Navigating The New UAE Bankruptcy Law: Key Insights And Implications For Businesses

Introduction

Until recently, the United Arab Emirates' (UAE) bankruptcy regime was controlled by limited provisions in the now abrogated Federal Law No. 18/1993 Issuing the Commercial Transactions Law. In 2016, the bankruptcy regime was subsequently reformed through the introduction of more comprehensive legislation pursuant to Federal Decree-Law No. 9/2016 On Bankruptcy, however, as the UAE legal system matured through its expertise in adjudicating on bankruptcy proceedings under Federal Law No. 9/2016, the need for further reform aimed at streamlining the UAE's bankruptcy regime become more apparent.

Consequently, the UAE recently enacted Federal Decree-Law No. 51/2023 Promulgating the Financial Reorganisation and Bankruptcy Law on 31 October 2023, which entered into force on 1 May 2024 and abrogated Federal Decree Law No. 9/2016. However, the Executive Regulations and decisions of Federal Decree Law No. 9/2016 remain in place until further notice

Federal Decree-Law No. 51/2023 offers detailed provisions on the measures available to corporate bodies and traders facing financial difficulties in the UAE and provides greater clarity than its predecessor on the eligibility to undertake bankruptcy measures, as well as the criteria for the distribution of liquidation proceeds, amongst other aspects. Further, unlike its predecessor, Federal Decree-Law No. 51/2023 adopts common provisions available in jurisdictions such as the United Kingdom and the United States of America, reflecting an effort to further align the UAE's bankruptcy regime with global standards.

Scope and application of Federal Decree-Law No. 51/2023

Federal Decree-Law No. 51/2023 is applicable to:

• companies established in mainland UAE;

• companies established in freezones without existing internal bankruptcy legislation;

• licensed civil companies of a professional nature; and

• natural persons acting as traders (who also fall within the scope of this law).

Federal Decree-Law No. 51/2023 does not apply to companies with internal bankruptcy legislation which include:

• companies established and operating within the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) as these financial freezones are governed by internal legislation;
• companies wholly or partially owned by the federal or local government whose establishment laws and memorandum of association provide for special bankruptcy provisions; and
• banks, financial institutions, and insurance companies licensed by the Central Bank of the UAE.

Bankruptcy authorities

Pursuant to the effort of Federal Decree-Law No. 51/2023 to streamline the UAE's bankruptcy regime, Federal Decree-Law No. 51/2023 designated three specialised bodies to conduct bankruptcy proceedings, i.e., the Bankruptcy Court, the Bankruptcy Department, and the Financial Reorganisation and Bankruptcy Unit (Bankruptcy Unit).

The Bankruptcy Court is tasked with deciding on the applications submitted to it and adjudicating on any disputes arising out of the law. It is comprised of two stages, the Court of First Instance and the Court of Appeal, with the Court of Appeal's judgments being immediately enforceable without the need for serving summons and is not subject to further objections.

However, judgments and decisions issued by the Court of First Instance can be appealed within 30 days of the judgment, or of the date of notification or announcement thereof, to the Court of Appeal as provided in article 263 of Federal Decree-Law No. 51/2023.

Enforcement of rulings by the Bankruptcy Court cannot be stayed unless the Bankruptcy Court itself deems it necessary to reverse the decision being executed or chooses to suspend its execution. This discretion can also be exercised upon request by the debtor, a creditor, the trustee, or other relevant stakeholders. Additionally, the Court of Appeal may issue a ruling to stay the execution of the decision during the appeal process, either upon submission of an appeal or while considering it. Now that Federal Decree-Law No. 51/2023 is effective, all applications and lawsuits submitted under Federal Decree Law No. 9/2016 will be transferred to the Bankruptcy Court.

To assist the Bankruptcy Court, the Bankruptcy Department is granted numerous competencies such as ensuring the observance of the procedural formalities pertaining to applications to the Bankruptcy Court, and the power to oversee the management of the debtor's assets and business.

