UAE Bankruptcy Law: Company Managers Accountable for Risky Decisions

The UAE's new Bankruptcy Law, effective May 1, 2024, signifies a significant shift in the regulatory landscape, bringing heightened scrutiny to high-risk decisions within companies. Unlike previous regulations where the primary burden fell on company directors, the new law extends potential liability to include senior management figures.

The expansion of liability under the new law encompasses de facto managers and individuals responsible for actual company management. This inclusivity extends to controlling shareholders and is welcomed within the legal community.

Key Points for Creditors

Under the new law, a 'two-year limitation period' from the bankruptcy declaration date allows for liability proceedings against individuals, including board members and senior management. However, these officials may be exempt if they can demonstrate adherence to standard measures or documented objections to pertinent actions.

Previous liabilities under the old law included financial accountability for actions taken up to two years before bankruptcy proceedings. These actions encompassed uncalculated business risks, undervalued transactions, and partiality towards certain creditors to the detriment of others. Exemption from responsibility is possible if individuals prove mitigation efforts or lack of involvement in said actions.

A Standout Reform

The new Bankruptcy Law stands out as a pivotal reform in the UAE's business sector, alongside other initiatives such as 100 per cent foreign ownership, intellectual property rights amendments and arbitration enhancements. Noteworthy is the law's provision for a clear legal roadmap for businesses and stakeholders navigating bankruptcy proceedings.

Determining Liability Payouts

The law stipulates that liability payouts against company directors or de facto managers should correspond to their degree of fault. This nuanced approach considers the impact of management decisions on the company's financial health, encouraging more responsible business practices.

Directors' liability may be triggered by actions such as settling one creditor's debt to the detriment of others or if it's proven that company assets are insufficient to cover at least 20 per cent of debts due to negligent management.

A Shift in Initiation Proceedings

A significant departure from previous requirements is the optional nature of initiating bankruptcy proceedings by the debtor. With increased liability concerns, boards of directors or managers may hesitate to file proceedings independently. The implications of this change await observation, with trends expected to crystallize over time.

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