What is the meaning of Bankruptcy in UAE and what procedures is to be followed?

Bankruptcy disputes arise when debtor ceases to pay its due debts to the creditors by reason of his financial instability for more than the period of 30 days. However, there is no such specific definition regarding the Bankruptcy in the laws dealing with it, but there are certain conditions in which debtor must apply for bankruptcy otherwise he will be liable for committing the default.

The new UAE bankruptcy law came into effect in the year 2016, before that most corporate insolvency in the UAE tends to be resolved through consensual restructuring of the debtor company’s liability. This informal form of consensual restructuring was not proved to be successful as it was found pre-judicial to the interests of both the debtors and creditors.

Therefore, to safeguard the interest of creditors, debtors and investors, the present law came into an effect backed by modern approach which streamlines and lays down new emphasis on the restructuring of companies in debts and secures businesses from failures and total shutdowns. Thus, it depends upon the skills and ability of the legal consultants and advisors to adopt such steps that give advantage to their clients depending upon the facts and circumstances of their case.

The below mentioned companies, establishment and traders are subject to the application of Bankruptcy law:

• Companies governed under or by the Commercial Companies Law
• Companies which are not established under the Commercial Companies Law, and which are wholly or partly owned by the federal or local government, unless expressing the fact that they chose the operations of the Bankruptcy law i.e., Federal Law by Decree No.9 of 2016 by defining it in companies’ constitution.
• Companies and establishments operating in the Free Zone and are subject to the provisions of Federal Law No.8 of 2004 (Law operating Financial Free Zone) except for those companies which incorporated under the above said law with their own exhaustive insolvency legislation such as Dubai International Financial Centre and Abu Dhabi Global Market.
• Companies and establishments which are not governed by the provisions regulating protective composition procedures, financial restructuring, and Bankruptcy.
• Any individual who is a trader in terms of Commercial Transaction Law
• Licensed Civil Companies carrying out professional activities

If the debter or distressed company ceases to repay its debts due its financial instability, the application for bankruptcy declaration can be made by the followings:

1. Debtor itself (unable to pay due debts for over 30 consecutive business days, and the due liability cannot be covered from debtor’s assets)
2. The public prosecutor
3. Court
4. Creditor or by a group of creditors, which holds an unpaid debt of not less than 100,000 AED, if a statutory demand notice has been served to the debtor and the said debt remain unpaid for at least 30 consecutive business days.

Once the bankruptcy application is submitted, the court appoints an expert who prepares the report on the financial position of the debtor keeping in view all its assets and liabilities and gives its opinion regarding the possibility of restructuring. Thereafter, Courts decides whether to initiate the proceedings against the debtor if all conditions are fulfilled.

If in any case Court decides to initiate the proceedings against the debtor, an expert is appointed under the supervision of court to which powers are given to deal with the business operations of debtor, claims and to preserve the assets of the debtor.

Moreover, all other consecutive proceedings regarding other claims including unsecured claims and enforcement actions against the debtor are deemed to be automatically stayed. After the said appointment, the court order is published in the newspaper within 20 days to invite all the creditors for their claim. Thereafter, the report is submitted by the appointed experts/trustee regarding the finances and claims, and all the creditors give their comments.

The Court then determines whether to initiate restructuring or liquidation proceedings after doing assessment of all the report submitted.  In a situation where the debtor expresses his willingness to continue the business and there is reason for the Court to believe that there is a possibility of repaying the creditors’ amount within a reasonable time, it allows the debtor to continue his business and restructuring proceedings remain in force.

This is a long procedure and takes approximately more than five years as the final restructuring report takes time in its preparation and requires votes of the majority creditors which should not be less than two-third of the total debt in value.

Most importantly if the debtor acts with a mala fide intent and tries to evade the amount owed by him or if the restructuring scheme or prevention composition plan is found to be inappropriate or terminated or either unable to get the approval from the creditors, Court orders the liquidation of the debtor’s company/companies and all its assets by appointing liquidator with an aim to secure the interest of the creditors.

There are certain safeguards and measures for protecting the debtor from bankruptcy and gives him an opportunity to repay the debts to the creditors showing its bona fide intention. Here are such measures described in a short manner to safeguard the interest of the debtor and also to ensure that no harm or loss is to be caused to the interest of the creditors. The said safeguards are mentioned here in under: –

• Preventive Composition

This procedure helps the debtor who is suffering from the financial instabilities, whether not declared insolvent or declared insolvent (by applying cash flow test or balance sheet test) for a period less than 30 consecutive business days. The aim and purpose of this process is to reach the stage of amicable dispute settlement with its creditors and to facilitate the rescue of his business.

During this procedure, the debtor files an application which can exclusively be made by him subject to the conditions that the same procedure has not been opted by him within the last year or the debtor has already entered the bankruptcy proceedings. The said application for composition must include all the details regarding the information of debtor’s assets, employees, copies of financial books and bank statements, list of creditors and debtors, proposal or lay out plan for the composition, and the name of the trustee to be appointed.

The court then appoints an expert to manage the affairs of the business and to give its opinion regarding the proposal of composition made by the debtor. Meanwhile, all the actions regarding other claims and consecutive proceedings are deemed to be stayed.

The operation of business during the composition proceedings retains the right for continuation under the supervision of trustee, and the trustee has powers to act on behalf of the debtor in relation to the operation of business and preserving assets. Moreover, during the procedure, sufficient time is provided to the debtor to negotiate with the creditors and manage all the liabilities by way of raising funds from other sources.

• Bankruptcy due to Emergency Financial Crisis

As per new amendment of 2019 in the existing Bankruptcy law, if the debtor is unable to pay any debt arising from the inability due to emergency financial crisis, the debtor is not liable to file for the bankruptcy. In the present scenario, the debtor must prove the case before the court that his financial disruption was a result of Emergency Financial Crisis, and the Court is barred from taking any precautionary steps against the debtor’s assets. Moreover, no such application will be entertained from creditor or from a group of creditors against the debtor in situation of Emergency Financial Crisis.

• Ray of Settlement with Creditors

The new amendment of 2019 further provides that if an application is submitted by the debtor for Bankruptcy, the debtor may request to court for settlement with creditors and the time of not more than 40 business days is granted to the debtor to make settlements. The said permission from the court is liable to be published in the newspaper for inviting the creditors for settlement and negotiate within the stipulated time of 20 days from the publication of the said permission. In case the settlement becomes successful with creditors (holding at least two-third of the total debt), it shall be recorded in writing and that settlement will be deemed to be binding upon all other creditors who have not participated in such proceedings subject to the approval from Court.

At NA Lawyers firm, consist team of expert lawyers on bankruptcy disputes which works in direction to save the interest of our clients in such disputes and believe in giving the best possible results. The highly qualified team of lawyers has an extensive experience in the field of Bankruptcy as we have protected our clients from bad debts, verge of liquidations and bankruptcy proceedings by adopting the means of settlements through negotiations and have presented them to protect them from any criminal liability.