Further, the Bankruptcy Unit has been established in respect of institutions and companies supervised by regulatory authorities, and will assist the Bankruptcy Court in:

• implementing the appropriate bankruptcy measures;
• approving the roster of experts from which trustees and controllers (detailed below) are selected; and
• creating a bankruptcy register.

The abovementioned bodies are assisted in their functions by one or more trustees, who are natural or legal persons, other than persons mentioned in article 41 of Federal Decree-Law No. 51/2023, nominated by the Bankruptcy Unit and appointed by the Bankruptcy Court to supervise restructuring and bankruptcy proceedings.

In addition, a controller, who is responsible for monitoring the implementation of preventive settlement, restructuring, and bankruptcy proceedings, may be appointed by the Bankruptcy Court, or based on the request of the debtor, creditors, or the Bankruptcy Unit. The controller is selected from amongst the roster of experts.

The available bankruptcy measures

To provide flexibility to debtors in financial difficulties, Federal Decree-Law No. 51/2023 establishes three measures to address financial distress which includes preventive settlement, restructuring and bankruptcy. These are also referred to as the "bankruptcy measures".

Preventive settlement is a measure available to debtors who are not yet insolvent (i.e. whose business is viable) but have defaulted on or expect to be unable to pay some or all of their debts as they fall due.

Preventive settlement may only be applied for by the debtor, and aims to help the debtor continue its commercial activity and pay its debts under the supervision of the Bankruptcy Court. Given that preventive settlement is debtor-led, it is a less coercive and onerous means of dealing with financial distress. Article 56 of Federal Decree-Law No. 51/2023 provides a detailed overview of all the circumstances in which a preventive settlement application can be made.

Restructuring is also aimed at helping debtors, who are not yet insolvent, to continue their commercial activity and settle their debts through a restructuring plan as supervised by the Bankruptcy Court, trustee and Bankruptcy Unit (where applicable).

Restructuring may be applied for by the debtor, creditor, or regulatory authority, highlighting the more coercive aspect of restructuring relative to preventive settlement. Restructuring may be applied for, amongst others, in certain cases such as when:

• the debtor has ceased to repay its due debt; or
• the debtor is in a state of financial deficit as determined by the Executive Regulations of Federal Decree Law No. 9/2016, until the issuance of the Executive Regulations of Federal Decree-Law No. 51/2023.

Unlike preventive settlement and restructuring, bankruptcy proceedings are taken in the case of insolvent debtors and are primarily aimed at allowing creditors to recover their debts by liquidating the debtor's assets. A bankrupt debtor will cease to have any involvement in the management of its business and assets, reflecting the emphasis on the creditors' interests as opposed to the debtor.

Bankruptcy proceedings comprise of three different routes to settling the debt owed to creditors:

• Settlement which is only available prior to the judgment declaring bankruptcy (the bankruptcy judgment) becoming final. The debtor may, with the approval of the Court of Appeal, be granted time to reach a settlement with its creditors if the debtor becomes able to repay all debts owed.
• Bankruptcy which involves the liquidation of the debtor's assets, i.e., all movable and immovable property owned by the debtor inside or outside the state and financial rights owed to the debtor from others (the debtor's assets), and distribution of the proceeds of sale of the debtor's assets to permit collective settlement.
• Reconciliation which is an agreement between the debtor and creditors to settle the debt and is available only to insolvent debtors who have not been convicted of bankruptcy fraud.

Bankruptcy proceedings will require proof of all three of the following factors:

• the debtor has ceased to repay its due debt;
• the debtor is in a state of financial deficit; and
• the debtor's business is not viable in the sense that it must not be possible for the debtor to pay its debts, or return its business to profitability via preventive settlement or restructuring.

Whilst the different bankruptcy measures allow the debtor varying degrees of control over its assets and business depending on the debtor's financial position, it is crucial to note that regardless of the measure initiated, the debtor or the trustee may not distribute profits to shareholders and partners, and similarly, the board members cannot dispose of their shares in the debtor company, without the permission of the Bankruptcy Court.

Further, it is important to note that the value of debt which the debtor defaults on or is expected to default on under each of the bankruptcy measures will be determined by the Executive Regulations as and when it is issued.

