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Major changes await the UAE's financial landscape as the new Bankruptcy Law is slated to become effective on May 1, 2024. Published in the Official Gazette six months ago, this law grants businesses and individuals operating in the UAE a transition period to align with the changes and ensure compliance.
While replacing the Prior Law, it introduces enhancements aimed at bolstering the nation's bankruptcy framework and fostering a dynamic economic environment.
Key Features of the New Bankruptcy Law
Scope and Definitions: The new Bankruptcy Law retains a broad scope, encompassing companies governed by the UAE Commercial Companies Law, individual traders, and licensed civil professional companies. It provides clarity and expands upon key definitions such as "cessation of payments" and "debtor's assets," while introducing terms like "related party" and "required majority" to enhance precision.
Establishment of Bankruptcy Court: A significant development is the establishment of a specialised Bankruptcy Court, with jurisdiction over bankruptcy-related matters. This dedicated tribunal aims to expedite proceedings and ensure efficient adjudication, offering immediate enforceability of judgments without the need for formal service.
Preventive Settlement Mechanism: Replacing the prior preventive composition, the new law introduces a court-supervised preventive settlement mechanism. This process enables debtors to continue business operations while addressing their debts, fostering a conducive environment for financial restructuring and debt repayment.
Liability of Management: The Bankruptcy Law extends liability beyond board members and managers to individuals directly involved in company management and liquidation. These individuals may be held accountable for actions contributing to the company's financial decline, subject to proportional liability for prescribed acts committed within two years before cessation of payments.
Claw Back and Enforcement: The law refines provisions regarding clawback, narrowing the timeframe for unwinding certain transactions to six months before cessation of payments, extendable to two years for transactions involving related parties. Moreover, it empowers creditors with secured debts to initiate enforcement proceedings against secured assets with the approval of the Bankruptcy Court.
Implications and Next Steps: Furthermore, the law's focus on holding management accountable underscores a commitment to fair business practices. Compliance with the Bankruptcy Law is crucial as non-compliance could result in serious consequences, including facing criminal charges for harming creditors.
In the coming months, stakeholders across various industries must familiarise themselves with and adhere to the new bankruptcy regulations. Detailed rules accompanying the law are expected, emphasising the importance of remaining vigilant and adaptable to leverage these changes optimally. The law will significantly impact how businesses address financial challenges, fostering a more favourable environment for investors in the UAE.
(The writer is a legal associate at Dubai-based NYK Law Firm.)
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