Investors from across the world recognise Dubai, UAE for a number of reasons, such as it has the world’s best hard infrastructure, an open economy and lastly has business-friendly policies. However, not all businesses may achieve the desired end result as mounting debts may force the investors to press the pause button in times of crisis. The tag of being bankrupt and the other liabilities that come along with it is not viewed as something desirable for businessmen. However, the UAE’s continued efforts to improve its soft infrastructure such as Bankruptcy Law is designed in such a way that both the defaulters and creditors get the opportunity to end the disputes over debt in a beneficial way. There are some protective measures in the Law applicable to the debtor to reach a settlement with his creditors even before applying for formal bankruptcy.
UAE Bankruptcy Law in a Nutshell
The UAE Federal Bankruptcy Law No.9 of 2016, as amended by Law No.23 of 2019 (the “Bankruptcy Law”) governs all bankruptcies on the federal and local levels in the UAE and is overseen by the Ministry of Finance. It applies to onshore and offshore companies (both trading and professional services), except where there is a specific offshore law that governs bankruptcy (as is the case in DIFC and ADGM, for instance), and to individual merchants (the subject of the bankruptcy being the “Debtor”).
The Bankruptcy Law provides various different options which either the Debtor or its creditors may consider, including protective mechanisms designed to avoid full bankruptcy proceedings. The Bankruptcy Law,
- Allows the companies in distress to have a chance to reorganise their operations to stay viable
- If the opportunity to stay viable is nil, the Law allows the businesses to initiate company liquidation in the UAE
- The UAE Bankruptcy Law allows the defaulting companies a relief from criminal penalties (Previously there were provisions to slap penalties against the directors and officers of the companies in debt)
Who Does the UAE Bankruptcy Law Apply to?
The UAE Bankruptcy Law is applicable to
- The companies set up in the UAE pursuant to the Commercial Companies Law
- Companies owned (partially or wholly) by the UAE government or owned by governments of individual emirates
- Free zone companies except for DIFC and ADGM
- Individuals termed as a trader under Federal Law No. 18 of 1993 relating to commercial transactions
- Civil companies.
How Does the Bankruptcy Process Work in the UAE?
The Bankruptcy Law in the UAE is composed of various options for the debtors and creditors to consider even before formally starting the Bankruptcy procedure.
The debtors and creditors can consider the following provisions included in the UAE Bankruptcy Law:
1. Preventive Composition
The preventative composition is a protective mechanism initiated between the debtor and creditor and is modelled on the French Safeguard procedure. The preventive composition applies to the company that is financially distressed but not yet solvent. In this procedure, the debtor gets a leeway to reach a settlement with its creditors in the initial stages of distress. However, there is a condition: the debtor should not default on any debts for more than 30 days.
The benefit of the preventive composition should be availed by initiating the procedure through the court. The debtor needs to apply to the court for protective composition. The court will appoint a composition trustee to facilitate a settlement plan with the creditors. The settlement plan becomes valid if the creditors approve it by vote.
2. Restructuring Process
The Bankruptcy Law in the UAE allows the companies to have a formal restructuring process in case the preventive composition appears to be not viable. The restructuring process is initiated as a bankruptcy application filed to the court by either the debtor or a creditor who has debts exceeding AED 100,000 which have been due for over 30 days despite sending a written notice.
A court-appointed bankruptcy trustee or other experts will prepare a report on the debtor’s business by assessing the possibility of restructuring the business. The creditors will hold a meeting and put the restructuring plan to vote for approval. All the criminal proceedings against the debtor will be put on hold pending approval of the Restructuring Plan. If the Plan is approved by the court as well as the creditors, then the debtor may get an opportunity to even sell the company as an ongoing concern
3. Bankruptcy
The court will move ahead with the official Bankruptcy of the debtor in case it invalidates the Preventive Composition or Restructuring procedure or terminate a Preventive Composition Plan or Restructuring Plan. The debtor or creditor can also directly approach the court for a formal bankruptcy process without referring to the restructuring process.
The debtor will be allowed by the court to continue the business until bankruptcy is declared. However, the business shall be continued only under the supervision of the bankruptcy trustee appointed by the court. During the bankruptcy, the trustee starts to sell the assets of the company to liquidate the company. The selling of the assets will be carried out under the supervision of the court.
Recommendations from Company Liquidators in Dubai
It is a known fact that no country encourages businesses to initiate bankruptcy proceedings as such extreme measures will in turn have crucial impacts on the economy. However, the UAE Bankruptcy Law is one of the most powerful measures that a creditor finds useful against a defaulter. The Bankruptcy Law in the UAE allows the creditor to force the debtor to expedite the payments or to reach a settlement. Company liquidators in Dubai view the UAE Bankruptcy Laws as a progressive law as it contains many protective measures such as Preventive Composition Plan and Restructuring Plan. However, the companies in financial distress should apply for bankruptcy only it has run out of all the options. To know further about the UAE Bankruptcy Law and its applications and impacts, consult with the best company liquidators in Dubai such as Jitendra Business Consultants (JBC). JBC has years of experience in helping companies set up a business in Dubai as well as assisting them in liquidation.