United Arab Emirates: Guidelines On UAE Insolvency Law

Throughout the United Arab Emirates ("UAE"), a common frustration exists with insolvencies due to its time-consuming nature and significantly low recovery rates, which stemmed from the outdated governance of insolvency under Volume 5 of the Federal Law No. 18 of 1993 on Commercial Transactions. Under these vague provisions, it was an offence for a company to fail to petition for bankruptcy within 30 days of the date of suspension of payment of its debts, and criminal proceedings could be taken against the directors of a company for failing to initiate and apply for corporate bankruptcy.

However, the relatively new Federal Law No. 9 of 2016 on Bankruptcy (the "Bankruptcy Law") has shed light on the treatment of companies in the UAE facing financial difficulties, and brings a certain level of clarity to the processes available to such companies. The provisions outlined in the Bankruptcy Law reflects an in-depth analysis of the insolvency process in multiple jurisdictions and therefore offers a relatively comprehensive guide to companies facing financial difficulties in the UAE. It is worthy to mention that the processes outlined by the Bankruptcy Law does not apply to individuals, but rather to companies and institutions that are established in mainland UAE and free zones that are not governed by existing bankruptcy provisions. It therefore does not apply to companies established and operating within the Dubai International Financial Centre and Abu Dhabi Global Market as these financial free zones have internal legislation in place regarding bankruptcy and insolvency.

The Bankruptcy Law introduces several detailed processes to address financial distress, all of which incentivize small and medium enterprises to be more proactive with their debt restructuring process. Specifically, it provides that a company is required to initiate the bankruptcy process after 30 consecutive working days from it either being unable to pay its debts when they mature, or being balance sheet insolvent. However, there is no longer a specific offence for failure to file for bankruptcy within the aforementioned timeframe under the Bankruptcy Law. In addition, it has been clarified that the onus falls on the company's shareholders to decide, by way of extraordinary resolution, whether to commence with a business restructuring or bankruptcy process.

Accordingly, this article shall outline the stages of the process to be pursued by UAE based companiesfacing financial difficulties whilst filing for bankruptcy, which is initiated by the debtor's submission of an application declaring bankruptcy. This article then addresses the process by which a trustee and controller is appointed by the Insolvency Courts, and then outlines the options of restructuring or liquidating the company pursuant to the recommendation of the competent jurisdiction.

I) Stage One: Submission of application declaring bankruptcy

In order to initiate judicial bankruptcy, the company (the "Debtor") will first be required to submit an application along with supporting documents before the Insolvency Court (the "Court"). The Court will examine the application on a prima facie basis and will decide whether to accept or reject the application.

The required supporting documentation to be prepared and submitted by the Debtor are as follows: -

  1. a memorandum containing a brief description of the economic and financial position of the Debtor, information about its assets, and a detailed disclosure its employees;
  2. a certified copy of the commercial, industrial or professional license and the commercial register issued by the competent authority within the UAE;
  3. a copy of the commercial books or financial statements relating to the Debtor's business for the fiscal year preceding the submission of the application;
  4. a report containing the following: -

    1. the cash flow forecasts and the profit and loss forecasts for the period of twelve (12) months following the submission of the application;
    2. a statement of the names of known creditors and debtors, their addresses, the amount of their rights or their debts and securities provided to them, if any;
    3. a detailed statement of the movable and immovable assets, the approximate value of each of such assets at the date of submission of the application, and any securities or rights of others arising therefrom.
  5. nomination of a trustee in order to take the proceedings in accordance with the provisions of the applicable UAE laws;
  6. a copy of the decision of the competent authority within the Debtor company authorizing the applicant to submit an application for initiating the proceedings,
  7. a copy of the Debtor's corporate documents and any amendments thereto which are deposited with the competent authority in the UAE;
  8. any other documents supporting the application which the Debtor believes to be relevant to its application; and
  9. a report issued by the authority concerned with credit information in the UAE.

Should the Debtor fail to provide any of the above documents, it will be required to disclose the reason for its non-submission in the application. Furthermore, should the Court find the documentation submitted insufficient for its decision-making, it may grant the Debtor an extension to furnish additional data and/or documentation.

The Court may then decide to appoint one of the experts enrolled with the Roster of Experts to render a report on the financial status of the Debtor. The report should be comprehensive and include its opinion on the possibility of restructuring the Debtor's debts, and to address whether or not the Debtor's assets are sufficient to cover the costs of the restructuring process. If the Court fails to find the person having the required experience to assist it in evaluating the Debtor's financial status, it may decide to appoint any expert other than those enrolled with its Roster. The Court shall also determine the scope of work, fees, and the period whereby the export is required to render its report (which should not exceed ten (10) working days from the date of the decision of appointment).

