Bankruptcy Law Reform: How the New Insolvency Rules Are Changing Commercial Contracts in the UAE

Most commercial contracts are drafted on a straightforward assumption: if one party becomes insolvent, the financially healthy counterparty can decide what happens next. It can terminate the contract, enforce security, call on guarantees or pursue recovery through the courts.

Under the UAE's current bankruptcy regime, that assumption is no longer entirely correct.

Federal Decree-Law No. 51 of 2023 on Financial Restructuring and Bankruptcy has significantly altered the legal landscape. In certain circumstances, a financially distressed debtor may apply to the specialised Bankruptcy Court to terminate its own contracts, even where the other contracting party objects. If the court approves the application, the counterparty's primary remedy may be limited to an unsecured compensation claim that ranks alongside other unsecured debts.

For businesses operating in the UAE, insolvency is therefore no longer simply a question of enforcing contractual rights after default. It has become an issue that must be addressed during contract drafting itself. Standard termination clauses, guarantee provisions and payment protections may no longer provide the level of security that parties have traditionally assumed.

A Modern Bankruptcy Framework

The UAE's insolvency regime underwent a major overhaul with the introduction of Federal Decree-Law No. 51 of 2023 concerning Financial Restructuring and Bankruptcy. Published in the Official Gazette on 31 October 2023, the law came into force on May 1, 2024, replacing Federal Decree-Law No. 9 of 2016 in its entirety.

 

The legislation applies to companies incorporated in mainland UAE and, unlike the previous law, also extends its scope to natural persons. The DIFC and ADGM remain outside the federal framework, as each free zone operates under its own insolvency legislation and judicial system.

Implementation of the law was further strengthened through Cabinet Decision No. 94 of 2024, which introduced detailed Executive Regulations. These regulations established procedural mechanisms that the primary legislation had left open, including a dedicated process for small debtors and the formal recognition of the Central Bank and the Securities and Commodities Authority as supervisory entities authorised to request the commencement of bankruptcy proceedings. Following the establishment of the Capital Market Authority on January 1, 2026, those references are now understood to refer to the CMA.

Institutional reform followed in 2025. Federal Judicial Council Decision No. 39 of 2025 established a dedicated Bankruptcy Court headquartered at the Abu Dhabi Federal Court of First Instance, effective from July 15, 2025. Headed by a Court of Appeal judge, the specialised court represents an important development in the UAE's insolvency framework and is expected to bring greater consistency and expertise to bankruptcy matters. The Federal Judicial Council also retains authority to establish additional bankruptcy circuits in other Emirates as caseloads increase.

 

Court-ordered Contract Termination Changes the Balance of Power

Perhaps the most significant feature of the new regime — and one that many commercial contracts still fail to address — is the Bankruptcy Court's authority to terminate contracts at the debtor's request.

Traditionally, insolvency clauses are drafted to give the solvent party the right to terminate once the other party becomes financially distressed. Under the new legislation, however, the initiative may lie with the debtor instead.

Where termination is necessary to enable the debtor to continue its business or where it serves the interests of creditors, the Bankruptcy Court may terminate a contract to which the debtor is a party, provided that doing so does not cause serious prejudice to the other contracting party.

Even where compensation is awarded, the practical outcome may be disappointing for the counterparty. Rather than receiving immediate payment outside the insolvency process, the compensation generally becomes an unsecured claim ranking alongside other unsecured creditors.

This changes the commercial risk profile of long-term contracts.

Suppliers, landlords, technology providers, consultants and service companies should therefore reconsider whether traditional termination clauses alone provide adequate protection. In many cases, retention-of-title provisions, advance payment requirements, escrow arrangements or properly structured security may provide significantly greater protection than relying solely on a contractual right that may never become effective.

Businesses should also consider the practical consequences of court-approved termination. Can replacement suppliers be secured quickly? Would alternative premises be available? Are there contingency arrangements for critical services? These commercial questions now sit alongside traditional legal drafting considerations.

The Moratorium: Enforcement Rights Temporarily Frozen

The commencement of bankruptcy proceedings also triggers an automatic moratorium that suspends most judicial and enforcement measures against the debtor's assets.

Initially lasting three months, the stay may be extended with the Bankruptcy Court's approval, with the overall period generally understood to be capped at six months.

During this period, unsecured creditors are effectively prevented from pursuing ordinary debt recovery proceedings, enforcing contractual payment obligations or seeking specific performance through separate litigation.

For many commercial counterparties, this may have greater practical significance than the ultimate outcome of the bankruptcy itself. A creditor with an otherwise straightforward claim may simply have to wait while restructuring efforts continue.

Certain claims remain outside the moratorium. Employment-related entitlements and family law matters are expressly excluded, ensuring that employee claims continue to be addressed despite ongoing restructuring.
 

