08 Sep 2020

How can businesses in financial stress benefit from insolvency procedures under UAE Bankruptcy Law

Authored by: Ahmed Nasser

Background

The Bankruptcy Law (Federal Decree Law 9. of 2016 concerning bankruptcy) is the first comprehensive UAE law to deal with and delineate insolvency procedures. It offers a number of roadmaps which a business in financial hardship can take advantage of with a view to continuing to trade.  

During the current times, it is useful to assess these options.

Government mediation and conciliation

The Bankruptcy Law provides a channel outside the courts for troubled businesses seeking a break. A trader that foresees financial hardship can resort to the Financial Reorganization Committee (FRC). The FRC is a permanent committee mandated with helping financially struggling businesses through mediation and conciliation. The FRC comprises representatives from the government’s main economic arms which gives it significant leverage in fulfilling its duty.

It is worth noting that the trader should not have ceased paying its debts nor be in a condition where its current assets do not cover its current liabilities for more than 30 consecutive days as conditions for its application to be considered by the FRC.  

Composition

A debtor may seek the court’s assistance in reaching a binding agreement with its creditors. If agreed by the majority of the creditors and the court, the composition agreement will bind all creditors.

Advantages of the composition process:

  • The composition process provides the debtor the opportunity to substitute a certain security for another. If the holder of the substituted security rejects the substitution, the court can enforce it.  
  • The court may order that the assets, which are essential to the continuity of the debtor’s business, not be disposed of without its permission.
  • The court may accelerate the payment of a debt where the holder of such debt accepts its reduction.
  • Penal procedures against the debtor arising out of a dishonored cheque as a result of insufficient funds are suspended by the court.

Again, the debtor should not have ceased paying its debts for more than 30 consecutive days nor be in a condition where its current assets do not cover its current liabilities as conditions for its composition application to be accepted by the court.

Restructuring

These insolvency procedures, contrary to those addressed above, can be resorted to by an insolvent debtor i.e. a debtor that has ceased paying its debts for more than 30 consecutive days.

Under the restructuring procedures, a debtor may apply to the court seeking the adoption of a restructuring plan which could lead to the survival of the business.

Advantages of the restructuring process:

  • The acceptance of the restructuring application by the court leads to the suspension of all claims and execution proceedings against the debtor’s assets.
  • The restructuring process provides the debtor the opportunity to substitute a certain security for another. If the holder of such substituted security rejects the substitution, the court can enforce it.  
  • The court may order that assets, which are essential to the continuity of the debtor’s business, not be disposed of without its permission.
  • Penal procedures against the debtor arising out of a dishonored cheque as a result of insufficient funds are suspended by the court.

Recommendation

Directors should always be aware of available options under the Bankruptcy Law. Insolvency procedures should not always be interpreted as meaning the end of the business. If used efficiently, they can be a possible lifeline to businesses that require breathing space during difficult trading conditions.

Should you require additional information about your options under the insolvency procedures, please contact Ahmed Nasser, Partner, Abu Dhabi.