidation Proceedings. Given below are the procedures of the two proceedings that are to be followed by the company in a case of restructuring.

1. Bankruptcy Proceeding 

• In the UAE business bankruptcy is governed by Federal Law by Decree No. 9  (the ‘UAE Bankruptcy Law 2016’), Federal Decree-Law No. 23 of 2019 amending Certain Provisions of the Federal Decree-Law No. 9 of 2016 on Bankruptcy (the ‘Amended UAE Bankruptcy Law of 2019) and the provisions of Federal Decree-Law No. 21 of 2020 (Amended UAE Bankruptcy Law of 2020) This law provides a legal framework to help distressed companies in the UAE avoid bankruptcy and liquidation through different modes like consensual out-of-court financial restructuring, composition procedures or financial restructuring.

• According to Article 67 of the UAE Bankruptcy Law 2016, if an entity is unable to fulfill its debts to its creditors, it may choose to file for bankruptcy.

• A company can approach the UAE Court which has the authority to conduct the bankruptcy proceedings. 

• If the company has failed to pay the company debts for more than thirty consecutive business days, past the due dates, due to the company's distressed financial condition, or if the company is in a state of over-indebtedness, the company shall apply to the Court, according to Article 68 of the UAE Bankruptcy Law 2016.

• In a situation where the Court is convinced that bankruptcy is an acceptable solution. The Court will pronounce an order and appoint a trustee to oversee the procedure mentioned in Article 82(1) of the Amended UAE Bankruptcy Law of 2019.

• The bankruptcy order will be made accessible to the Ministry of Economic and relevant Commercial Register and the UAE Central Bank.

• The bankruptcy adjudication summary will be published in daily newspapers as directed by the Court. It must include an invitation to corporate creditors to have their debts registered in the bankruptcy and a declaration outlining the creditors' claims against the petitioner.

• The trustee will then file a document with the Court identifying all of the company's creditors and their claims and any securities held against those claims concerning Article 96 of the UAE Bankruptcy Law 2016. The trustee's report may include restructuring of the company's debts. The company's debts may be restructured as part of the trustee's report. However, Article 124 (3) of the UAE Bankruptcy Law 2016. states that if the company is unable to comply with the restructuring processes, the Court may declare the company bankrupt. 

• The Court will later publish a statement detailing the accepted claims of creditors and rule on any objections.

Preventive measures prescribed by the law to limit bankruptcy:

• Declaring a company bankrupt in the UAE, will not only have legal implications, but also many commercial and economic repercussions on the reputation of the company. The companies can avoid full bankruptcy proceedings through one of the following protective mechanisms:

1.  Protective Composition

• Protective Composition is a measure designed to assist debtors to reach settlements with their creditors whereby the debts are to be paid on fixed dates under the supervision of the UAE Court and with the assistance of a composition trustee to be appointed by the court.

• Before a company ceases to pay its debts and before the application for bankruptcy is made, the company may submit a protective composition scheme to the court to avoid bankruptcy. Only the debtor is the entity entitled to make such an application.

• In case the court grants the composition application, all judicial proceedings regarding the enforcement of the debtor’s assets shall stay pending the approval of the protective composition scheme which will be subject to the discretionary powers of the court.

• The court shall appoint a composition trustee whose powers include taking inventory of the debtor’s assets and inviting the creditors to meetings to allow the debtor’s composition scheme. The composition scheme should include a reference to the possibility of the company generating profits and an implementation schedule of no more than 3 years from the date of approval by the court for this scheme. 

• After the court approves the scheme, the trustee shall supervise the scheme throughout its implementation period.

2. Restructuring
The restructuring scheme is very similar to the protective composition scheme. Under this scheme, the bankruptcy trustee holds the right to apply for a restructuring arrangement. The application for restructuring can be made during the consideration of the bankruptcy application. 

3. Obtaining new funding
The law authorizes the court, at the request of the company or the trustee appointed in protective composition or restructuring proceedings, to allow the debtor to obtain new financing by pledging any of the debtor’s unencumbered funds.

4. Financial reorganization
The law also allows the company to apply to the Financial Reorganisation Committee to reorganize its financial position and to discuss the chances of reaching a consensual agreement between the debtor and its creditors before resorting to the court. 

2. Liquidation or Winding up Proceedings

• According to UAE law, the liquidation and dissolution of a corporation is the process of ending a business. It is a time-consuming procedure that entails liquidating shares and assets, collecting debts, and paying or discharging creditors' responsibilities. A corporation may be dissolved for any of the reasons listed below:

• Depletion of the company's assets, rendering the remaining assets unprofitable

• The company's tenure, as stipulated in its charter documents, comes to an end.

• Achieving the goals outlined in the company's memorandum of association

• Amalgamation of the corporation

• Decision of the shareholders as stated in the memorandum of association.

• Liquidation may be voluntary or involuntary (through a court order). Voluntary liquidation occurs when the shareholders agree to liquidate the company and appoint a liquidator through a shareholders' resolution. If the shareholders disagree and seek liquidation through the courts, the competent court will determine the method of liquidation and officially appoint a liquidator. Even if the partners choose the liquidation, the liquidator's duty does not cease with the partners' death, bankruptcy, insolvency, or interdiction order.

• The UAE Federal Law No 2 of 2015, commonly known as the (Commercial Companies Law), permits companies to declare voluntary liquidation by passing a General Assembly Resolution.

• Unless the company's Memorandum of Association or Articles of Association contain special provisions or provisions that contradict the 2015 Law, the liquidation procedure shall be carried out in line with the 2015 Law's default requirements.

• The first stage in the liquidation process is to officially declare it by registering it in the Commercial Register and publishing it in two local Arabic daily newspapers.

• After that, a liquidator will be appointed (either by the shareholders or by court order) to determine the company's assets and obligations. This effectively gives the liquidator complete control over the company's board of directors, including the ability to file or defend legal claims and take actions to protect and preserve the company's assets.

• All known creditors will be notified to file claims by the liquidator, and unknown creditors will be notified by publishing in two local daily Arabic newspapers. Creditors have 45 days from the date of notice to make a claim or dispute any debt.

• Company assets will be liquidated as needed (creditors will be paid, and shares will be distributed amongst the shareholders). When the liquidator has finished the liquidation procedure and filed the liquidation report, the competent authority will issue a liquidation certificate certifying the completion of the liquidation and closure of the business, subject to shareholder approval. The liquidation will be completed and recorded in the Commercial Register. After then, the corporation will be stricken from the Commercial Register.

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