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Practical Aspects of the New Bankruptcy Law

Dr. Michael Krämer

Author: Dr. Michael Krämer
Senior Lawyer.

Guiding Principle
On 29 December, 2016, Federal Decree Law No. 9 of 2016 (“New Bankruptcy Law”) has come into force. This article will provide you with an overview.

A. Previous Situation
Up until the coming into force of the New Bankruptcy Law, insolvency proceedings in the UAE were dealt with by the Fifth Book of Federal Law No. 18 of 1993 (“Commercial Transactions Law”). The New Bankruptcy Law now repeals these provisions, as well as certain provisions in Federal Law No. 3 of 1987 (“Penal Code”).
The insolvency related provisions in the Commercial Transactions Law have long been deemed outdated as they were, for example, focusing mainly on individual traders. The insolvency of corporate entities was dealt with too, but more or less just as an exception to the rule. As a matter of fact, the insolvency procedures under the Commercial Transactions Law were rarely applied in court. One reason may well have been that the costs associated with filing for the bankruptcy of a debtor deterred most creditors from pursuing such action. Taking the comparatively high costs of court proceedings in the UAE into account, there was simply not much reason to pay such fees if doing so does not necessarily lead to an improvement of the applicant’s financial position. It will be interesting to see if the New Bankruptcy Law will find broader acceptance.

B. The New Bankruptcy Law
   1. Scope
The scope of debtors to which the New Bankruptcy Law applies, is broader than that to which the Commercial Transactions Law used to apply. While the Commercial Transactions Law applied to “commercial traders”, the New Bankruptcy Law more specifically applies to all commercial entities governed by Federal Law No. 2 of 2015 (“Commercial Companies Law”), companies in most free zones (except DIFC and ADGM), general traders and even civil companies conducting professional business.

   2. Procedures
The New Bankruptcy Law describes mainly three different scenarios for businesses that face financial difficulties:
• Preventive composition;
• Insolvency with restructuring; and
• Insolvency with liquidation.

      a) Preventive Composition
The preventive composition is a debtor initiated, court-sponsored process, designed to assist businesses that are facing financial difficulties, but are not yet insolvent.
Creditors are not allowed to initiate such preventive composition. Only the debtor may apply, in order to assist the debtor with finding a settlement with its creditors.
The preventive composition procedure (“PCP”) is open to businesses who are either in a state of over indebtedness or have ceased payments for not less than 30 consecutive business days. Certain documents will have to be submitted to the court, together with the application for preventive composition. Following such application, the court will appoint an expert to prepare a report on the financial condition of the debtor applicant, determining whether the conditions are met for PCP to commence, and whether or not the debtor has sufficient funds to cover the cost of the PCP process. Once approved, the PCP will be announced publicly and creditors will be invited to submit proofs of their claims against the debtor. From this point onwards, a moratorium on creditor actions will immediately apply, thus protecting the debtor from claims that may worsen its financial position further.
During the PCP, the debtor will keep managing the business, albeit under supervision of a court appointed trustee, who is given wide-ranging powers to ensure that the debtor’s assets are being preserved.
The next step is then for the debtor to devise a restructuring plan for the business. Such plan will need to be initially approved by the court, following which it will be presented to the creditors. The restructuring plan is approved if creditors representing not less than two thirds of the total outstanding debt vote in favour of such plan. Creditors who did not approve the restructuring plan will be bound by it anyway, if the required two third majority approved the plan.
The debtor will be given a maximum of three years to implement the restructuring plan. Once all obligations contained in that plan have been discharged, the court, at the request of the trustee, the debtor or any interested third party, will publicise its decision, following which the protections of the PCP will cease to apply and the debtor is expected to continue normal business procedures.

      b) Insolvency with restructuring
This process is designed for businesses that are technically insolvent, but show sufficient promise to be rescued.
The process is quite similar to the PCP, but with certain key differences:
• While the PCP can only be applied for by the debtor, also creditors holding an ordinary debt of not less than AED 100,000 may apply for the insolvency of the debtor;
• Once the insolvency filing has been accepted by the court, the debtor’s business will be managed by a court appointed trustee, as opposed to the debtor itself (under supervision of the trustee) as during the PCP; and
• The trustee will produce a report, proposing whether the debtor’s business is worth rescuing and a restructuring plan should be prepared, whether it is in the best interest of the creditors if the debtor’s business is being sold as a whole or whether the debtor should be sent into liquidation.

      c) Insolvency with liquidation
In cases where neither PCP nor a restructuring plan are approved or where they are terminated, or if the debtor is acting in bad faith to evade its financial obligations, the court will order the insolvent winding up of the debtor.

C. Conclusion and Outlook
The New Bankruptcy Law is certainly a welcome modernisation of the Fifth Book of the Commercial Transactions Law. As mentioned above, however, the insolvency related provisions in the Commercial Transactions Law have hardly ever been tested. In our view, the main reason was that it did not seem to make much sense for a creditor to spend a substantial amount of money on court and legal fees just to apply for the insolvency of one of its debtors. Instead, such money would have been better spent on either finding an out of court solution or, if litigation could not be avoided, on claiming the total amount due to the creditor, as opposed to just a fraction, which the creditor would receive at most and only after the debtor has been declared insolvent.
Does this change with the New Bankruptcy Law? That certainly remains to be seen once the first attempts to test the New Bankruptcy Law have commenced. However, Art. 76 of the New Bankruptcy Law appears to limit the amount a creditor will have to spend on having its debtor declared insolvent to a maximum of AED 20,000 (presumably plus lawyers’ fees). The Fifth Book of the Commercial Transactions Law did not feature a comparable cap.
The UAE appears to have its fair share of commercial entities, which, despite being technically insolvent, keep trading. This poses a risk to commerce as such and should be fought. We will see if the New Bankruptcy Law will be capable of achieving this. It certainly does offer novel and welcome regulations, which would be useful not only to reduce the number of technically insolvent entities that keep trading, but also to offer those traders who do face financial difficulties a chance to achieve a turn-around of their fortunes.

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