New UAE Bankruptcy Law

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New UAE Bankruptcy Law: Concerns and Answers

 The new UAE Federal Decree Law No. 9 of 2016 (the “Bankruptcy Law”) was finally approved by the UAE Cabinet on 4 September 2016. This new Law is expected to put some light on the regulation on how companies should deal with their financial health issues.

To date, the regulation governing the bankruptcy of UAE-based companies was spread through a set of laws, mainly UAE Federal Law No. 5 of 1985 (the “Civil Code”), UAE Federal Law No. 18 of 1993 (the “Commercial Code”), UAE Federal Law No. 8 of 1984 (the “Companies Law”) and UAE Federal Law No. 3 of 1987 (the “Criminal Law”). However, such legal framework does not provide with useful mechanisms that could help out a company to overcome its financial problems.

Due to the lack of such effectiveness, the market was forced to look for alternative remedies to fill up the lack of a proper legal system and satisfy the interest of both creditors and debtors. Those remedies include both extra and judicial actions such as:

• Debtor-Creditor Agreements: by which the parties agree to appoint an expert who would help the parties to reach a settlement agreement;
• Financial Restructurings: big companies with enough turnovers were tended to force the banks to refinance their debts by threatening with failing to pay previous loans in case of denial; while SMEs used to arrange new repayment plants that cut off any investment plan.
• Criminal sanctions: in UAE, companies usually guarantee their payment by means of cheques signed under the name of the creditor. Bouncing a cheque is a criminal action under the Criminal Law, which might have an effect in the way the liquidation procedure takes place.

However, the above-listed mechanisms have not been producing the purported results. In line with that, mainly three concerns have been raised since long ago regarding the reasons for that lack of effectivity: the absence of a specialized institution which could deal with bankruptcy procedures, the absence of well-regulated bankruptcy procedures or the interference of the Criminal Law in such commercial matter.

In that regard, this Article aims to present a general view on how these three main critics have been addressed by the new Bankruptcy Law, as well as explain what can be expected from the new legal scenario.

Financial Restructuring Committee
As per Article 3.1 of the UAE Bankruptcy Law, the UAE Council of Ministers, known as the Cabinet, shall issue a resolution forming the so-called Financial Restructuring Committee (the “Committee”). The Committee’s role is still to be defined in detail through such resolution; however, the Bankruptcy Law has advanced some of the Committee’s functions.

Hence, it is expected that the Committee will deal mainly with two matters. Firstly, the Committee shall oversee the management of the enterprises’ financial restructuring procedures (explained in Section 2) by the assistance of experts in order to facilitate consensual agreements between creditors and debtors.

In addition to that, the Committee shall set up and regulate a registry for the disqualified persons and directors against whom judgments have been issued imposing bankruptcy restrictions and orders. This kind of registry has been demanded for a long time by companies operating in the UAE market that were unable to find out the financial health of the companies they were financing.

Bankruptcy Proceedings
Before the approval of the new Bankruptcy Law, the bankruptcy proceedings were regulated under the Commercial Code and were limited to court-driven proceeding addressed to liquidate companies rather than assist in restructuring their debts.

Contrary to the set of rules contained in the Commercial Code, the Bankruptcy Law provides with two type of proceedings that a company could undergo when dealing with its financial issue. These proceedings, which may be grouped into Preventive Composition Proceedings or Bankruptcy Proceedings, would vary depending on the status of the company.

A. Preventive Composition Proceedings
A debtor may apply for a Preventive Composition Proceeding “if he encounters financial hardship that requires assistance to reach a settlement with his creditors” and if he is not in default of his payment duties for more than 30 days consecutive days.

According to the Article 5 of the Bankruptcy Law, “the purpose of the preventive composition procedure is to assist the debtor to reach settlements with his creditors under a preventive composition scheme, under supervision of the Court” and by the assistance of a trustee.

The Preventive proceedings are handled by a trustee with the assistance of the Debtor and the supervision of the Court. Such proceedings shall conclude with the elaboration of a Preventive Composition Scheme that shall contain the terms and conditions of the debt settlement, which the creditors shall approve.

Being the aim of this procedure to protect the Debtor’s patrimony, the Debtor is prevented from disposing of his patrimony and the creditors shall see their proceedings against the Debtor suspended, unless otherwise is decided by the Court.

B. Bankruptcy Proceedings
The Bankruptcy Proceeding may be filed by (a) the Debtor, if he ceases repayment of his debt on maturity dates for over 30 days consecutive business days; (b) the creditor/s holding an ordinary debt of at least AED 100,000, if the debtor fails to repay the due debt within 30 consecutive business days from the date of being notified; and (c) the Court, upon request from the Public Prosecutor proving that the debtor is in the condition of account receivable.

These procedures governed by the Bankruptcy Law regulate a double scenario depending on the financial health of the company: (i) the Debtor’s restructuring, if possible, by assisting him to apply the business restructuring scheme; and (ii) the Debtor’s declaration of bankruptcy, by assisting in proceeding with a fair liquidation of properties to discharge his obligations.

•The Debtor’s restructuring procedure is, as the Preventive Composition Proceedings, handled by a trustee with the assistance of the Debtor and the supervision of the Court. Such proceeding shall conclude with the elaboration of a Restructuring Scheme within 3 months that shall contain the terms and conditions of the debt settlement, which will be voted by the creditors.
•The Debtor’s declaration of bankruptcy shall take place via judgment when a settlement of the debts could not be reached regardless of the reason. Upon issuance of the judgment, the creditors shall file their claim within 10 business days or otherwise such claims will be discarded.

The bankruptcy proceeding will also be handled by a trustee appointed by Court, who will audit and liquidate the Debtor’s assets that do not fall under the protect assets provisions contained within Article 132 of the Bankruptcy Law.

Having liquidated the assets, the trustee shall distribute the liquidation revenues based on priorities among creditors as per the provision of the Law. Pursuant to the Chapter 6 of Section 5 of the Bankruptcy Law, the priority payments shall be as follows:

I. Trustee’s expenses in the procedures of selling the guarantees properties;
II. Creditors holding guaranteed debts;
III. Judicial, expert or trustee’s fees or expenses;
IV. Labor entitlements of employees;
V. Debts of maintenance paid by the Debtor as per a competent court’s judgment

C. Criminal Sanctions

Despite the numerous claims for the criminal sanctions to be removed from the bankruptcy proceeding, those are still a type of sanctioning tools that UAE Courts may impose. Hence, the Bankruptcy Law’s Section 6 of Chapter 7 sets out a set of scenarios in which an imprisonment sentence can be imposed on the board of directors, managers, liquidators, trustee or expert when their actions cause damage to the Debtor’s patrimony in the detriment of the creditors.  The length of these imprisonment sentences may range between 1 to 5 years.

 

Written by Carlos Marcos

Associate/United Advocates

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