As the pandemic continues to grip the world, it might mean that businesses and investors alike find themselves on shaky grounds, and it is quite pertinent to have a sound grasp on the relevant Bankruptcy Laws as more enterprises face uncertainty in financial conditions. However, experts suggest that the amendments made to the Bankruptcy Laws in 2016 certainly help businesses adapt to the pandemic situation if they were to run into indebtedness. The UAE has been building a conducive business atmosphere and the law on companies based in the United Arab Emirates (UAE) and its financial sector was adapted to this regime which traditionally based on consensual restructuring and hence, is a paradigm shift in the legal landscape. This post seeks to elucidate and simplify the Bankruptcy Laws, and to assist company owners and investors understand the impact of the amendments.
General Overview and Key Features
The New Bankruptcy Law brought under the Federal Decree No. 9 of 2016 ("Law") which came into force in December 2016, has placed a new emphasis on the early restructuring and indebtedness of distressed companies and has streamlined and modernised the UAE's bankruptcy law. The new law seems to aim at ensuring compliance, reducing the risk of non-partisan bankruptcy and allowing creditors to secure their rights. The law has 230 articles, which offer debtors and creditors more flexibility by enabling effective negotiation. Hence, this Bankruptcy regime offers two options to businesses, namely settlement by negotiation which buys time to repay, or, liquidation if your establishment has been pushed to the brink with no valuable assets to spare.
A few of the key features of the Bankruptcy Law is that its ambit is wide enough to include all companies incorporated under the Commercial Companies Law, most free zone companies, individuals trading for profit and licensed civil companies of a professional nature, while excluding companies, which are wholly or partially owned by the government. Furthermore, the law removes criminal offences related to bankruptcy. For instance, criminal proceedings relating to company checks are halted once one of the above options is resorted to, namely preventative composition or restructuring scheme.
This is good news for debtors and creditors: it protects organizations that go to court - and leads to bankruptcy - and offers companies in financial difficulty the opportunity to avoid liquidation by restructuring and restructuring their debts early. After the 2008 global financial crisis, the UAE government seems to have worked to further regulate and support companies in financial difficulty.
This solution, as defined under Article 5 of the Law, has the objective of facilitating settlements between debtors and creditors under the supervision of the court. This mechanism, contained under Title 3 [Articles 5 - 66] of the law elucidates the detailed procedure involved in preventive composition.
Here, the debtor can approach the court with an application for preventive composition. The court shall examine the application, verify the documents, may request more documents if required and grant more time for the debtor to submit such documents. The relevant court fee for filing the applications, as decided by the court, has to be paid to the Court Treasury by the stipulated date. If the court decides to approve the application, the Preventive Composition Procedure begins.
The court, then, appoints a trustee to move ahead with the procedure. The trustee shall take an inventory of the debtor's assets and might ask for information and assistance on the same from the debtor. The court can also appoint an inspector to oversee the procedure. Here, once this procedure starts, the debtor is not allowed to dispose of his assets. However, the stay on judicial procedures, as stated above, would turn out to be a relief to the debtors.
The trustee shall then publish the decisions and notify all creditors, who in turn, shall hand over the relevant debt documents. Following this, there shall be a 7 day period to object to the claims. Subsequently, the trustee, with the assistance of the debtor, creates a draft composition plan, which will get reviewed by the court to ensure the best interests of both parties, and asks the trustee to discuss the plan with the creditors. Once a meeting is called and the plan is consented to by a majority of the creditors, the plan is set in motion and the trustee shall oversee the same.
The provisions for Bankruptcy are contained under Title 4 [Articles 67 - 170 of the Law], where if the scheme of preventive composition is not a workable solution, the next resort could be to apply for restructuring or bankruptcy. Here, while the court shall, with the assistance of the expert, attempt to check the viability of restructuring, the final resort shall be to proceed with Bankruptcy with the oversight of the court. Here, the timeline of the procedure is similar to that of preventive composition. The Debtor can apply to the court if he fails to pay his debts for over 30 working days owing to the difficulty in financial position, which will be verified by the court. However, it has to be noted that in this case there are others who are eligible to apply as well, namely, the public prosecutor, a court, a creditor or group of creditors, who hold an unpaid debt of not less the 100,000 AED, if a statutory demand has been served on the debtor and has remained unpaid for at least 30 consecutive business days.
The court, on receipt of the application, checks the documents to make sure the documents are in order, and might allow more time for submission of such required documents. However, incomplete applications with documents that are still not submitted, can be rejected by the court. Except in the case of the public prosecutor submitting the application, the applicant will be required to pay the court fee as decided by the court, within a deadline, to the Court Treasury. Once the application is accepted the court shall appoint an expert to assess the financial situation at the Debtor's end.
If the application is accepted, a trustee is appointed from among experts and an inspector and additional trustees may also be appointed by the court. The trustee can submit applications to the court to assist in the process involved. He then publishes a summary of decisions and informs creditors, who in turn, submit claims and documents. However, the creditors may submit the claims even after the deadline provided they have acceptable reasons. The trustee shall prepare a list of creditors as per the information given by the creditors. The trustee then prepares a report and for the same, the trustee can ask for necessary information. This report will be an assessment of the possibilities of restructuring and bankruptcy proceedings, which will be examined by the court to verify the inclusion of all relevant claims and subsequently by debtors and creditors. If restructuring is viable, the plan has to be ratified by the court and the trustee shall oversee the process. However if the same is not viable, under this law, the non-feasibility or non-appropriateness of restructuring shall leave the court with the option of bankruptcy proceedings, which the court shall oversee with the assistance of the trustee. The adjudication of bankruptcy and liquidation process will be overseen by the trustee who asks the creditors to submit residual final claims if any and moves forward to liquidate the assets and report to the court periodically.
The impact of COVID-19 on companies has proven the need for a bankruptcy system that includes friendly rules for both debtors and creditors. Like many other comparable jurisdictions, the UAE has followed suits and become a pro-restructuring country. UAE law had previously imposed prison sentences on defaulting debtors. Compared to the previous law embedded under the Commercial Transactions Law, which contained no less than 255 articles on insolvency and bankruptcy proceedings, the new law and its provisions are ground-breaking in many respects and have influenced the development of a more pro-structured and efficient financial system.
The changes will allow companies to look forward to securing liquidity, which is clearly a prerequisite in times of need. This is designed to enable individuals and businesses to address credit challenges in emergencies. However, before setting out to apply for a process, one has to remember that the application may involve payments including court fees, translation fee and so on, and that supporting documents including trade license, memorandum explaining financial conditions, cash flow reports, financial statements, credit report and so on have to be collected and easily accessible to be able to submit the same within time periods allotted by the courts.
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