Recently, both within the UAE and globally, there has been increased focus on insolvency and winding-up of business. Concerns have arisen regarding maximisation of creditor recovery. Legislative developments in global insolvency continue to move away from dissolution oriented systems and towards facilitating survival, where possible, of the business entity facing financial difficulty. Given the extent of foreign investment in the UAE and recent publicity regarding the financial challenges encountered by business incorporated or operating in the UAE, growing attention is focused on the UAE insolvency regime and the ability of creditors to recover debts.
- One of the principle elements of UAE Bankruptcy Law is the use of protective composition to facilitate the survival of the trader’s business and to enable the trader avoid bankruptcy. However, an approved composition procedure is not available for joint participation companies or for companies in liquidation.
- Should a court decide to permit the commencement of a protective composition, the court will place a stay on any actions against the trader, will investigate the trader’s financial position and may impose a number of other measures.
- The entry into and compliance with the terms of the composition allows the debtor to resume all his rights and duties as a normal trader and provides the trader the opportunity to continue trading and navigate through a difficult period for the business.
Purpose of UAE Bankruptcy Law
Volume V of UAE Federal Law No.(18) of 1993 issuing the Commercial Transactions Law (Bankruptcy Law) governs the bankruptcy of traders carrying on commercial activities in the UAE. One of the principle elements of the Bankruptcy Law is the use of protective composition to facilitate the survival of the business and to enable the trader avoid bankruptcy.
Protective compositions are proposals put forward by a trader to its creditors to facilitate the survival of the business. The proposals could involve a number of options, including extended repayment schedules, fresh equity injections, a merger or re-structuring.
Criteria for composition
Where a trader has traded continuously for one year and has complied with the requirements to maintain company registers and commercial books he may avail of a formal court approved preventative composition with creditors. The application for a composition scheme must be supported by documentation setting out, among other things, the financial position of the debtor, its assets, details of the creditors of the business and the reasons for the financial difficulty.
Any proposed settlement must be for no less than 50% of the debt with a term of payment not exceeding three years from the date on which the arrangement was ratified. If the application is approved by the court, the court will then appoint a trustee, who will publish the decision in two daily newspapers accompanied by an invitation to creditors to attend a creditors' meeting.
Effect on interested parties
Once the court decides to permit the commencement of a protective composition, the court will place a stay on any actions against the trader and will investigate the trader’s financial position. The court also has the power to order such measures as may be necessary for preserving or managing the trader’s assets until a final decision has been reached.
Following the decision to commence composition proceedings, actions against the trader will be suspended, debts owed shall not become due and interest shall cease to accrue. During the composition proceedings certain secured creditors will require court approval to commence or continue with claims in respect of the secured assets.
The debtor shall be permitted to run his business under the supervision of the trustee. However, following the issuance of decision approving the protective arrangement, the debtor may not borrow, transfer or create security over certain property without court approval. All creditors (secured and unsecured) are required to provide documents to the court proving the existence of the debts.
The trustee shall prepare a list of creditors and their debts. A copy of the list is sent to the debtor and all creditors. The debtor and the creditors are then given an opportunity to object to the details in the list.
After expiry of the period for objections, the supervising judge shall prepare a final list of creditors, a report on the financial condition of the debtor and convene a creditors' meeting to agree the terms of the composition to be entered into between the debtor and the creditors.
Once the terms of the composition have been decided upon, a majority of the trader’s creditors holding at least two thirds of its debts must approve the composition for it to be presented to the court as being acceptable to the creditors. If, following receipt of the creditors approval, the requisite court approval of the composition is given, all unsecured creditors are be bound by the terms of the composition. The composition does not compromise secured debts or debts incurred after the submission of the composition application.
Consequences of no composition
If no agreement is reached between creditors, regular bankruptcy proceedings may commence. If the composition is nullified for any reason, including failure by the trader to meet scheduled payments under the composition or the court approval was obtained by fraud, then the position of the trader and that of the creditors will revert to the position before the composition was proposed and the trader will face the consequences of bankruptcy.
Resumption of business
The composition will terminate once the debtor has honoured all obligations. The entry into and compliance with the terms of the composition allows a debtor to resume all his/its rights and duties as a normal trader and provides the trader with the ability to continue trading and navigate through a difficult period for the business.
In the current climate due to stricter lending criteria and a general lack of liquidity in the market an otherwise healthy business could get into financial difficulties (for example due to cash flow issues at a particular point in its financial year) which if its creditors were willing to reschedule debt payments could facilitate the survival of the trader. Although there may be a psychological barrier to the commencement of any bankruptcy procedure, the protective composition process permitted by the Bankruptcy Law does provide a viable solution to facilitate the survival of a UAE business is in difficulty. There are not, however, many examples of successful adoption of this process in practice.
All recommendations are provided without consideration of any specific reader's objectives, situation or particular needs. Those acting upon such recommendations do so entirely at their own risk.