Application for bankruptcy measures

Where the criteria for bankruptcy measures (outlined above) have been met, Federal Decree-Law No. 51/2023 outlines a standard application procedure to initiate bankruptcy measures, which is supplemented thereafter by additional information based on the type of measure applied for.

With the exception of preventive settlement which can only be applied for by the debtor, other bankruptcy measures may either be initiated by the debtor, its creditors, or a competent regulatory authority.

An applicant will be required to submit a guarantee to the Bankruptcy Court treasury based on a percentage of the total debts or assets of the debtor, or total debts of the creditor where the application is submitted by the creditor, as of the date of filing of the application. The value of the percentage will be determined by the Executive Regulations of Federal Decree-Law No. 51/2023 when issued.

Debtors may file an application with the Bankruptcy Department for the initiation of the relevant bankruptcy measures, within 60 days from the date the debtor becomes aware that it will be unable to pay its debts, or has ceased to repay its debt. The debtor is considered to have ceased paying its debt if the debtor has been notified to pay a certain debt within a specific timeframe, but fails to do so after ten days have passed from the end of the timeframe specified in the notice, regardless of whether the debtor has sufficient funds to pay such debt or if sufficient guarantees exist in respect of such debt.

Alternatively, an ordinary creditor or group of individual creditors, or otherwise creditors whose debts are secured by a mortgage or right of transfer over the debtor's assets or business, or whose debts are secured by a mortgage or lien, as provided for in article 16 of Federal Decree-Law No. 51/2023, may submit an application, if the debtor defaults on settling debt that is due for payment, unconditional, undisputed in nature (e.g., evidenced by a cheque or signed invoice), and not less than the value stipulated in the Executive Regulations of Federal Decree Law No. 9/2016 until issuance of new one. The creditor must notify the debtor to settle the concerned debt within 30 days of the notification prior to submitting an application.

Likewise, the regulatory authority may, in the case of debtor companies or corporate bodies, submit an application in respect of debt supervised by the authority, if the debtor has ceased repaying its debt. Alternatively, an application can be submitted if there exists an expectation that the debtor will be unable to pay its debts within three months due to a an imbalance in its financial position or disturbance of its financial conditions. In both cases, a notification must also be sent to allow the debtor to settle the debt within a maximum of 30 days prior to submitting an application. The value of the debt that the debtor ceases paying or is expected to stop paying, along with the value of the financial deficit will be determined by the Executive Regulations of Federal Decree-Law No. 51/2023.

Preventive settlement

The initiation of preventive settlement proceedings will impact the following key aspects of the debtor's business:

• Management of business and assets: The debtor will be permitted to manage its business and assets in a manner that does not harm creditors.
• Moratorium: Lawsuits or executive actions in relation to the debtor's assets or debts, will be suspended for three months, extendable for up to six months according to the Bankruptcy Court's discretion. Labour lawsuits and personal status lawsuits (with the exception of inheritance lawsuits) are excluded from the moratorium, along with any requests for the termination of existing contracts in the case of a breach thereof. The moratorium will end either upon expiry of the six months, approval of the preventive settlement proposal (PSP) or the Bankruptcy Court's decision to terminate preventive settlement.
• Debt maturity: The issuance of a decision to initiate preventive settlement will not result in the extinguishment of the maturity of debts or the suspension of their interest.
• Contractual obligations: Preventive settlement proceedings will not result in the termination or suspension of the debtor's effective contracts, unless the Bankruptcy Court decides otherwise.
• New financing: The debtor may obtain new financing, such as loans or banking facilities, if this was stipulated in the PSP as expanded on below, or approved by two-thirds of creditors holding at least more than half of the approved debts (the required majority).

