The new UAE bankruptcy law has created quite a stir in the local and global business arena. This article attempts to deconstruct the complexities of the law and help the SMEs and entrepreneurs decode the new provisions – an ISME feature.
According to Wikipedia, “Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.”
The bankruptcy law is an important piece of reform that is based on legislative and economic principles to help boost business confidence. The UAE has been working on it for a long time, and with the final draft of the federal bankruptcy law being approved by the UAE Cabinet, the finalized law is just a matter of months now.
Here are a few things you need to know about the soon to be passed bankruptcy law.
What is the bankruptcy law?
The bankruptcy law is a comprehensive legal framework aimed to help distressed companies in the UAE circumvent bankruptcy and liquidation. It is drafted by the Ministry of Finance, and the law draws on the best insolvency and bankruptcy protection practices from several countries, including France, Germany, the Netherlands, and Japan. The primary purpose of the law is to safeguard the rights of both, the creditors and the debtors, in insolvency situations, including measures that prioritize secured creditor rights and aid companies to restructure without unanimous creditor approval.
Why is the bankruptcy law important?
UAE has long been in need of a robust and viable bankruptcy law. In fact, the lack of a modern, comprehensive bankruptcy law has been cited as one of the major shortfalls of the UAE’s business climate. Companies, irrespective of their sizes, have been unable to persuade the local courts to offer a moratorium on debt claims when they run into financial trouble while they work on restructuring their business and finances, thus leaving them at the mercy of creditors. Even though there are more than 250 articles in the country’s commercial transactions law dealing with insolvency, the existing regulations are more suited to the resolution of the insolvency of smaller and local companies, rather than international companies with byzantine global funding structures. These provisions offer fewer options to companies threatened with bankruptcy beyond liquidation, and therefore hardly used.
When will the law be implemented?
The UAE’s cabinet has approved the new law on the 4th of September, after several years of intense scrutiny conducted by a series of committees. Generally, laws approved by the Cabinet are referred to the FNC for consultation, before being sent to the President’s office for the final approval. However, as per the UAE Constitution, laws can be referred directly to the President’s office when the FNC is in recess. Since the FNC was on break till mid-October, the President’s signature was received and the law which has been published in the UAE’s official legal gazette, will be coming into effect a couple of months later, which might be as early as the first quarter of 2017.
The UAE Bankruptcy Law, aimed to promote direct foreign investments and boost business confidence, is likely to come into effect early next year.
Whom does the law apply to?
The law is applicable to companies established under the commercial companies’ law, companies that are wholly or partially owned by the federal or the local government, and companies and institutions established in free zones that are not governed by any existing bankruptcy provisions. The new law does not apply to organizations registered in the DIFC and the Abu Dhabi Global Market, as both these financial free zones have their own internal legislation regarding insolvency and bankruptcy. The law includes provisions related to senior employees and directors of insolvent companies but does not cover individuals.
What are the key features of the new law?
The new law will now require establishing a separate regulatory body, the Committee of Financial Restructuring (CFR). It will oversee the procedures of financial restructuring outside the scope of the courts, will be responsible for the appointment of experts in the field of financial restructuring, and create and maintain an electronic database of individuals who have had bankruptcy rulings against them.
This new bankruptcy law sets out four broad ways for insolvent companies to avoid bankruptcy:
- Financial reorganization, an initial solution available to financial entities regulated by the Central Bank and the Securities and Commodities Authority, administered by experts appointed by the CFR.
- A pre-emptive settlement, managed by the courts, which allows a bona fide debtor to agree to a settlement with the creditors that will be nullified if the pledger fails to abide by the settlement terms agreed by both sides.
- Financial restructuring, wherein the company’s debts are reorganized to the satisfaction of the majority of the creditors holding at a minimum of two-thirds of the outstanding debt, in a procedure overseen by the courts.
- The raising of new funds, according to the criteria determined by the courts.
When can the petition be filed?
The UAE bankruptcy law sets out two routes through which the bankruptcy petition can be filed:
By the debtor who
- Is struck with financial difficulty and require assistance in reaching a conciliatory level with its creditors; and
- Has ceased paying its debts for a period of more than 30 consecutive working days
By the creditor who
- Is owed a minimum of Dh 100,000 by the debtor
- Has already warned the debtor to fulfill the debt
- Has fulfilled the waiting period of 30 consecutive working days from the date of such a warning
A broad array of penalties (both financial and penal) are included in the new UAE bankruptcy law, some of which provide a broad discretion to the courts as to penalty.
If the tribunal finds that the debtor has insufficient funds to fulfill at least 20 percent of the creditor’s claims, the court has the authority to obligate all or some of the directors or managers of the debtor to pay all or part of the debts where their responsibility for the debtor’s losses is “…evident…” in reference to the Commercial Companies Law.
The law will encourage higher standards of corporate governance given that one of the penalties (Article 200) imposes a maximum sentence of one-year imprisonment or a fine not exceeding Dh 30,000 for those who receive a bankruptcy judgment and did not maintain sufficient commercial records to establish their financial position before the bankruptcy. Corporate governance is increasingly being regarded as an important consideration in the region, and it is expected to continue with the implementation of the new UAE bankruptcy law.
General managers, in particular, should continue to implement appropriate systems for managing the cash flow and working capital of the business during financial difficulties.