09 Dec 2020

New Amendments to the UAE Bankruptcy Law

Authored by: Ahmad Sergieh

In the context of the current pandemic and its impact on businesses in the UAE, His Highness Sheikh Khalifa bin Zayed Al Nahyan, President of the UAE enacted on 27 September 2020 amendments to Federal Law No 9 of 2016 (“Bankruptcy Law”) pursuant to Federal Decree Law No. 21 of 2020 which modify and supplement certain provisions of the Bankruptcy Law (“Amendments”).

The Amendments will come into force at the time of publication in the official gazette.

The Amendments modify and supplement the existing Bankruptcy Law. Specifically, they;

  1. extend the ‘stay’ on judicial proceedings where a Commencement Order has been made against the debtor under either (i) Protective Composition Proceedings (PCP); or (ii) Restructuring-in-Bankruptcy (RIB) proceedings (subject, in either case, to the overriding right of creditors to make application to the Court to lift the stay);

  2. clarify the position of preferential creditors where distributions are made under formal bankruptcy procedures; and

  3. introduce a new procedure in circumstances where the debtor’s obligation to file for bankruptcy under Part 4 (RIB or formal bankruptcy) is deferred by reason of an ‘Emergency Financial Crisis’

Emergency Financial Procedures

Concept of an “emergency financial crisis”

As a result of the global pandemic which has affected a number of UAE businesses, the Amendments introduce a new chapter (Chapter 15) to Part Four of the Bankruptcy Law entitled “Bankruptcy Proceedings during the Emergency Financial Crisis”.

An Emergency Financial Crisis is defined as “A public situation that affects trade or investment in the state, such as the outbreak of epidemic, natural or environmental disaster, war, or other which case and duration shall be determined by a cabinet resolution, based on the Minister’s proposal”.

Suspension of the debtor’s obligation to file for bankruptcy

In the event that: (i) a debtor defaults in respect of the payment of its commercial debts for a period exceeding thirty (30) consecutive business days; or (ii) is deemed to be in a state of over-indebtedness as a result, in either case. of an Emergency Financial Crisis, the debtor will no longer be under an obligation to file for RIB or formal bankruptcy procedures under Part 4. Such obligation will instead be deferred for a period commensurate with the duration of the Emergency Financial Crisis. There are no provisions in the Amendments themselves to determine how long an Emergency Financial Crisis may last, although there are placeholder provisions in the Amendments which are intended to provide a more detailed description of both cause and duration through issue of secondary legislation by way of a Cabinet Resolution.

If the debtor nonetheless decides to file a petition for bankruptcy during an Emergency Financial Crisis, the Court still has discretion to accept such petition. The Court may decide to refuse to appoint an expert or a trustee in respect of the bankruptcy proceedings provided that the debtor is able to show that its current financial condition results from an Emergency Financial Crisis.

Bankruptcy application filed by creditors

The Amendments also provide that the Court must delay acceptance of any bankruptcy petition filed by any creditor or group of creditors against a debtor during an Emergency Financial Crisis.

All debtors may benefit from such restriction, whether such debtors have ceased paying their debts as a result of the Emergency Financial Crisis or prior to such relevant period.

Deferral is therefore mandatory where a creditor files a bankruptcy petition with the Court but is discretionary where the debtor files under the Emergency Financial Procedures.

Settlement with Creditors

Where a Court accepts a bankruptcy petition filed by a debtor (but not a creditor) whilst an Emergency Financial Crisis subsists, the debtor may request the Court for a grace period of not more than forty (40) business days in order to reach a settlement with its creditors (“Settlement Request”).

If the Settlement Request is approved by the Court, it must be published in two (2) local daily newspapers (in English and Arabic) which will include the following:

  1. an invitation for the creditors to negotiate a settlement agreement with the debtor within twenty (20) business days from the date of publication of the invitation; and

  2. the place or the method by which the negotiation proceedings shall be conducted.

The settlement period offered by the debtor to its creditors should not exceed twelve (12) months from the date of the Court’s approval.

Once a settlement agreement is approved by the relevant creditors representing two thirds of the total debt in value, such settlement agreement shall be binding in respect of all creditors. including those who abstained from engaging in the negotiations. The negotiations for reaching a settlement between the debtor and creditors should be documented in writing (including by electronic mail).

Once a settlement is reached between the parties, the debtor, or any of the creditors who were part of the negotiations, should notify through the Court all other affected creditors (specifically trade creditors) within ten (10) business days from the settlement date.