In terms of procedure, the initiation of preventive settlement proceedings mandates the debtor to perform the following:

• Formation of a creditor's committee and preparation of list of debts: Within 10 days of the issuance of the decision to initiate preventive settlement proceedings, the debtor is required to coordinate with the creditors to form a creditor's committee comprising of representatives from the categories of different debts. Thereafter, the debtor is granted 10 additional days to provide detailed information about the list of debt categories owed.
• Development of/and voting on the PSP: The debtor will also be required to submit a PSP including the information required by article 66 of Federal Decree-Law No. 51/2023 to the Bankruptcy Department within three months of the date of the issuance of the decision to initiate proceedings, which may be extended by the Bankruptcy Court, and invite creditors to vote on the PSP. The PSP must be approved by the required majority. If the PSP is rejected, a second meeting will be held, and if the PSP is thereafter not accepted by the required majority, this will amount to a rejection of the PSP.
• Notification of voting outcome: The debtor is required to notify the Bankruptcy Department, the controller, the Bankruptcy Unit and regulatory authority where applicable, of the approval or rejection of the PSP within 10 days from the date of such. Should the PSP be rejected, the Bankruptcy Court will issue a decision to terminate the preventive settlement proceedings.
• Application for the ratification of the PSP by the Bankruptcy Court: Alternatively, should the PSP be approved by the required majority of creditors, the debtor must seek the Bankruptcy Court's ratification of the PSP by filing an application within the same notification referred to in the preceding paragraph. Creditors who did not approve the PSP, did not attend the meeting due to a justified excuse, or were not notified of the meeting (the "eligible creditors"), may file an appeal to the Bankruptcy Department against the approval of the PSP within 10 days from the date of themeeting. Any appeals will be decided on by the Bankruptcy Court within the same decision regarding ratification of the PSP.
• Bankruptcy Court's judgment of the ratification application: Taking into account the above, the Bankruptcy Court may thereafter issue three decisions as follows:
  • The Bankruptcy Court may reject to ratify the PSP in case of its rejection thereby resulting in the termination of preventive settlement proceedings, or the initiation of restructuring or bankruptcy proceedings as per the request of the debtor, creditors, Bankruptcy Unit or regulatory authority.
  • The Bankruptcy Court may decide to suspend the ratification of the PSP and issue its instructions on the procedures required to be re-taken or the amendments to be made.
  • The Bankruptcy Court may ratify the PSP upon verifying that the conditions in article 75 of Federal Decree-Law No. 51/2023 were fulfilled.
  • Implementation of the PSP: Should the PSP be ratified, the PSP will be effective even as against creditors who disapproved it, and the debtor must proceed with its implementation. The Bankruptcy Court may appoint a controller to supervise implementation of the PSP. Upon implementation of the PSP, the debtor will be required to notify the Bankruptcy Department within 10 days of its completion and submit a statement of settled debts, the method of settlement thereof and proof of settlement. Thereafter, the Bankruptcy Court will issue a decision of completion of the PSP within 10 days of the Bankruptcy Department's notification. Creditors are permitted to file a grievance against the debtor's notification relating to the settlement of debts. If accepted, the PSP will not be regarded as having been implemented as against such creditors. Following the settlement of debts as verified by the Bankruptcy Court, the Bankruptcy Court will issue a decision declaring completion of the PSP.

Restructuring proceedings

Should an application for restructuring proceedings be accepted by the Bankruptcy Court, one or more trustees will be appointed to oversee the restructuring proceedings within 10 days of the decision to accept the application.

In respect of the impact of the initiation of restructuring on the debtor's business, the impacts are same as that of preventive settlement with respect to new financing and contractual obligations, with the following differences to be noted:

• Management of business and assets: The debtor will be permitted to manage its business and assets in a manner that does not harm creditors. However, the Bankruptcy Court may decide to prevent the debtor from managing its assets and business upon a reasoned application by the trustee, creditor(s) or Bankruptcy Unit, and appoint a trustee within 10 days of such application.
• Moratorium: The scope of the moratorium will remain the same as with preventive settlement, however, the moratorium will be observed until ratification of the restructuring plan (the plan), or there has been a decision by the Bankruptcy Court to terminate restructuring proceedings.

