Following the 2008 global financial crisis, the UAE has worked diligently to further regulate and support companies in financial difficulties. After a long period of anticipation, the UAE Bankruptcy Law (Federal Law Number 9 of 2016) came into effect on 29 December 2016 (the “Bankruptcy Law”). This legislation has overhauled how the law deals with businesses with debt burdens that they cannot pay. It has mapped out a process for the restructuring of debt owed to creditors, as well as drawing a line between the rights and duties of each party involved in the bankruptcy process.
Following a successful pilot phase of the legislation in action, the Bankruptcy Law has been amended to further refine the process and also expand the scope of application, culminating in Federal Decree-Law No. (23) of 2019 Amending Certain Provisions of the Federal Decree-Law No. (9) of 2016 on Bankruptcy, issued 5th September 2019 and which came into force in January 2020. The Bankruptcy Law applies to all companies established under the UAE Company Commercial Law, including most free zones except for the DIFC and ADGM.
We will review the most prominent and important amendments, as well as their effects for the parties involved in the application of the Bankruptcy Law:
- What we deem the most noteworthy update is Article (4) Paragraph (1) allowing any regulated company to apply to the Financial Restructuring Committee (FRC) to facilitate amicable agreements between the debtor and its creditors, with the assistance of one or more experts appointed by the Committee for this purpose, following the procedures stipulated in the Cabinet’s Resolution. Previously only financial institutions licensed in the UAE that were facing current or projected financial difficulties could apply to the FRC. This amendment now caters for a wider scope of the FRC’s remit and the applicability of the legislation to a broader range of business entities.
- The revision to Article (24) now imposes on trustees the duty to prepare an inventory of the debtor’s known creditors for submission to the Court. The inventory shall additionally include a ‘determination of the creditors, holders of preferential rights and the nature of such rights.’ This is to establish the grading of creditors’ dues as early as possible and determine which creditors have a greater preference.
- The revision of Article (29) allows the Court to appoint one or more controllers from among the creditors who request such appointment, to supervise the implementation of the protective composition procedure. Where there are candidate creditors of ordinary debts, debts secured by a mortgage, or privileged creditors, at least one controller must be appointed for each group. This amendment ensures that creditors can monitor and observe the process applied by the law and ensure that the process is secure and transparent. Also, Article (43) Paragraph (1) stresses a comparable idea as it states that “upon the suggestion of a group of creditors or by the Court’s accord after consulting the trustee, the court may issue a decision to establish one or more committees of creditors who represent different categories of creditors.”
- Amendments to Article (32) paragraph (2) states that “the creditors of the debts secured by a mortgage may exercise their foreclosure rights if their debts are due, upon approval of the court. The court shall decide whether to grant such approval within ten (10) Business days from the date a creditor files an application with the court.”
- Article (45) previously stated only the voting rights of ordinary creditors were of consideration while voting on the draft Protective Composition Plan; this has now been amended to include privileged creditors whose debts have been accepted.
- Furthermore, amendments to Article (46) Paragraph (1) and (2) now allow secured creditors to officially file as a creditor, as well as all other creditors. This amendment increases secured creditors’ options and rights in circumstances of bankruptcy. The amended law states that secured creditors have additional rights to vote on a protective composition to the extent that the money they are owed exceeds the value of the security.
- Article (69) now allows mortgagees to be regarded as creditors when filing, subject to the debt exceeding the value of their security, as it states that (1) the creditor or the group of creditors with a debt of not less than AED 100,000 may apply to the Court to open the procedures and (2) the creditor whose debt is secured by a mortgage shall only submit an application.
- Lastly, point (e) of Article (189) of the revised law now states that debtors’ professional fees incurred under the bankruptcy proceedings, are to be treated as a priority debt, including legal fees incurred as a result of the bankruptcy proceedings. This amendment was made as a consideration to the effort and time-consuming process involved in the resolution of the complicated cases of bankruptcy. Additionally, point (b) and (c) in the same article include outstanding end of service gratuity and alimony debt to also be treated as priority debts.
The amended law has also included several procedural amendments:
- Notices of bankruptcy may now be served electronically;
- Creditor Committee Meeting invitations may now be recorded and made available electronically. Previously, invitations to these meetings could only be issued via publication in two widespread local daily newspapers;
- Amendments to Articles (42) and (103) now allow electronic means to be used to deliberate insolvency plans and vote thereon.
- An amendment to Article (73) states “the debtor may specify whether the application is for the purpose of restructuring, or for the purpose of adjudicating bankruptcy and liquidation. Also, he shall mention the justifications on which the application is based.” This amendment is a useful measure to allow the debtor to establish their intentions early in the proceedings.
In a nutshell, the Bankruptcy Law has been better adapted to the current market conditions through the latest amendments, and further regulates and facilitates the process between debtors and creditors to make the business environment in the UAE more investor-friendly and transparent.
If you need any help in understanding the impact of this law on your business, please contact Dina Assar at email@example.com