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Insolvency or Bankruptcy – Time to choose the appropriate remedy

Owner's Profile

Staff Writer, TLR

Published on July 14, 2023, 17:40:59


failing attempts running business worrying

Are failing attempts at running your business worrying you about the survival option? Businesses across the UAE are now concerned for their mere existence as the debts are outstanding and they may fall under the criteria of being declared as insolvent.

The Bankruptcy Law is significant for rescue opportunities to businesses. Bankruptcy Law applies to corporate entities and traders trading for profit. It excludes government bodies or companies trading in free zones such as the DIFC and Abu Dhabi Global Market (ADGM). Such companies have their insolvency laws and hence, have been excluded. Personal laws have also been modified to give the effect of the Bankruptcy Law.

Tests for determining bankruptcy:

There are two tests laid down for determining if a debtor is bankrupt:

  1. Cash-flow test – applicable where the debts are unpaid for a period more than 30 days
  2. Balance sheet test – applicable where the liabilities exceed the assets at any given time

Court supervised bankruptcy procedure:

There are two procedures available for managing the financial crisis –

  1. Preventive composition procedure (‘PCP’) - available to the debtor
  2. A formal bankruptcy procedure split into a rescue process or liquidation – available to the debtor or creditor or group of creditors with an outstanding debt of not less than AED100,000

Under PCP, since the debtor is not bankrupt as yet, the parties have an option to mutually enter into a binding agreement as an alternative to filing for bankruptcy. The cash-flow test is applied under PCP to determine the debtor’s eligibility. Once the debtor has opted for PCP and the application has been accepted by the Court, the moratorium period is applied. The moratorium period does not prevent any enforcement of secured claims with the Court’s permission.

The formal bankruptcy procedure involves a rescue process similar to PCP. The moratorium period is effective once the application is approved by the Court. Similarly, the secured claims can be enforced hereunder with the permission of the Court.

In case of a liquidation, where the Court deems fit, all assets may be liquidated and the distribution may be done as per the preferred debts ranked in the Bankruptcy Law.

For the Court to accept the application under PCP or Bankruptcy procedure, an expert committee is formed to determine the financial status of the debtor. The expert committee shall also be responsible to provide for a restructuring plan, if applicable.

Liabilities of Directors:

The Directors have a personal liability if the company is declared bankrupt. They may be required to contribute towards all or some debts of the company if the assets are insufficient. The directors are also liable for penalties viz., fine and imprisonment for fraudulent or reckless acts. As directors have full access to run the affairs of the company, they are required to act responsibly and in the interest of all stakeholders. It is suggested that in case of an inability to meet the demands of creditors, the directors should be proactive and file a claim for being declared insolvent.