The procedure relating to restructuring proceedings is also similar to that of preventive settlement, however, there are additional steps required to be observed as stated below:

• Invitation to creditors to submit their debt: Within 10 days of the notification informing the trustee of his appointment, the trustee is required to announce a summary of the decision initiating restructuring proceedings and invite creditors to submit their claims and supporting documents within 30 days of the announcement.
• Creation of creditors' register: The trustee is required to create a register of the details of the creditors with the information contained in article 96 of Federal Decree-Law No. 51/2023 and submit the register to the Bankruptcy Department.
• Verification of the list of debts by the trustee and approval thereof by the Bankruptcy Court: Within 30 days of the creditors submitting their debts and supporting documents, the trustee will verify the debts, and submit a list of the debts to the Bankruptcy Department and the trustee must thereafter announce the list and the accepted and rejected debts. The debtor, and every creditor, even those not included in the list of debts, may file a grievance to the Bankruptcy Department against the list of debts, within 10 days from the announcement of the list. The Bankruptcy Court will approve a final list of undisputed debts.
• Development of and voting on the restructuring plan: The debtor under the trustee's supervision will develop the plan, taking into account the requirements provided in article 108 of Federal Decree-Law No. 51/2023. The trustee will be required to notify the Bankruptcy Department, and Bankruptcy Unit where applicable on the progress of developing the plan on a monthly basis. The plan must be deposited with the Bankruptcy Department within three months of the date of the issuance of the decision initiating restructuring proceedings, with the possibility of extending such timeframe. The debtor must also convene a meeting to obtain the approval of the required majority on the plan. Eligible creditors may also file an appeal to the Bankruptcy Department against the approval of the plan within 10 days from the date of the meeting which will be decided on by the Bankruptcy Court within the same decision regarding ratification of the plan.
• Ratification of the plan: Should the plan obtain the approval of the required majority, the plan will be ratified by the Bankruptcy Court upon the trustee's notifying the Bankruptcy Department of its approval. Notably, even if the planwas disapproved, the Bankruptcy Court is empowered to ratify the disapproved plan based on the debtor's request, provided that the rights of the creditors are not less than those available to the creditors in the event of the debtor's bankruptcy.
• Implementation of the plan: Should the plan be ratified, the debtor will implement it under the supervision of the trustee or the Bankruptcy Unit where applicable, for which the trustee must comply with the obligations in article 116 of Federal Decree-Law No. 51/2023.
• Termination of restructuring prior to implementation of the plan: The debtor may request termination of restructuring prior to the implementation of the plan if the conditions for restructuring are no longer met. Similarly, the debtor or the regulatory authority may request to terminate restructuring and open bankruptcy proceedings instead.

In case the plan is not ratified, and/or restructuring proceedings are terminated, the Bankruptcy Court may potentially initiate bankruptcy proceedings.

Bankruptcy proceedings

As mentioned, the Bankruptcy Court may issue a decision to initiate bankruptcy proceedings, upon fulfilment of all three bankruptcy conditions above, and a trustee will also be appointed to oversee and manage the bankruptcy proceedings.

It is pertinent to note that the impact of initiating bankruptcy proceedings on the debtor's business differ significantly than with preventive settlement and restructuring proceedings, as outlined below:

