Timely amendments to UAE Bankruptcy Law introduced to cover emergency situations
On 24 October 2020, the UAE Cabinet announced its decision to amend Federal Law No. 9 of 2016 (the "Bankruptcy Law") by adding certain provisions to allow for business continuity during emergency situations, including pandemics and natural disasters. This is a timely amendment to the Bankruptcy Law and has been introduced in response to the COVID-19 global pandemic.
The Bankruptcy Law is amended by a Federal Decree Law (the "Amending Law"). The overarching aim of the Amending Law is to provide assistance to debtors, both companies and individuals, facing financial distress to enable them to continue operating in emergency situations.
In this update, we look at the changes made to the Bankruptcy Law.1
The key change introduced by the Amending Law is the introduction of the concept of an 'Emergency Financial Crisis'. This is defined as "a public event that affects trade or investment in the State such as the outbreak of an epidemic, a natural or environmental disaster, war or others". Whilst it is likely that the current COVID-19 pandemic falls within this definition, the Amending Law makes it clear that it is a matter for the UAE Cabinet to determine if, and for how long, any given situation will be deemed to be an Emergency Financial Crisis. The changes made to the Bankruptcy Law, which apply during an Emergency Financial Crisis, are set out below.
1. Obligation on a company to initiate Bankruptcy Proceedings suspended and new negotiated settlement process
The existing obligation on a company to apply to the Court to commence bankruptcy proceedings if it has failed to pay its debts when due for more than 30 days is temporarily suspended for the duration of the Emergency Financial Crisis, provided that the debtor's default is caused by the Emergency Financial Crisis.
Instead, the debtor can apply to the Court for a 'grace period' of up to 40 days to attempt to negotiate a settlement with its creditors. The process is similar to the existing preventative composition process. If the Court approves the grace period, the debtor is obliged to publish the Court's decision in two national newspapers and invite creditors to negotiate a settlement within 20 business days of publication. The settlement terms must include satisfaction of all debts within 12 months. If the settlement is agreed by creditors, who hold at least two thirds of the value of the debt, the settlement (once approved by the Court) will be binding on all creditors, regardless of whether they participated in the negotiations or agreed to the settlement terms.
This process gives distressed debtors protection from formal bankruptcy proceedings and breathing space to continue operating, whilst under the protection of the Bankruptcy Law regime. However, not all distressed debtors will be in a position to take advantage of this new process – where the debtor is unable to: (i) repay all debts in full within 12 months; or (ii) secure agreement to its proposals from the requisite majority of creditors, the debtor will be obliged to file for bankruptcy proceedings in the normal course. In such cases, the Amending Law gives the Court the power to accept the application and to amend the process as it deems fit, so long as the debtor's default is caused by or is a result of the Emergency Financial Crisis.
The following provisions apply to debtors subject to this new process:
(A) Relaxation of prohibition on disposing of debtor's assets
During an Emergency Financial Crisis, directors and managers are permitted to dispose of a debtor's assets in order to pay unpaid wages and salaries to employees, who are necessary for the continuity of business. Such payments do not include allowances, bonuses or other casual payments in kind.
Whilst this is a useful tool to promote retention of critical employees to facilitate business continuity, this is a limited carve out to the existing prohibition on the disposal of assets under the Bankruptcy Law (whether under a preventative composition or bankruptcy proceedings). The Amending Law reiterates that the debtor's board and directors must act with caution and in good faith, in the interests of the debtor to protect its objects and financial assets. In addition, the board is required to ensure the debtor's accounts are updated to include details of the losses incurred due to the Emergency Financial Crisis.
(B) Creditor's application for debtor's bankruptcy during Emergency Financial Crisis
Whilst creditors holding debt of more than AED 100,000 can still apply to the Court to start bankruptcy proceedings against a debtor who has failed to settle a demand for payment within 30 days, the creditor's application will not be considered by the Court until the end of the Emergency Financial Crisis. Significantly, this suspension of creditors' rights applies whether or not the debtor's default is caused by the Emergency Financial Crisis.
(C) Restriction on precautionary measures and enforcement proceedings
In addition, no precautionary measures may be ordered by the Court against the debtor's assets which are necessary for its business continuity during the Emergency Financial Crisis. This includes fixing seals on a debtor's business premises or its properties (unless the Court deems such properties to be irrelevant to the running of the debtor's business). However, secured creditors remain entitled to apply to the Court for an order permitting them to enforce security against the debtor.
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1 In preparing this briefing we have relied on a Westlaw translation of the Amending Law and Bankruptcy Law.
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.