A decision shall be rendered by the Court within either five (5) working days from either the date of submitting the application, or the date of its receipt of the expert's report.

If the Court decides that the application is complete and meets the necessary conditions as per the applicable UAE laws, the Court will initiate the proceedings for bankruptcy – otherwise, it shall be rejected. This decision is highly subject to the discretionary power of the competent Courts. In case of rejection, both parties (the creditor and the debtor) may exercise their right to appeal the Court's decisions or judgments issued in relation to the acceptance or rejection of the insolvency application.

II) Stage Two: Appointment of Trustee and Controller

Should the application be accepted by the Court, one or more trustee(s) will be appointed, and the trustee will either be one of the experts or any other individual as deemed fit by the Court. The trustee will be required to determine the desired mechanism to proceed with the bankruptcy proceedings, and will mutually agree on the appointment of a controller.

The Court shall notify the trustee of his appointment decision on the day following the issuance of the appointment decision, and shall provide the trustee with all the information available about the Debtor.

Within five (5) working days of the trustee's appointment, he shall: -

  1. publish a summary of the decision initiating the proceedings in two local newspapers in both Arabic and English, provided that the publication includes summons to the creditors to file their claims and supporting documents within twenty (20) working days from the date of publication; and
  2. notify all the creditors whose addresses are known to provide their claims and documents within twenty (20) working days from the date of publication.

The Debtor is required to provide the trustee with any additional details which were not reported to the Court including but not limited to information about its creditors, debt amounts, details of any contracts under implementation, and any pending or ongoing legal proceedings to which it is a party.

Thereafter, the trustee shall provide a list of the creditors who have filed their claims, a statement of the amount of each debt separately, the supporting documents and its securities (if any), his opinion on accepting, modifying or rejecting the same, and his proposals on the payment method, if possible.

The trustee shall submit such list to the Court within ten (10) working days from the expiry date of the time limit specified for the creditors to file their claims. This time limit may, if necessary, be extended once for a similar period through a Court order. This list shall then be published in two local newspapers in both Arabic and English within three (3) working days from its submission to the Court. Both the Debtor and any creditor(s) may exercise their right to object to the Court within seven (7) days from publication, and the Court shall decide on the objection within ten (10) days the date of filing.

Any debts owed to the government as taxes or outstanding fees shall be construed as acceptable debts that shall not require auditing by the trustee.

The trustee's findings shall be compiled in a report to the Court and shall provide his recommendation on either:-

  1. the possibility of restructuring the Debtor's business, and whether it is required to submit a restructuring scheme to the Debtor's creditors. Should the scheme be submitted to creditors, it must be accompanied by a statement indicating the Debtor's readiness to continue its business; or
  2. the possibility of selling the Debtor's business in whole or in part as an "existing and practiced activity" in the case of bankruptcy and liquidation of its assets.

The Court shall review the report submitted within ten (10) days and shall order the trustee to summon the Debtor, the creditors, and any appointed controller to attend one or more meetings to discuss the report.

A decision shall be promulgated by the Court on whether the Debtor should proceed with either restructuring its business subject to the courts approval or declare its bankruptcy.

If the Court issues a decision initiating the restructuring proceedings, the appointed trustee shall prepare and develop the restructuring scheme, with the assistance of the Debtor, within a period not exceeding three (3) months from the date of the decision. The Court may extend this period at the request of the trustee for an aggregate period of three (3) additional months. Updates regarding the restructuring scheme must be provided to the Court every twenty (21) working days.

The restructuring scheme must be capable of implementation within a maximum period of five (5) years, which is subject to extension and must address the following: -

  • the extent to which the Debtor's business might re-achieve profits;
  • the activities which are to be suspended or terminated;
  • the terms and conditions of the settlement of any obligations;
  • performance bonds to be provided by the Debtor (if any);
  • purchase offers pertaining to all or part of the Debtor's assets (if any);
  • grace periods and payment discounts;
  • the possibility of converting the debt into shares in the capital of any project;
  • the possibility of consolidating, creating, redeeming, selling, or substituting any securities to implement the draft scheme (if necessary);
  • proposing a period(s) for repaying the whole debt.

III) Stage Three: Bankruptcy and Liquidation

The Court shall deliver a judgment declaring the Debtor's bankruptcy and ordering the liquidation of its assets in various cases, including but not limited to:-

  1. if the Court adjudges to terminate the composition proceedings in accordance with the provisions of the applicable UAE laws;
  2. if the Debtor is the applicant and acts in bad faith or the application is intended for procrastination or evasion of financial obligations;
  3. if the restructuring proceedings are inappropriate for the Debtor, based on either the data and documents submitted with the application, or due to the impossibility of restructuring as per the report prepared by either the expert or the trustee;
  4. if the Court decides to reject the scheme of restructuring in accordance with the relevant UAE laws; or
  5. if the Court renders a judgment nullifying the proceedings or annulling the restructuring scheme pursuant to any applicable UAE laws.