• Affixation of seals on the debtor's assets: Within 10 days from the decision to open bankruptcy proceedings, seals will be affixed on the debtor's shops, offices, stores, books, papers and movables (excluding any necessary items of the debtor) in order to allow an inventory of the assets to be conducted.
• Management of assets and business: The debtor will be prohibited from managing its business and assets owned by it on the day of the decision to initiate bankruptcy and those whose ownership devolves to the debtor after the bankruptcy judgment. Instead, the trustee will assume management of the debtor's business and assets, and may appoint another person to continue operating the debtor's business if the public interest, or the interest of creditors or the debtor, so require.
• Prevention of lawsuits against the debtor: It will not be permissible to file or proceed with a lawsuit against the debtor, except for the lawsuits enunciated in article 156 of Federal Decree-Law No. 51/2023 such as criminal lawsuits, among others.
• Debt maturity: The maturity of all cash or monetary debts due from the debtor, whether ordinary or secured, will be extinguished. Interest on ordinary debts will also be suspended. It is worthy to note that the Bankruptcy Court may deduct from certain deferred debts an amount equivalent to the legal interest for the period starting from the date of the bankruptcy judgment to the date of maturity.
• Contractual obligations: In principle, contractual obligations, such as payments under lease contracts in which the debtor is a tenant, employment contracts, and contracts for the supply of goods and services should continue, unless the debtor's business ceases to operate, or the trustee requests termination of the contract. Contracts will also be assigned if it is in the best interests of the bankruptcy funds, i.e., it would increase the debtor's assets.
• Invalidity of certain dispositions against creditors: Certain dispositions made by the debtor six months prior to the debtor ceasing to repay its debt, or two years prior to the cessation of payment of debt in case of related parties, will not be effective against creditors, and the person subject to the action will return to the debtor or the trustee what was obtained or the value of such. These dispositions include:
  • donations or gifts, except for small gifts that are customarily accepted;
  • transactions in which the debtor's obligations are significantly unbalanced with the other party;
  • payment of debts before their maturity or using consideration other than that agreed-upon, unless there are commercial justifications; and
  • granting new securities for existing debts, unless there are commercial justifications.

Noting the three options available for the settlement of debt under bankruptcy proceedings, the procedure pertaining to settlement, bankruptcy and reconciliation differ. Where a settlement is reached, this will be submitted to the Bankruptcy Court for approval, which will entail cancellation of the bankruptcy judgment. In the instance a settlement is not reached, and it is decided to proceed with bankruptcy, the procedure to liquidate and distribute the debtor's assets will first involve the completion of an inventory of the debtor's assets by a competent individual selected by the Bankruptcy Court.

In the instance a settlement is not reached, and it is decided to proceed with bankruptcy, the procedure to liquidate and distribute the debtor's assets is similar to that of restructuring, as a creditors committee may be formed and a list of debts is to be prepared in the same manner as that under restructuring proceedings. The trustee must ensure that within 10 days of his appointment or within 10 days of the announcement of the decision to initiate bankruptcy, the creditors are invited to submit any final claims that were not previously submitted. The creditors will be given 10 days to submit their claims. It is worth noting that a list of debts will not be required where the trustee believes that all proceeds from the sale of the debtor's assets will be used to cover the bankruptcy charges, fees and costs. .

An inventory of the debtor's assets will also be prepared by a competent individual selected by the Bankruptcy Court.

Upon completion of the inventory, the trustee will receive the debtor's assets, books, and papers, and must invite the debtor, creditors, and Bankruptcy Unit (where applicable) to present their proposals on the liquidation and distribution plan (the LDP).

As with restructuring and preventive settlement, the trustee will invite the creditors to approve the LDP through a meeting, for which only creditors whose debts are accepted, even temporarily, may vote on the LDP. The LDP will require the approval of the required majority. Should the LDP not be approved, the meeting will be postponed for 10 days to allow for a second meeting. If the LDP is not approved thereafter, this will constitute a rejection of the LDP and the Bankruptcy Court will, within 10 days from the date of notification, assign the Bankruptcy Unit (where applicable) to make necessary amendments to the LDP.

Alternatively, if the LDP was approved, the Bankruptcy Court will approve the same.

The trustee must thereafter proceed with implementation of the LDP within two years, ensuring that the trustee provides a monthly statement on the status of liquidation, value of deposited amounts and distributions made to creditors to the Bankruptcy Court.

The trustee will ensure that the distribution of the sale proceeds of the debtor's assets are made only to creditors who present a debt instrument that has been accepted by the debtor, or in respect of debt which the Bankruptcy Court has verified the debtor's acceptance of. The distribution of sale proceeds must take place according to the following ranking of debt enunciated in article 179 of Federal Decree-Law No. 51/2023, with secured debts taking priority over preferred debts, and preferred debts taking priority over ordinary debts.

Shares pertaining to disputed debts, or debts which have not been finally accepted, will be set aside in the Bankruptcy Court's treasury until the respective disputes have been resolved. Any surplus amounts arising from the sale of the debtor's assets will be returned to the debtor.

