26 Jun 2024

Bankruptcy Law

Authored by: Catriona McDevitt

Federal Law Decree No 51 of 2023 concerning Financial Restructuring and Bankruptcy (the New Bankruptcy Law) came into effect in the UAE on 1 May 2024 and repealed the previous bankrupcty law, Federal Decree Law No 9 of 2016 (the Old Bankruptcy Law). All regulations issued under the Old Bankruptcy Law remain in force until new regulations are published, which will further clarify a number of points.

As with the Old Bankruptcy Law, the New Bankruptcy Law does not apply to companies established in the Dubai International Financial Centre (DIFC) or the Abu Dhabi Global Markets (ADGM), each of which have their own bankruptcy regulations.

While the New Bankruptcy Law maintains a number of provisions from the Old Bankruptcy Law, there have been significant developments in the New Bankruptcy Law, some of which are highlighted below:

New Bankruptcy Court

The establishment of a new Bankruptcy Court, which will hear bankruptcy related matters and allow for the appointment of experts and auditors to assist the Bankruptcy Court, is one of the most significant developments.

Preventative Settlement

A new process, preventative settlement, replaces the previous process of preventative composition, and is a court supervised process which allows the debtor to continue operating its business and paying off its debts. This is generally intended for shorter, less complicated restructurings which can be completed within a short period of time. The debtor may apply for preventative settlement proceedings in particular circumstances, including where it has defaulted or believes it will be unable to pay its debts as they fall due.

The other processes under the Old Bankruptcy Law, namely restructuring and bankruptcy procedures, have been retained under the New Bankruptcy Law.

Clawback

The New Bankruptcy Law has decreased the clawback period during which certain transactions could be unwound if performed within two years prior to the initiation of bankruptcy proceedings, to a shorter period of six months prior to the date of cessation of payment, which can be extended, however, to two years if the transaction was conducted with a related party.

Liability of Directors

Potential liability has been widened under the New Bankruptcy Law from board directors and managers to now include any person responsible for the management of the company and those in charge of the liquidation. If a company is declared bankrupt, the Bankruptcy Court may hold such persons liable for specific acts committed within two years before the company’s cessation of payment and if found to be liable, such persons may be required to pay a sum proportionate to their errors, which will be used to help repay the company’s debts. Such individuals can dispute such claims by demonstrating they had taken all precautionary measures that a reasonable person could take in such circumstances or if they had documented their objections to the relevant actions that were adopted.

Bankruptcy Department

Under the New Bankruptcy Law, a Bankruptcy Department has been established at the Bankruptcy Court’s headquarters and has wide powers including the ability to discuss with creditors matters before the Bankruptcy Court and receive and register applications received under the New Bankruptcy Law.

New and updated definitions

The New Bankruptcy Law has clarified and expanded certain definitions, including, significantly, the recognition of both natural and legal persons as “debtors”. In addition, the definition of “debtor’s assets” now includes all moveable and immoveable properties owned by the debtor both within and outside of the UAE.

The implementation of the New Bankruptcy Law is a welcome development in the bankruptcy process in the UAE and brings the UAE’s regulatory framework in line with international best practices and standards. The adoption of a new Bankruptcy Court and Bankruptcy Department, clarification and expansion of a number of concepts under the New Bankruptcy Law and tighter provisions regarding liability of directors and those responsible for managing a company should foster both an increased awareness of responsible management and corporate governance practices and encourage increased confidence in the UAE’s bankruptcy regime.

We await with interest the Executive Regulations implementing the New Bankruptcy Law.