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New Bankruptcy Law in the UAE

Guiding Principle
After several years of scrutiny by a series of committees, the UAE’s Cabinet approved the new law on September 4, 2016. Upon receiving the President’s signature, the law will be published in the UAE’s official legal gazette, coming into effect three months later. Therefore, it may come into effect as early as the first quarter of 2017.

Previously, business owners and managers could be criminally penalized for business failure. This possibly included jail terms. It resulted in many people actually fleeing the UAE and leaving debts and unpaid loans in their wake.

There were in fact already previously many articles in UAE laws that dealt with issues of insolvency in the UAE, but they were better suited to smaller companies.

The new law now provides a comprehensive legal framework to help distressed companies in the UAE to avoid bankruptcy and liquidation. The law seeks to safeguard the rights of both creditors and debtors in insolvency situations, including measures that prioritize secured creditor rights and enable companies to restructure without unanimous creditor approval.

The law applies to companies established under the Commercial Companies Law, companies that are fully or in part owned by the federal or the local government, and companies and institutions established in free zones that are not governed by existing bankruptcy provisions. The new law does not apply to companies registered in the DIFC and the Abu Dhabi Global Market, as both financial free zones have their own internal legislation covering insolvency and bankruptcy. The new law contains provisions related to senior employees and directors of insolvent companies, but does not cover private individuals. It also applies to companies rather than individuals as the government is drafting additional legislation to cover personal insolvency over the next 12 months.

Under the existing regulations it is difficult to liquidate companies; individuals can face criminal action if they default on debts, causing expatriates to flee the Middle East’s business hub rather than face prison.

The law will be overseen by a new regulatory body, the committee of financial restructuring, which will receive applications from troubled companies looking for protection, as well as creditors seeking to enforce debt repayments after 30 days of non-payment.

The new law sets out four broad pathways for insolvent companies to avoid bankruptcy:

  1. Financial reorganization, an initial solution available to financial entities regulated by the Central Bank and/or the Securities and Commodities Authority;
  2. A pre-emptive settlement, overseen by the courts, which allows a bona fide debtor to agree a settlement with creditors, which will be nullified if the debtor fails to abide by the settlement terms agreed;
  3. Financial restructuring, whereby the company’s debts are restructured to the satisfaction of a majority of creditors holding at least two-thirds of the outstanding debt, in a process overseen by the courts;
  4. The raising of new funds, according to criteria determined by the courts.

It is widely believed that this change will make business in the UAE an even more attractive proposition for investors eyeing the region as a base. It is also expected that it will bolster the confidence of businesses already trading in the country.

January, 2017 Tarek Jairwdeh
Meyer-Reumann & Partners, Dubai Office
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