Secured creditors are treated differently. Rather than enforcing security through separate proceedings, they may seek enforcement through the Bankruptcy Court itself, centralising insolvency-related disputes within a single judicial forum.

Restrictions on Debtor Conduct Affect Contractual Performance

Once restructuring proceedings commence, debtors face significant restrictions on their commercial activities.

Without the trustee's written approval, they cannot issue or renew guarantees, settle debts before they fall due, establish new companies, acquire shares, transfer assets or resolve judicial claims.

Although these restrictions are designed to preserve the debtor's estate, they may create unexpected contractual consequences.

For example, a supply agreement may require periodic renewal of a bank guarantee, while a construction contract may oblige the contractor to provide additional performance security during the project. Once restructuring begins, the debtor may be legally incapable of fulfilling these obligations regardless of its commercial intentions.

Businesses should therefore consider requiring key security arrangements to be completed at contract execution or linked to clearly defined milestones rather than relying on future renewals that insolvency proceedings may prevent.

Expanded Liability Beyond Directors

The new legislation also broadens potential personal liability. Responsibility is no longer confined to formally appointed directors or managers. It may extend to anyone exercising actual management or effective control over the debtor's affairs, as well as those supervising liquidation.

Where misconduct during the two years preceding insolvency contributes to the company's inability to satisfy its debts, the court may require responsible individuals to contribute towards the resulting shortfall in proportion to their involvement.

This represents an important development for shareholders exercising extensive reserved powers, management companies, franchise operators and others who exercise significant operational control without necessarily holding formal corporate office.

Indemnities, warranties and governance provisions in shareholder agreements, management contracts and franchise arrangements should therefore be reviewed carefully in light of this broader liability framework.

Priority Financing may Dilute Unsecured Creditors

Another important commercial feature of the legislation concerns rescue financing. Companies undergoing preventive settlement or restructuring may obtain new financing, including funding that enjoys priority over existing unsecured debts where approved under the statutory process or supported by creditors holding two-thirds of the outstanding debt.

Where additional security is granted over assets already subject to existing security, the new lender generally ranks behind the existing secured creditor unless that creditor agrees otherwise.

For unsecured suppliers and trade creditors, however, the implications are significant.

Credit extended on ordinary commercial terms may ultimately rank behind rescue financing introduced during restructuring, reducing potential recoveries if insolvency occurs.

This reinforces the importance of negotiating appropriate credit limits, security arrangements and shorter payment cycles with counterparties whose financial position is uncertain.

Regulatory Intervention may Trigger Proceedings

The legislation also strengthens the role of financial regulators. Where debtors are supervised by the Central Bank or the Capital Market Authority, the relevant regulator may request commencement of bankruptcy proceedings once statutory thresholds are satisfied.

This means that proceedings may begin following regulatory concerns rather than obvious payment defaults visible to counterparties.

Contracts involving banks, insurers and other regulated financial institutions should therefore incorporate stronger reporting obligations, financial information rights and early-warning mechanisms capable of identifying regulatory intervention before formal insolvency proceedings commence.

Specialised Bankruptcy Court Brings Greater Certainty

Since July 2025, insolvency disputes under the federal regime have been heard by the dedicated Bankruptcy Court rather than the general commercial courts.

The establishment of a specialist court should produce greater consistency in interpreting key provisions, particularly those governing court-approved contract termination, creditor priorities and restructuring procedures.

Businesses should nevertheless remember that this framework applies only to mainland UAE entities.

Companies incorporated within the DIFC or ADGM remain subject to entirely separate insolvency legislation, judicial procedures and dispute resolution mechanisms. Contractual provisions appropriate for mainland counterparties may therefore prove unsuitable for free zone entities.

A New Approach to Contract Drafting

The UAE's bankruptcy reforms do not suggest that every commercial counterparty should be viewed as a credit risk.

They do, however, require businesses to rethink long-standing assumptions about contractual protection.

Termination clauses remain important, but they are no longer sufficient on their own. Businesses should instead adopt a broader approach to insolvency planning by reviewing security arrangements, guarantee provisions, retention-of-title clauses, payment structures, financial covenants and early-warning mechanisms.

For long-term supply, financing, construction and services agreements, contractual resilience now depends less on what happens after insolvency and more on how effectively risks are allocated before financial distress arises.

The introduction of the dedicated Bankruptcy Court, together with the expanded powers available under Federal Decree-Law No. 51 of 2023, marks a significant evolution in the UAE's insolvency framework. Companies that proactively review and update their commercial contracts in light of these reforms will be considerably better placed to protect their legal and commercial interests than those relying on traditional insolvency clauses drafted for a very different legal landscape.