OVERVIEW OF THE UAE'S NEW BANKRUPTCY LAW

22 May 2024

Ajmal Khan Nadakkal

The United Arab Emirates (UAE) implemented a new bankruptcy regulation, Federal Law Decree No 51 of 2023, on May 1, 2024. This new law supersedes the previous Federal Decree-Law No 9 of 2016. While retaining much of the previous law’s framework, it introduces notable changes affecting creditors and debtors, including explicitly recognizing both natural and legal persons as 'debtors'. It also preserves the emergency financial crisis provisions from the old law, signaling expected impacts on restructuring and insolvency proceedings in the UAE.Dubai:

On May 1, 2024, the UAE enacted Federal Law Decree No 51 of 2023 concerning Financial Restructuring and Bankruptcy (New Bankruptcy Law), which repeals Federal Decree-Law No 9 of 2016 (Old Bankruptcy Law) entirely. Despite this, much of the Old Bankruptcy Law's structure remains intact. Procedures for preventative settlement, financial restructuring, and bankruptcy are maintained, with the New Bankruptcy Law reinforcing certain provisions from the old one. For example, emergency financial crisis provisions are retained, and now, a "debtor" includes both natural and legal persons. Significant changes for creditors and debtors are introduced, which will likely affect restructuring and insolvency cases in the UAE moving forward.

Introduction of New Administrative Units

The New Bankruptcy Law introduces the "Bankruptcy Department" and the "Financial Restructuring and Bankruptcy Unit," which are expected to enhance the infrastructure, administration, and processes of the UAE’s bankruptcy regime. The Bankruptcy Department will likely be an extension of the Bankruptcy Courts, while the Financial Restructuring and Bankruptcy Unit, an arm of the Ministry of Justice, will handle administrative aspects of bankruptcy and restructuring cases. This unit will also maintain a register of court judgments and insolvency applications against debtors, a first for the UAE. These administrative arms replace the Financial Restructuring Committee (FRC) under the Old Bankruptcy Law, clarifying the judicial authority and protections for debtors.

Establishment of New Bankruptcy Courts

The New Bankruptcy Law establishes specialized Bankruptcy Courts at both federal and local levels to manage and adjudicate preventative settlement, financial restructuring, and bankruptcy processes. This move aims to enhance the speed and efficiency of formal restructuring and insolvency cases in the UAE. Having dedicated Bankruptcy Courts aligns the UAE with international best practices, similar to the bankruptcy court system in the United States. All pending claims, legal proceedings, grievances, and actions under the Old Bankruptcy Law that have not been adjudicated by May 1, 2024, will be transferred to the new Bankruptcy Courts for determination under the New Bankruptcy Law. These courts will oversee the management of debtors' assets and business to ensure efficient proceedings and will have the authority to meet with creditors to discuss relevant matters. Decisions of the Bankruptcy Courts will be immediately enforceable as writs of execution, without requiring service, and enforcement of those decisions cannot be challenged, clarifying and streamlining onshore processes.

Recognition of Bankruptcy Proceedings in Other Jurisdictions

The New Bankruptcy Law does not adopt the UNCITRAL Model Law on Cross-Border Insolvency, unlike the DIFC, ADGM, and Saudi Arabia. This means that separate recognition of the UAE bankruptcy process in foreign jurisdictions will still be necessary. However, recent decisions by English courts, indicate a willingness to recognize UAE bankruptcy proceedings, suggesting that other jurisdictions might follow suit.

Changes to Preventative Composition Procedure

The preventative composition procedure under the Old Bankruptcy Law is renamed "preventative settlement" under the New Bankruptcy Law. This debtor-led process allows a debtor to complete a composition, scheme, or restructuring plan with creditors. The New Bankruptcy Law allows debtors to manage their business and affairs during the process without automatically appointing a Trustee, provided creditors' interests are not harmed. A Trustee can be appointed only with the Bankruptcy Court's permission, a change favorably viewed by the UAE business community.

Moratorium Period

The New Bankruptcy Law reduces the moratorium period following the commencement of preventative settlement proceedings from ten months (extendable by four months) to three months, with possible extensions up to a maximum of six months. This aims to enhance the speed and efficiency of procedures under the New Bankruptcy Law. Debtors will need to carefully consider whether the preventative settlement route is appropriate, given the shortened moratorium period.

Powers of Trustee and Creditor-Driven Tools

The New Bankruptcy Law extends the powers and duties of Trustees to deal with debtor assets, under the oversight of the Bankruptcy Court and relevant administrative functions. However, it does not prescribe a creditor-driven process or out-of-court appointment of an independent office-holder, which some creditors might view as a missed opportunity. Creditors can still petition to initiate financial restructuring or bankruptcy procedures if relevant conditions are met.

Insolvency Test

Under the Old Bankruptcy Law, the insolvency test included both cashflow and balance sheet assessments. Debtors could submit to a preventative settlement procedure if they had not paid debts for over 30 consecutive working days due to financial instability or a debit estate. Alternatively, debtors could submit to financial restructuring or bankruptcy procedures if they ceased to pay debts for more than 30 consecutive working days due to financial instability or a debit estate. The New Bankruptcy Law removes the distinction between insolvency assessments for preventative settlement and bankruptcy procedures. Article 15 states that a debtor may apply for preventative settlement or bankruptcy proceedings within 60 days of ceasing payment or becoming aware of their inability to pay debts when due. This timeframe allows debtors additional breathing space and eliminates the balance sheet insolvency test, focusing solely on cashflow insolvency.

The New Bankruptcy Law represents a significant investment in the UAE's bankruptcy infrastructure, with the establishment of Bankruptcy Courts, a Bankruptcy Department, and a Financial Restructuring and Bankruptcy Unit aligning the UAE's regulations with international best practices. Progress is also being made in recognizing UAE bankruptcy processes in other jurisdictions, even without adopting the UNCITRAL Model Law. While some creditors might have hoped for additional improvements, the new law retains the "rescue" framework of the Old Bankruptcy Law. Detailed regulations, including criteria like the minimum debt value for initiating bankruptcy proceedings, will be provided in the upcoming Executive Regulations.

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