Ending bankruptcy

It will be possible to declare the end of bankruptcy in the following cases:

• There has been a decision by the Bankruptcy Court to end bankruptcy.
• The debts of creditors listed in the final list have been paid or, there has been a deposit of the amounts and a bank guarantee sufficient to pay such debts.
• The end of bankruptcy may also be declared if there are insufficient funds before the ratification of the settlement (if applicable).

Reconciliation

Alternatively, should the debtor and creditors decide to proceed with reconciliation, the procedure for reconciling the debt will commence by an application by the debtor or the trustee, in which the reconciliation terms (the terms) will be presented. The application must also be accompanied by a list of creditors and the amounts of their debts as of the date of the application, along with the other details mandated in article 193 of Federal Decree-Law No. 51/2023.

Thereafter, the procedure is similar to that of restructuring and bankruptcy, for which the trustee will be required to host a meeting in the presence of the creditors to discuss the terms and for which voting on will take place according to the same conditions and procedure as the LDP.

If the terms were approved, the Bankruptcy Court will ratify the same which will be effective against the creditors who are entitled to vote on the terms, those who approved the terms, rejected them, objected to them and did not attend the meeting.

Consequently, the debtor will implement the terms under the supervision of the trustee, who will submit a monthly report on the progress of implementation to the Bankruptcy Department, creditors, debtor, and Bankruptcy Unit (where applicable).

It is possible to request the annulment or invalidation of reconciliation in case the bankrupt debtor does not implement the terms or is convicted of bankruptcy fraud or other forms of fraud provided for in article 201 of Federal Decree-Law No. 51/2023 (the fraud conditions). If an application for annulment or invalidation is accepted, this will have the same effects as the decision to initiate bankruptcy adjudication procedures

Otherwise, a decision to end bankruptcy through reconciliation, can be made in the following circumstances:

• Completion of the terms:
  • Upon implementation of the terms, the trustee will submit an application to the Bankruptcy Department and will notify the creditors, the debtor and the Bankruptcy Unit (where applicable) of the application. Creditors will be allowed to object to the application within 10 days to the Bankruptcy Department.
  • The Bankruptcy Court will decide whether to accept or reject the application and if accepted, it will issue a decision ending bankruptcy through reconciliation.

The decision to end bankruptcy through reconciliation will result in all effects of bankruptcy lapsing. However, it is pertinent to take note of the effects in terms of the rights and obligations on each of the following parties:

• The trustee and the debtor:
  • Upon the Bankruptcy Court's decision to end bankruptcy through reconciliation, the trustee will be required to submit a final statement of account to the Bankruptcy Department within 10 days of the Bankruptcy Court's decision. The debtor may submit an objection against the final statement, and the trustee will thereafter be required to respond within 10 days of its notification of the objection.
  • After the lapse of the time granted for the trustee to respond, the Bankruptcy Department will refer the objection to the Bankruptcy Court.
  • The creditors and interested parties:
  • An interested party can submit an application for invalidation in case the fraud conditions are present.
  • Creditors can submit an application to invalidate or annul the reconciliation to the Bankruptcy Department in case one of the two fraud conditions are present.

Rights of appeal

Given the impact of any actions taken in preparation of, or during one of the bankruptcy measures by different parties and the consequences thereof, Federal Decree-Law No. 51/2023 provides the ability to appeal or file grievances against certain judgments, decisions and actions taken throughout. Accordingly, this section will provide an overview of the circumstances in which it is possible to lodge a grievance, appeal, or objection under Federal Decree-Law No. 51/2023, noting the instances and time frames mentioned in the previous section.

Grievances may be filed to the Bankruptcy Court through applications lodged to the Bankruptcy Department, by any interested party against actions or omissions of the debtor, the trustee or the Bankruptcy Department. It is important to note that the grievance will not suspend the procedures, unless the Bankruptcy Court decides otherwise. In these circumstances, the interested party may be required to submit an in-kind or bank guarantee issued by a bank operating in the UAE which the grievant will recover if the grievance was settled in his favour.

