12 Dec 2016

New Federal Bankruptcy Law – Law by Decree No (9) of 2016 – Part 1

Authored by: James Farn

New Federal Bankruptcy Law – Law by Decree No (9) of 2016 – Part 1

In Brief:

  • Explanation of bankruptcy in the UAE context
  • Consideration of some of the changes introduced by the new Law which comes into force on 29 December 2016

This article is part 1 of a series on this important legal development in the UAE.

Bankruptcy explained

Although the phrases bankruptcy and insolvency are often interchangeable, UAE Federal law refers specifically to ‘bankruptcy.’ A modern and efficient bankruptcy law is an essential element in a productive and forward-looking economy, because it describes processes by which those who are unable to pay their debts (whether they be individuals or corporate entities or organizations are discharged from their liabilities. When a debt is eliminated as part of a bankruptcy process, the debtor himself is rehabilitated so that he emerges successfully from his financial difficulties and is able to make a ‘fresh start.’ As such, bankruptcy can be distinguished from other process such as, for example, the dissolution of a company which simply brings the life of a company to an end. A debtor can stay in business, while reorganizing itself around a more favourable debt structure and a government can return to providing essential services to its citizens.

Processes

Bankruptcy processes can be shaped in different ways. For example, some jurisdictions place an emphasis on preventive assistance to a debtor in financial difficulties in an attempt to allow him to reach a financial compromise with his creditors where his financial situation allows – a so-called   ‘debtor-friendly’ structure. The United States and France have bankruptcy systems that follow this pattern. Conversely, other jurisdictions - UAE included - place a greater emphasis on the realization of assets to satisfy the demands of a debtor’s creditors – a so-called ‘creditor-friendly’ system.

When shaping a bankruptcy system, a choice can also be made between managing that system through the courts (allowing them for example to nominate an administrator, approving a restructuring plan or making a final decision on a liquidation process) or operating a practitioner–driven system, where an ‘outside’ administrator, (one not necessarily appointed by the court) has a central role in supervising the activities of a debtor during a bankruptcy process such as re-structuring or negotiating with a debtor’s creditors.

Perceived deficiencies with the current UAE bankruptcy system 

The UAE has traditionally operated a very creditor-friendly and highly court-driven bankruptcy system. Because the general emphasis under current UAE bankruptcy legislation is to achieve recovery of assets for the benefit of creditors, as a consequence, it offers limited options to a trader seeking a corporate restructuring or a protective composition from its creditors where it gets into financial difficulties.

The existing UAE bankruptcy law has also been little-used to date. There are perceived to be a number of reasons for this, many of which were considered at the time that the new law was being shaped bank in 2009/2010. These included:

  • Lack of bankruptcy proceedings for individuals or ‘non-traders.’
  • Limited bankruptcy procedures.
  • Minimal safeguards for re-structuring proceedings.
  • Lack of legal clarity associated with the current bankruptcy legislation.
  • High entry barriers in the form of time-consuming and costly filing requirements with the court.
  • Negative mind-set against bankruptcy and the perceived failure to differentiate between ‘fraudulent‘and ‘honest’ bankruptcy.

Traditionally, the low recovery rates experienced with the number of limited bankruptcy cases brought before the UAE courts led to the conclusion that the existing legislation was not working. One of the key objectives of the new federal bankruptcy Law therefore is to change the emphasis, moving away from a creditor-friendly system and towards a more debtor-friendly one.

The existing bankruptcy provisions (which are contained in Volume V, Commercial Transactions Law (CTL)) are to be repealed and replaced by the new Law, which comes into effect on 29 December 2016. Other bankruptcy-related provisions, including various pre-bankruptcy-related crimes (currently contained in the Penal Code) and those concerning treatment of preferential debts are also repealed or superseded by the provisions of the new Law.

1          Lack of bankruptcy proceedings for individuals and other limitations

The current bankruptcy legislation only provides for the bankruptcy of a trader (as defined under the CTL) and no one else. There are limited provisions in the Civil Code which impose restriction orders on a bankrupt individual or Civil Trader. There is no possibility of rehabilitating a Civil Trader’s or individual’s liabilities where he gets into financial difficulties.

Although a separate personal insolvency regime (Personal Over-Indebtedness Procedure) for individuals not trading for profit was included in the 2011 draft Law, this has been omitted from the new Law. However, we understand from talking with Ministry of Finance officials that a separate personal bankruptcy Law or procedure may follow next year.

2          Class of persons to which insolvency procedures are available extended

The new Law extends the class of persons who are able to use the modified bankruptcy procedures described in the new Law. Such persons include companies governed by the UAE Commercial Companies Law (CCL), most free zone companies, sole establishments, and civil companies conducting professional business, as well as any other person carrying on commercial business as a trader. Government-owned companies not established under the CCL - for example, companies formed by Emirate decree, may ‘opt-in’ to the provisions of the new Law by express provision in their constitutional documents.

3          ‘Gateways’ into insolvency extended

The conditions necessary for commencement of relevant insolvency procedures have been extended.

Bankruptcy proceedings may be commenced where the debtor is either:

a. in a state of ‘cessation’ of payments for a continuous period of 30 days due to an unstable financial position (the existing ‘cash-flow’ test); and / or

b. is in (or has not yet reached) a state of ‘over-indebtedness’ where the debtor’s assets do not cover its existing payment obligations - broadly, a position where the debtor’s assets no longer cover its liabilities for a continuous period of 30 days or more, including  it is assumed a trader’s its contingent liabilities (a ‘balance-sheet’ test).

Our next newsletters will continue to address the changes introduced by the new Law.

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.