If the Court rules to initiate the proceedings of declaration of the Debtor's bankruptcy and liquidation of its assets, it shall appoint, in its judgment, a trustee to initiate the required proceedings. Within three (3) working days from the date of the judgment, the trustee is obliged to publish the Court judgment declaring the Debtor's bankruptcy and liquidation in two local newspapers in both Arabic and English. The creditors shall then have ten (10) working days to file their unclaimed debts.

Note that it is permissible for the Debtor, subject to the Court's approval, to practice its business under the supervision of the trustee for a period of six (6) months until the business is sold.

Upon issuance of a court judgment declaring the Debtor's bankruptcy and liquidation of its assets, the maturity of all debts due from the Debtor, whether ordinary or preferential, shall be extinguished. It is worthy to note that the Court may deduct from certain deferred debts an amount equivalent to the legal interest for the period starting from the date of the Court's judgment initiating the bankruptcy proceedings to the date of maturity. Moreover, any debts owned by the Debtor in foreign currency shall be converted to the local currency (Arab Emirates Dirham) at the time of the issuance of the bankruptcy judgment.

The distribution of liquidation proceeds to the relevant creditors shall take place by the trustee in a pari passu manner and pursuant to the Court's approval. It is worthy to mention that the trustee may distribute the liquidation proceeds after each sale or after the accumulation of funds generated by the total sales and submit a distribution list to the Court for approval.

Whilst distributing the proceeds of the liquidation, the trustee should take the following into account: -

  1. Any court fees or costs or any fees or expenses of any trustee to be appointed in accordance with the provisions of the applicable UAE law and any expenses incurred during the relevant proceedings or transactions.
  2. Any fees, expenses or costs incurred after the issuance of the decision initiating the proceedings for the purpose of providing the Debtor with goods and services, or the continuation of the performance of any contract in consonance with the applicable UAE law, to the extent that such fees, costs and expenses achieve benefits for Debtor's business or assets.
  3. Any new unsecured financing obtained in accordance with the provisions of the applicable UAE law, including the amount of the original debt, and unpaid related interests and expenses. This shall apply if the value of the security granted to the new financing is not sufficient to pay all due amounts to pay such financing.
  4. The creditor shall receive his share of the proceeds in the place where the trustee performs his mission, unless otherwise agreed upon between the trustee and the creditor.
  5. Portions of the debts which have not been finally accepted and those to which objections are filed in accordance with the provisions of the Bankruptcy Law shall be set aside and deposited in the Court Treasury until they are finally decided upon.
  6. The secured preferential creditor shall be paid the proceeds arising from the sale of the assets securing the debt. Should the value of the encumbered assets is not sufficient to pay off the entire secured or preferential debt, the outstanding debt that remains unpaid shall rank as an ordinary debt.
  7. The trustee shall deliver the Debtor any surplus of the liquidation proceeds after fulfilling all his liabilities.
  8. After completion of the final distribution of the Debtor's assets to the creditors, the Court shall issue a decision closing all proceedings, which shall contain a list of creditors whose debts are accepted, the amount thereof and the unpaid debt, and shall order the trustee to publish such decision in two local widely circulated daily newspapers, one published in Arabic and the other in English.
  9. The trustee shall return all the documents in his custody to the Debtor after the completion of the proceedings and his mission.
  10. The proceedings of declaration of bankruptcy and liquidation of assets may be terminated at the request of the Debtor at any time if the reasons leading to the declaration of the Debtor's bankruptcy and liquidation of his assets disappear.
  11. After closing the proceedings of declaration of the Debtor's bankruptcy and liquidation of his assets, each creditor whose debt is accepted and not fully paid shall be entitled to execute on the Debtor's assets to obtain the outstanding debt. Acceptance of the debt referred to section (1) shall be deemed as a final judgment with respect to such execution.

Due to the comprehensive nature of the Bankruptcy Law, no supporting Executive Orders and Regulations clarifying its implementation have been issued so far. The Bankruptcy Law significantly improves the old insolvency regime under the Federal Law No. 18 of 1993 on Commercial Transactions, and gives companies an opportunity to redeem their financial status within the UAE, which in turn provides for a more business friendly environment and allows for a more sustainable economy. However, it will take time for shareholders of UAE companies to fully understand the implementation of the law in practice , and until multiple applications are filed, the practical effects and effectiveness of the various processes outlined in the Bankruptcy Law can only be analyzed theoretically.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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