In relation to appeals, interested parties may appeal decisions or judgments of the Bankruptcy Court to the Court of Appeal within 30 days from the date of notification or announcement of the decision, or issuance of the judgment.

It is worth noting that in the case of small debtors whose assets do not exceed the value that is to be specified in the Executive Regulations, any judgments and decisions of the Bankruptcy Court will not be subject to appeal unless the reasons for appeal relate to:

• a lack of jurisdiction; or
• missing appeal deadlines (e.g. time-bar limitations).

Finally, creditors, the debtor, and the Bankruptcy Unit (where applicable) may object to the trustee's actions before they are completed. The objection is to be filed with the Bankruptcy Court and will not result in the suspension of the trustees action unless the objection was filed by the Bankruptcy Unit.

Noteworthy provisions

In consonance with the trajectory of Federal Decree-Law No. 51/2023 to strike equity and fairness as between debtors and creditors, Federal Decree-Law No. 51/2023 details several provisions to achieve so, which apply to all bankruptcy mechanisms unless indicated otherwise. These include:

• Enforcement against secured creditors: Creditors with secured debts may obtain the Bankruptcy Court's approval to take execution procedures against the secured assets through the trustee, without having to initiate separate proceedings.
• Netting: It may be possible to set off debts incurred after issuance of the decision to initiate one of the bankruptcy mechanisms, if provided for in the PSP, the restructuring plan, or based on the Bankruptcy Court's decision, with such netting agreement considered final.
• Extension of liability of board members and managers of debtor companies: As with Federal Decree Law No. 9/2016, members of the board of directors and managers may be held personally liable to pay monetary compensation for certain errors committed in the two years preceding cessation of payment of debt, in an amount proportionate to the error committed. However, this has now been extended to include persons responsible for the actual management of the company (e.g., de facto managers/directors), which can encompass shareholders, in addition to those in charge of the liquidation process. The circumstances in which this liability may be imposed include:
  • adopting risky commercial methods to conduct business;
  • entering into transactions for without or for insufficient consideration of no proportionate benefit to the company's funds;
  • paying the debts of certain creditors with the intention to harm other creditors; and
  • failing to manage the company in a manner that led to the deterioration of the company's financial position, resulting in the company's assets being insufficient to pay at least 20% of its debts upon being declared bankrupt.
• Prevention of settling debts after the initiation of bankruptcy measures: Debtors will be prohibited from settling their debts after the initiation of bankruptcy mechanisms, save for debts relating to the right of workers and suppliers, as well as other debts necessary for the continuation of the debtor's business preservation and development of its assets.
• Recovery of assets: It may be possible to recover certain property from the debtor's assets, such as goods, shares, real estate, commercial papers and other papers, banknotes, and any items proved to be owned by another person.
• Collecting debts from partners and shareholders: With the exception of companies undergoing preventive settlement, the Bankruptcy Court may entrust the trustee to follow up on collecting the debts of partners or shareholders due to non-payment of the remainder of their shares in the capital or for any other reason, prior to their due date.

Ultimately, the detailed provisions enacted by Federal Decree-Law No. 51/2023 exhibit a welcomed balance between the rights of debtors and creditors, while retaining flexibility to allow debtors to overcome financial distress in the UAE. This is displayed through, amongst other changes, the preventive settlement measure, the ability of the debtor's business to continue operating after being declared bankrupt, the possibility of reconciliation, and the possibility to settle and set-off certain debts post- bankruptcy.

Accordingly, the changes enacted to the UAE's bankruptcy regime by Federal Decree-Law No. 51/2023 provide for a more business friendly environment and sustainable economy.

While the practical effects of Federal Decree-Law No. 51/2023 are yet to be seen, we can be hopeful that the administrative reform accompanying Federal Decree-Law No. 51/2023, in particular that which is related to the establishment of the Bankruptcy Unit empowered to provide training on Federal Decree-Law No. 51/2023 and the UAE's maturing expertise in adjudicating on bankruptcy proceedings, will contribute to its enhanced understanding and application.

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.