The New UAE Bankruptcy Law: An Overview
On October 31, 2023, the United Arab Emirates (UAE) published Federal Decree Law No. (51) Regarding Financial Restructuring and Bankruptcy in its Official Gazette, with the law having taken effect on May 1, 2024. This new legislation supersedes Federal Decree Law No. 9 of 2016 on Bankruptcy, marking a significant evolution in the country's legal framework for financial restructuring and bankruptcy.
Federal Decree Law No. (51) of 2023 introduces several key updates aimed at enhancing the success rate of financial restructurings in the UAE. While it retains some elements of its predecessor, the new law is designed to address the complexities of modern financial challenges more effectively. It is important to note that, similar to the previous legislation, the new bankruptcy law does not apply to entities within the Abu Dhabi Global Market (ADGM) or the Dubai International Financial Centre (DIFC). These free zones continue to operate under their distinct insolvency regimes, providing tailored solutions suited to their unique business environments.
Below-mentioned are the key highlights and the provisions of this legislation:
Creation of the Bankruptcy Administration
Under the current local and federal legal system, this law creates a special court known as the "Bankruptcy Court" and a devoted "Bankruptcy Administration." Under the direction of a judge and with the help of an adequate staff, the Bankruptcy Administration manages routine processes and helps the court decide cases. The filing of applications, as well as the holding of meetings and hearings before the Bankruptcy Administration and the court, can all be started electronically.
Introducing Preventive Restructuring and Settlement Processes
Rather than going straight to bankruptcy and liquidation, businesses or merchants now have two other options:
Preventive Settlement Procedures
Through these methods, a merchant or debtor corporation can offer a settlement to creditors either before or after they enter a state of default. This settlement, if accepted by the majority of creditors, will bind all creditors and grant a six-month moratorium, during which time all enforcement efforts against the debtor will be suspended.
Restructuring Procedures
In the event of a default or financial insolvency, debtors may choose to undergo restructuring. While a debt restructuring plan is being developed, the court may decide to appoint a trustee for prudent management, or it may permit the debtor to carry on running its company. This plan could entail selling off assets or finding new funding, and it would halt all legal actions until the plan is approved or the court rules that the restructuring was failed.
Liquidation Plan
Subject to creditor approval, the trustee creates a liquidation plan with the goal of maximizing the value recovered from the bankruptcy estate. Interestingly, the law allows debtor assets to be sold as a going concern, guaranteeing that future investment returns are factored into the asset assessment.
Preventive Settlement Mechanism
It is now possible for debtors and creditors to reach a preventive settlement under judicial supervision. By using this method, debtors can keep running their businesses while paying off debts gradually by agreeing to accept lower payments from creditors. After the settlement is finalized, the debtor is released from bankruptcy and allows them to resume their unrestricted commercial operations since they are completely dismissed from any residual debts.
Enhancing the Role of Trustees
The new law places significant emphasis on the role of trustees in the bankruptcy process. Trustees are responsible for managing the debtor's assets, ensuring that creditors' claims are addressed fairly, and implementing the court-approved restructuring or liquidation plans. This enhancement aims to provide a more structured and efficient approach to bankruptcy proceedings.
Legal Protection for Creditors
The new law includes provisions to protect the rights of creditors during the bankruptcy process. This includes ensuring transparency in the debtor's financial dealings and providing mechanisms for creditors to participate in and influence the restructuring or liquidation plans. These provisions are designed to build trust in the bankruptcy process and encourage more active participation from creditors.
Promoting Business Continuity
A key objective of the new law is to promote business continuity wherever possible. By providing mechanisms for restructuring and preventive settlements, the law aims to keep businesses operational and preserve jobs, which is crucial for the economic stability of the UAE. This focus on continuity is a significant shift from previous approaches that often led to liquidation and business closures.
Conclusion
The new Financial Restructuring and Bankruptcy Law represents a significant advancement in the UAE's legal framework for handling financial distress and insolvency. By offering more efficient financial restructuring options, the law seeks to promote sustainable business practices and enhance market confidence in the UAE.
Originally published on June 14, 2024
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