UAE UNVEILS NEW FINANCIAL RESTRUCTURING AND BANKRUPTCY LEGISLATION

11 December 2023

Ajmal Khan Nadakkal

I. ENHANCED FLEXIBILITY

• Substitution of Preventive Composition Tool: The New Law replaces the erstwhile mechanism of "Bankruptcy Preventive Composition" with a more accessible alternative termed "Preventive Settlement." This marks a positive shift, garnering favorable reception from the legal community and local businesses. Under this revamped mechanism, debtors are empowered to conduct their commercial activities and address outstanding debts through a court-supervised settlement proposal approved by creditors. Notably, this allows debtors to manage their business and assets without the appointment of a trustee, accompanied by a potential moratorium period ranging from 3 to 6 months from the acceptance of the petition.

• Pre-insolvency Mediation: This voluntary process enables debtors and creditors to reach a mutually agreeable settlement before financial distress becomes severe.

• Rescue Plan: This proactive approach allows debtors to propose a plan for restructuring their debts and reviving their businesses, with the approval of the Tribunal.

• Composition Agreement: This consensual arrangement allows debtors to reach an agreement with a majority of their creditors to reduce or restructure their debts.

II. STREAMLINED PROCESS

• Establishing a Dedicated Tribunal:  A groundbreaking introduction is the establishment of a specialized division. Article 12 of the New Law establishes a  Bankruptcy Unit, within the Courts. Overseen by a senior Court of Appeal judge, this unit is dedicated to managing and overseeing bankruptcy and restructuring cases, offering vital support to the Bankruptcy Court. Simultaneously, the Financial Restructuring Committee retains its significance under the New Law, with an expanded mandate covering various aspects of the bankruptcy process.

• Adopting a Pre-application Stage: Debtors are encouraged to engage with the Tribunal at an early stage to assess their financial situation and explore restructuring options.

• Implementing Fast-track Procedures: For certain cases, the Tribunal can expedite the bankruptcy process to ensure timely resolution.

• Enforceability of Bankruptcy Court Decisions: The New Law underscores the immediate and binding nature of Bankruptcy Court decisions, considering them as writs of execution under Article 8,Decisions of Bankruptcy Court are promptly enforceable. However, a mechanism is in place for the suspension of execution under specific circumstances, allowing for flexibility and intervention by relevant stakeholders and the appellate process.

III. PROTECTING CREDITORS' INTERESTS

• Fair and Equitable Treatment: The law mandates that creditors be treated fairly and proportionally, ensuring that their claims are considered and addressed.

• Priority Rules: The law establishes clear priority rules for the distribution of a debtor's assets, ensuring that creditors are paid according to their legal entitlements.

• Secured Creditor Protection: The rights of secured creditors are explicitly recognized and protected to ensure that they receive adequate compensation for their secured claims.

• Liability of Board of Directors, Managers, and Fault-Based Accountability: The New Law introduces noteworthy changes to the accountability of board directors, managers, and liquidators in bankruptcy scenarios. It expands potential liability to de facto managers and individuals responsible for actual management, offering a more comprehensive approach to holding individuals accountable. The amount awarded against directors or de facto managers corresponds to their level of fault, and a two-year limitation period is established for initiating liability proceedings.

IV. EMPOWERING THE TRIBUNAL

• Pre-insolvency Mediation: This voluntary process encourages creditors and debtors to resolve their disputes amicably, minimizing the need for formal bankruptcy proceedings.

• Rescue Plan: This proactive approach empowers debtors to propose restructuring plans with the potential to save businesses and preserve employment opportunities.

• Composition Agreement: This consensual arrangement allows debtors and creditors to reach a mutually agreeable debt-restructuring plan, avoiding the complexities of formal bankruptcy proceedings.

V. BENEFITS FOR DEBTORS

• Mitigating Financial Strain: The law provides debtors with options to restructure their debts, reducing their financial burden and enabling them to continue operating.

• Preserving Business Assets: The law prioritizes the preservation of a debtor's business assets, allowing them to maintain operations, generate revenue, and maintain employment.

• Second Chance: The law provides debtors with a second chance to rehabilitate their businesses and regain financial stability, fostering a culture of entrepreneurship and innovation.

• Preventing Long-Term Financial Distress: The New Bankruptcy Law aims to prevent long-term financial distress, promoting a culture of responsible debt management and risk mitigation.

VI. BENEFITS FOR CREDITORS

• Fair and Equitable Treatment: The law ensures that creditors are treated fairly and proportionally throughout the restructuring and bankruptcy proceedings.

• Increased Recovery Rates: The law's focus on consensual debt settlements and streamlined proceedings can lead to higher recovery rates for creditors.

• Preserving Debtor Value: The law promotes the preservation of debtor value, which can benefit creditors through maximizing the recovery of their claims.

• Promoting Financial Stability: The New Bankruptcy Law contributes to a more stable and resilient financial system, protecting creditors from excessive risk and fostering a conducive environment for sustainable economic growth.

IN CONCLUSION

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