29 Mar 2017

Bankruptcy Law - Review of Termination Rights in Commercial Contracts

Authored by: Hadef & Partners, Sector Groups

Whilst a great amount of commentary has followed the issuance of the new Bankruptcy Law, we believe that it would be preferable to issue our analysis after a few key points become clearer. However, more immediately, what you may not be aware of is that there are some practical implications of this new law on businesses in the UAE.

One example of this is that, Article 34(1) of the Bankruptcy Law provides that if a protective composition procedure has been commenced by a debtor and a court order has been issued, the creditor (counterparty) must continue to perform the contract, which will remain in full effect, notwithstanding the debtor’s apparent inability to pay debts as they become due.

In particular, if any of your commercial contracts do not contain an express right to terminate such contract in the event of the counterparty’s insolvency, if you delay in exercising this right, even by just a few days, you may have inadvertently relinquished your right to end the contract and so potentially mitigate your losses. In such case, the creditor will have to continue to supply goods and services and so increase its financial exposure, despite perhaps being already out of pocket on unpaid invoices. If your credit control processes fail to identify this type of concern, or you are perhaps slow in reacting to suspected financial difficulties of your customers/clients, your contractual right to terminate may be lost.

For more information, please contact us on sectors@hadefpartners.com