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Insolvency procedures

Procedures
What are the main insolvency procedures applicable to companies in your jurisdiction?

  • Liquidation
  • Bankruptcy
  • Judicial composition
  • Protective composition

Liquidation – Typically commenced by shareholder consent and can be either a solvent or insolvent proceeding. A liquidator is appointed to realise the company’s assets and distribute the proceeds to the company’s creditors and any surplus to its shareholders.

Bankruptcy – The company, creditors, the public prosecutor and the court on its own motion can petition for the bankruptcy of a company. The court will find a company bankrupt if it:

  • is unable to pay its debts
  • has ceased paying its debts
  • has closed its place of business
  • has acted to the detriment of its creditors

A trustee in bankruptcy is appointed to realise the company’s assets and distribute the proceeds to the company’s creditors.

Judicial composition – A company in financial distress can propose a contractual rescheduling or compromise of its debt to its creditors. The composition is binding on the company and all unsecured creditors if it is approved by the court and a majority of the company’s creditors. The court appoints a composition trustee to oversee the implementation of the composition. A judicial composition is only available if the company acts in good faith.

Protective composition – Where a bankruptcy petition is presented against a company, it can the company:

  • has a commercial registration
  • is financially distressed
  • acts in good faith

The court appoints a composition trustee who proposes a contractual rescheduling of debt to the company’s creditors. The composition is binding on the company and all unsecured creditors if it is approved by the court and a majority of the company’s creditors.

Moratorium
Can a company obtain a moratorium whilst it prepares a restructuring plan?

No.

Directors
To what extent do the directors of the company remain in control of its affairs during any of the above procedures?

Liquidation – the liquidator takes day to day charge of the company’s business, however, the directors retain those residual powers not assumed by the liquidator.

Bankruptcy – the directors’ powers cease and the court appoints a trustee in bankruptcy who takes control of the company’s affairs.

Judicial composition – the directors remain in control subject to the supervision of the composition trustee.

Protective composition – the directors remain in control subject to the supervision of the composition trustee.

Timeline to commence liquidation
How quickly can a creditor generally commence the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?

There have been very few liquidations in the UAE, however, typically under the essentially similar law of Dubai an unopposed liquidation can be commenced in six to nine months.

Overseas proceedings
Do your courts recognise insolvency proceedings commenced in the courts of another jurisdiction?

Generally yes, subject to the laws and treaties governing the enforcement of foreign judgments.

Position of creditors

Forms of security
What are the main forms of security over movable and immovable property?

Security is taken over:

  • moveable property by a pledge
  • tangible and intangible business assets by a mortgage
  • land and buildings by a mortgage
  • receivables by an assignment

Preferential status
Which classes of creditor are given preferential status? Are any classes subordinated?

Preferential debts are:

  • taxes and other sums due to the government
  • costs and expenses of the insolvency
  • wages

and they take priority over all other secured and unsecured debts.

Treatment of foreign creditors
Are foreign creditors treated equally to domestic creditors?

Yes.

Termination of contract by reason of insolvency
Are contract terms permitting termination of the contract by reason of insolvency valid?

Yes, the law provides for termination in such circumstances, but no case has yet come before the court.

Retention of title
Are retention of title clauses effective?

Yes.

Setting aside transactions

Transaction avoidance provisions
What are the main transaction avoidance provisions, and who can challenge transactions?

In a bankruptcy the creditors can challenge any transaction that was to the detriment of the creditors as a whole and was entered into at a time when the counterparty was aware of the company’s insolvency.

Position of directors

Risks for directors
What are the risks facing the directors of an insolvent company?

Directors can be held civilly liable to discharge part or all of the company’s debts if:

  • the company is unable to pay at least 20% of its debts
  • they are found criminally liable for:
    • concealment
    • false accounting
    • embezzlement

Directors can be held criminally liable and imprisoned for up to five years for:

  • concealment
  • misappropriation
  • fraud
  • deceit
  • failure to keep proper accounts
  • putting assets beyond the reach of creditors
  • preferring one creditor over others
  • false accounting
  • embezzlement

A director convicted of a crime of dishonesty is liable to disqualification from acting as a director.