The long-awaited UAE Federal Bankruptcy Law (the New Law) is expected to take effect on 29 December 2016. The reforms aim to modernise the largely untested existing bankruptcy legislation in a manner suitable to the economic and business landscape of a fast-developing country like the UAE. The move is away from the stigma of bankruptcy and business failure to rescue and rehabilitation.

The New Law repeals certain existing insolvency regimes and insolvency-related criminal offences and expands the protective composition and bankruptcy procedures into three new key procedures for certain companies in financial difficulties:

  • Protective Composition. This is a court-driven procedure attractive to a debtor in financial difficulties but not yet insolvent and who wishes to come to an arrangement with its creditors outside of a formal bankruptcy procedure.
  • Restructuring Scheme. This is a restructuring process for insolvent debtors but where the court decides that the business is capable of rescue.
  • Liquidation. This is an insolvent winding-up where a protective composition or restructuring scheme is not appropriate, not approved or terminated, or the debtor acts in bad faith to evade its financial obligations.

The legal position in the UAE historically has provided limited options to creditors and debtors in distress. The New Law is a welcome development, providing promising tools for the implementation and development of a modern insolvency framework in line with international best practice within which debtors and creditors can seek effective restructuring solutions.

We have set out below a table detailing the key features of the new procedures and some key developments that distinguish the New Law from existing legislation.

Scope of application

Existing bankruptcy legislation in the UAE applies to “traders” only. The scope of the New Law is wider and it applies to companies governed by the provisions of the Commercial Companies Law (CCL), most free zone companies (other than free zone companies incorporated in free zones which have their own insolvency laws e.g. DIFC and ADGM), sole establishments and civil companies conducting a professional business.

Government-owned companies not established pursuant to the CCL (e.g. decree companies which are formed by Emiri Decree) may expressly choose to opt into the New Law by providing for this in their constitutions.

Out-of-court restructurings

A previous draft of the New Law mentioned an out-of-court private restructuring procedure applicable to entities that have not yet become insolvent with the aim of facilitating a consensual settlement. The New Law has not taken this concept forward and only allows for a court-driven restructuring process. However, it remains to be seen whether, if the procedures introduced by the New Law are successful, such a private out-of-court process may be introduced in due course to further develop the law.

Financial Restructuring Committee

The New Law introduces a Financial Restructuring Committee (the Committee) to be formed by cabinet resolution under the authority of the Minister of Finance. The Committee is to be tasked with overseeing the management of the restructuring procedures of licensed financial institutions to facilitate consensual restructuring arrangements between a debtor and its creditors on conditions set out in the cabinet resolution. It is unclear whether this aims at some sort of restructuring framework for insolvent financial institutions, and, if so, how this will relate to the existing provisions which apply to the liquidation of banks and financial institutions.

The Committee is also to maintain a register of insolvencies, provide sign-off on expert fees and maintain an approved list of insolvency experts assisting the courts.

Insolvency tests

Existing legislation provides for a cash flow insolvency test only. The New Law introduces an additional balance sheet test, where the debtor’s assets are insufficient to cover the debtor’s current liabilities.

Threshold/Demand

Under existing law, any creditor could apply to the court to have a trader declared bankrupt where such trader has not paid its debts for more than 30 days, regardless of the amount owed. The New Law provides that before commencing proceedings a creditor (or a group of creditors) should (i) hold claims against the company in a minimum amount of AED 100,000 and (ii) have requested the debtor in writing to discharge the debt and have provided a 30 business day period from the date of such request.

Bankruptcy by default

Under existing law a trader would have committed the criminal offence of bankruptcy by default if it had suspended payment for more than 30 days and failed to file for bankruptcy within such time. The New Law has decriminalised the offence of “bankruptcy by default”. Note that a debtor who fails to repay debts due for over 30 business days, or which is balance sheet insolvent, is still required to initiate insolvency procedures and failure to do so will be dealt with within the regime of the New Law.

Dishonoured cheques

Under the New Law, criminal proceedings in connection with dishonoured cheques issued by the debtor are to be stayed once a Protective Composition or a Restructuring Scheme has been initiated, provided the relevant dishonoured cheque was issued prior to the application for such Protective Composition or commencement of the Restructuring Scheme. The stay applies until the relevant procedure is completed and the holder of the cheque is treated in the same manner as a debtor’s pool of creditors and will be subject to settlement in accordance with the applicable procedure.

In a Liquidation, the New Law provides for various situations where directors and management remain exposed to criminal liability in connection with any criminal or fraudulent acts, conviction for which may result in imprisonment and the payment of fines.

The table below sets out a high level overview of the key features relating to the Protective Composition, Restructuring Scheme and Liquidation procedures.

Key points

Protective Composition

Bankruptcy (both Restructuring Scheme and Liquidation)

Restructuring Scheme (further detail if not already addressed under “Bankruptcy”)

Liquidation (further detail if not already addressed under “Bankruptcy”)

Process type Court process Court process
Solvency Solvent Insolvent
Solvency test The debtor shall not have ceased payment of due debts for more than 30 consecutive business days due to financial difficulties or where the debtor’s assets are insufficient to cover due liabilities at any time The debtor has ceased payment of due debts for over 30 consecutive business days due to financial difficulties or where the debtor’s assets are insufficient to cover due liabilities at any time
Purpose Rescue Depending on whether the court decides to implement the Restructuring Scheme or Liquidation, either rescue or liquidation Rescue Insolvent winding up
Who can file? Debtor Debtor, creditor(s) or Public Prosecutor The court in its discretion, within the Bankruptcy process The court in its discretion, within the Bankruptcy process
Moratorium Moratorium applies, although secured creditors can enforce security with permission of the court Moratorium applies, although secured creditors can enforce security with permission of the court N/A
Secured creditors Bound if they expressly voted in favour of the Protective Composition and waived their security rights Bound if they expressly voted in favour of the Restructuring Scheme and waived their security rights N/A
Creditor approval Majority in number and 2/3 by value of the unsecured creditors Once approved, binding on non-consenting unsecured creditors Majority in number and 2/3 by value of the unsecured creditors Once approved, binding on non-consenting unsecured creditors N/A
New financing Ability to raise new secured financing with priority over existing unsecured debt but with safeguards for existing secured debt Ability to raise new secured financing with priority over existing unsecured debt but with safeguards for existing secured debt N/A
Performance of obligations & contracts Prevention of insolvency related contractual termination by debtor’s counterparties Prevention of insolvencyrelated contractual termination by debtor’s counterparties N/A
Implementation deadline 3 years (may be extended for another 3 years with majority creditor approval) 5 years (may be extended for another 3 years with majority creditor approval) N/A
Procedure Art. 5 - 66 of the New Law Art. 67 - 98 of the New Law Art. 98 - 123 of the New Law Art. 124 – 151 of the New Law