The new bankruptcy law of 2016 that repeals the Commercial Transactions Code (CTC) of 1993 has much to offer. Now businessmen will no more have to face arrest or legal prosecution for unpaid debts nor do they have to flee the country to avoid arrest as many had done in the past. The new legislation offers creditors and debtors increased flexibility in dealing with financial distress while ensuring certainty and security for business owners and investors who can rely to some extent on protection for their businesses during a restructuring. It will also enable them to effectively negotiate with their creditors.
Legal experts said the new law primarily involves four new procedures, each of those supervised by the court. These include a 'light touch' rehabilitation process for solvent debtors facing financial difficulties called 'the preventative composition'; a more substantial rehabilitation process for insolvent debtors- the restructuring scheme; an end-of-the-line insolvent liquidation process; and a framework for the financial restructuring of financial institutions.
However, as the new law is applicable only to commercial firms, government- owned companies and individual traders, non-trader individuals who are unable to repay their debts will not get protection from arrest under the law. It is also said that cases of personal bounced cheques will remain subject to the general rules under the UAE Civil Code.
The legislation is applicable to all onshore and freezone companies in the UAE- with the exception of companies in the financial free zones and shall offer protection for employees, share-holders and directors of companies undergoing court-led insolvencies. Also following the implementation of the law, there is no need to set up special tribunals as in the past to deal with the insolvencies of large companies.
Perks of UAE's new bankruptcy law
The new law suspends criminal proceedings on a debtor with dishonored company cheques once a preventative composition or restructuring scheme has been initiated. The provisions in this new law are more flexible and might help to reduce the financial distress by reinforcing the ability to seek new financing. Restructuring debt can be taken into consideration than provoking member of the management to abscond and exit the UAE. The completion of the entire process is to be done in a given specific timeline. The bankruptcy trustees nominated by the debtors are authorized with more power which shall reduce the court's involvement and lead to a smoother and more efficient process.
In case of exploitation of this protection, debtor will be charged under fraudulent insolvency offence.
This procedure is intended to give some time to the debtor facing initial financing difficulties and is intended to be used at the early stages of financial distress. A restructuring process may be commenced by a debtor where it has failed to meet its debts as they have fallen due for a period of more than 30 working days as a result of financial difficulties or where such debtor is balance sheet insolvent.
The process may also be commenced by an unsecured creditor owed a debt of more than Dh100,000 that is more than 30 working days overdue following a formal demand by the creditor.
The court appoints an official or insolvency trustee to manage the debtor or its business by determining the indebtedness of the debtor and monetizing the debtor's assets under the court's supervision. In the case of a court ordering an insolvent liquidation, the debtor (or presumably its board if it is a company) may no longer participate in any commercial activity.
This law aims at recovery and restoration under court's supervision. Though it has some shortfalls, it represents a significant improvement on the existing legal framework.
It is said that the success of the new law will depend on the approach taken by the local courts and the implementation will be critical. A sea change is involved in the treatment methodology of debtors in the new law. Earlier the insolvency regime was untested and scrutinized by practitioners and market participants. According to the World Bank, average of insolvency process in the UAE that results in a recovery for creditors on the dollar takes 3.2 years with a cost to the estate of 20 per cent of the estate which is much more than Singapore or the United Kingdom with figures for recovery of 88.7 and 88.6 cents on the dollar, taking 0.8 and one year, with a cost of four and six percent.
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