The settlement agreement must then be approved by the Court. However, the Court may reject the proposed settlement within fifteen (15) business days if certain circumstances justify such decision including bad faith.

Any creditor who did not approve the settlement may file a grievance before the Court within a period of fifteen (15) business days from the date of being notified of the settlement. Such grievance must be dealt with within five (5) days from the date of filing such grievance.

Once the Court approves the settlement agreement, it shall be considered final and binding on all creditors.

Liability of the directors and general managers

The Amendments also provide that the potential civil or criminal liability of directors and general managers of a corporate debtor (either during or prior to the commencement of Financial Emergency Procedures) will not not be triggered if such directors and managers dispose of the debtor’s assets to pay the unpaid salaries of its employees (excepting allowances, raises and other incidental payments).

The Amendments also provide that the directors and general managers must ensure that a debtor’s financial statements are updated to reflect the losses incurred as a result of the Emergency Financial Crisis.

These provisions are without prejudice to any other civil or criminal sanctions that could be imposed against a director or manager arising under Part 6 of the Law or under any other relevant legal provision.

Cessation of Court actions

In the event that a debtor files for bankruptcy during an Emergency Financial Crisis, the Court shall not take any precautionary measures against the debtor’s assets in order to ensure the continuity of the debtor’s business.

New financing

There are special provisions to deal with new monies as part of the settlement arrangements on a ‘last-in, first-out’ basis.

If new money is provided by a bank against additional security taken over existing debtor assets which are fully collateralized, the new creditor can (with Court approval) take a first-ranking pledge up to an additional 30% of the existing value of such assets. These arrangements would give an existing creditor ‘super-priority status’ over an existing creditor(s) to the extent of the new money provided.

In cases where a creditor (bank or otherwise) provides new money to be secured against assets which are not fully collateralized: i.e. where there is available equity, such security will rank behind the existing security over the same assets unless the existing creditor(s) who have security over that asset agree otherwise.

The Emergency Financial Procedures allow for an ‘accelerated’ form of settlement procedure which reflects the ‘emergency’ nature of the debtor’s financial position. Given that these procedures are set out in a new Chapter embedded in Part 4 of the existing Law, they are to be treated as a separate standalone procedure to the existing RIB procedures described elsewhere in Part 4. Consequently, if the debtor is unsuccessful in reaching a settlement with concerned creditors within the prescribed time limit of forty (40) days, a debtor would presumably have to discontinue the Emergency Procedures and re-petition the court for admittance into formal RIB or formal bankruptcy procedures, depending on its financial position at time of re-application. The Amendments do not include any specific provision which would enable to a debtor to transition directly into RIB or formal bankruptcy procedures in such circumstances.

Proceedings outside Emergency Financial Procedures

Existing Bankruptcy Proceedings

The Court also has discretion to extend the relevant time periods set out under the Bankruptcy Law in circumstances where a petition has been filed by the debtor under Part 3 (PCP) or either the debtor or its creditor(s) under Part 4 (RIB or formal bankruptcy) at any time before the Emergency Financial Crisis procedure has come in effect but where the debtor’s financial condition is nonetheless attributable to an Emergency Financial Crisis event.

Suspension of existing legal proceedings

The Amendments further provide that, in the event that the Court orders the commencement of PCP proceedings under Part 3 or formal bankruptcy proceedings under Part 4, existing legal proceedings against the debtor shall be suspended for a period lasting until the earlier of:

  1. the date on which the Court approves the restructuring plan scheme under either procedure; or

  2. ten (10) months from the date of the Commencement Order (subject to the ability to extend for an additional four (4) months).

There are exceptions, including circumstances where the creditor petitions the Court to enforce if (i) enforcement would not prejudice any proposed restructuring plan or sale of business or (ii) (in the case of formal bankruptcy only), sale and liquidation of the debtor’s assets has not started within the prescribed one (1) month period from the date of Commencement Order.

Preferential creditors

Article 185 of the Law has been amended to clarify the position of preferential creditors (i.e. those described under Article 189 of the Law) in the event of sale and liquidation of the debtor’s assets in formal bankruptcy proceedings under Part 4. Specifically, secured creditors (whether security subsists over the debtor’s movables or immovable assets), shall have priority over all other creditors, including preferential creditors (who rank second) and then ordinary creditors.

For more information on the new Amendments to the UAE Bankruptcy Law, please contact Ahmad Sergieh, Partner, Head of Corporate, Dubai a.sergieh@hadefpartners.com