Bankruptcy to be decriminalised under new UAE law

Author: Kirsty Tuxford | Date: 21 Sep 2016

Businesses to enjoy better protection, including the ability to reschedule debt, as more liberal legislation takes effect

New legislation in the UAE will mean it is no longer a criminal offence for an organisation to go bankrupt, ending the threat of significant legal proceedings if businesses cannot pay their creditors.
 
Employees, shareholders and directors of insolvent companies will benefit from some protection, but private insolvent individuals will not be covered.
 
Several committees evaluated the law on 4 September, and it is now awaiting final approval from the Federal National Council (FNC). The law could potentially come into effect in Q1 of 2017 and is expected to provide a boost to the economy as organisations will be more incentivised to innovate and take calculated operational and strategic risks.
 
The law will apply to organisations established under the commercial companies law, those that are partly or wholly owned by the government and organisations established in free zones that are not covered by existing bankruptcy legislation.
 
“There are twin gates through which any debtor will become subject to the law’s processes: payment suspension, where the debtor has stopped meeting or servicing their debts; and excessive indebtedness, where the debtor’s assets do not cover liabilities,” said Gary Watts, partner and regional head at law firm Al Tamimi & Company.
 
“A debtor in the position of payment suspension or excessive indebtedness can access the law’s procedures to protect themselves from other legal attacks. The law provides for active involvement by creditors, who can attend meetings, inform court-appointed experts of their debt claims, and vote on any proposed restructuring.”
 
The draft of the new law currently circulating incorporates elements from the French, German and US systems and reflects a debtor-friendly and court-driven process.
 
“The whole purpose of the new legislation is, where possible, to provide ‘preventative assistance’ to a debtor in financial difficulties and help restructuring of the debtor’s liabilities, rather than help a creditor get its money back as a starting point,” said James Farn, partner, head of banking and finance for Abu Dhabi at Hadef & Partners.
 
“Formal bankruptcy or insolvency of a debtor may only be used where a restructuring cannot be achieved (because the debtor’s financial position is hopeless) or where it would be inappropriate in the circumstances,” said Farn. “The whole emphasis of the new law is therefore turned around, within reason, to favour the debtor and not the creditor.”
 
Reports suggest that a new Committee of Financial Restructuring (CFR) will be responsible for assigning financial restructuring experts to assist insolvent organisations.
 
Several options will be available to struggling businesses, including: financial reorganisation overseen by CFR experts; a pre-emptive settlement between debtor and creditor overseen by the courts; financial restructuring overseen by the courts; or the raising of new funds.
 
“The financial reorganisation procedure is a private out-of-court procedure and therefore may appeal to many organisations as an alternative to using a court-sponsored, and therefore public, procedure,” said Farn. “It may also encourage debtors to have meaningful conversations with their creditors at an earlier stage rather than wait until their financial position has deteriorated – by which time they may not be able to use the procedure at all.
 
“The existing court composition procedure is amended, making it easier for a debtor to achieve some breathing space in order to sort out its financial difficulties with creditors. Specifically, it is expected that debtors will be able to obtain new financing under these new arrangements and therefore enhance the prospect of financial recovery,” he added.
 
During the recession of 2009-2010, many businesses went bankrupt and owners fled the country without repaying creditors. The new law should enable businesses to continue operating through tough economic times, and also encourage SMEs and other organisations to take more risks, which the Emirates NBD bank has hailed as a positive for the economy.