UAE Bankruptcy Law & New Court

With the ongoing development of the UAE’s legal system, the new bankruptcy law brings important changes designed to improve economic stability. On May 1, 2024, the UAE’s Federal Law Decree No. 51 of 2023 came into effect, updating the rules for Financial Restructuring and Bankruptcy. This law builds on the old UAE bankruptcy laws, modernizing how insolvency, debt restructuring, and creditor protections are handled.

The New Bankruptcy Law includes key updates that make managing insolvency easier. It expands the definition of a “debtor” to include both individuals and businesses, while keeping important parts of the old law, like special rules for financial crises. One major change is the creation of a dedicated Bankruptcy Court, which aims to simplify insolvency cases, making the legal process clearer and faster.

This law strengthens the UAE’s economy by providing better systems for debt restructuring, ensuring creditors are treated fairly, and clearly explaining how insolvency cases should be handled. These improvements help to build a more resilient economy and contribute to a stable business environment in the UAE.

KEY FEATURES OF THE NEW BANKRUPTCY LAW

The scope of the New Bankruptcy Law UAE remains largely aligned with previous UAE bankruptcy laws. It applies to companies that are governed by the UAE Commercial Companies Law, individuals who are considered traders, and licensed civil companies that provide professional services. However, some businesses, like those located in free zones such as the Dubai International Financial Center (DIFC), are not covered by this law because they follow their own bankruptcy rules.

NEW BANKRUPTCY COURT AND ENFORCEABILITY OF RULINGS

A key development under the New Bankruptcy Law is the establishment of a dedicated Bankruptcy Court with full jurisdiction over all matters related to bankruptcy. Starting in May 2024, any ongoing cases in UAE courts, initiated under the previous law, will be moved to this specialized court. The law also allows for the appointment of auditors and experts to assist in decision-making, ensuring complex financial cases are handled accurately and efficiently.

The creation of Bankruptcy Courts at both the federal and local levels aims to streamline processes related to preventive settlement, financial restructuring, and bankruptcy. The goal is to improve the speed and efficiency of handling insolvency cases, aligning the UAE more closely with international practices, such as the United States bankruptcy system. This approach helps avoid conflicts that previously arose when different courts were involved.

These courts will actively oversee the management of a debtor’s assets and business operations, ensuring smooth proceedings. They will also facilitate meetings with creditors and manage related discussions. Importantly, their decisions will be immediately enforceable as writs of execution, without the need for formal service. Challenges to these decisions can only occur if the Bankruptcy Court itself reverses or stays enforcement, or if the decision is contested in the Court of Appeal.

GOVERNING ENTITIES

One notable update introduced by the New Bankruptcy Law UAE is the official designation of the UAE Central Bank and the Securities and Commodities Authority (SCA) as Supervisory Entities. While these bodies already had oversight roles, the Executive Regulation now formalizes their authority in overseeing how the Bankruptcy Law is applied.

This formal recognition is expected to bring more stability to the insurance, financial, and securities sectors in the UAE. By actively participating in the insolvency processes of the companies they regulate, the UAE Central Bank and the SCA will ensure transparency and structured oversight during bankruptcy or restructuring procedures for financial institutions under their supervision.

REGULATORY BODIES 

A key change under the New Bankruptcy Law UAE is the formal recognition of the UAE Central Bank and the Securities and Commodities Authority (SCA) as primary regulatory bodies overseeing the law’s implementation. Although both entities have had oversight roles in the past, their responsibilities are now explicitly defined by the Executive Regulation. 

This adjustment is expected to strengthen stability in the UAE’s financial, insurance, and securities sectors, as these authorities will take an active role in overseeing insolvency processes for the entities they regulate. Their involvement will not only improve transparency but also ensure clear and organized oversight during bankruptcy and restructuring procedures, helping create a more resilient system for financial institutions.

ROLE OF THE BANKRUPTCY REGISTER:

The new law places the responsibility on the Financial Reorganisation and Bankruptcy Unit to establish and manage a bankruptcy register that records all related applications and actions. The Executive Regulation defines the specific details to be included and sets conditions for interested parties to access this information. Individuals or entities with a legitimate interest can request access by submitting a formal application, specifying their needs and purpose, with approval required from the Minister of Justice or an authorized representative. This register aims to enhance transparency and provide stakeholders with easier access to critical insolvency data, improving the process compared to previous frameworks.

PREVENTIVE SETTLEMENT UPDATE

The updated insolvency law simplifies the way businesses manage financial trouble by replacing the older preventive composition system with a more flexible approach called Preventive Settlement. The older system had strict rules that made it difficult for companies to reorganize. 

In contrast, Preventive Settlement allows businesses to keep operating under court supervision while repaying their debts. Companies can apply for this process if they’ve missed payments or expect that they won’t be able to meet upcoming obligations. This new law gives businesses more options to reorganize and manage debts before reaching the point of bankruptcy, helping them continue operations while addressing financial challenges.

• Preventive Composition

Instead of jumping straight into bankruptcy, businesses can propose a preventive composition plan. This means that, with the court’s oversight, a company can work with creditors to reorganize and find a solution to settle debts while keeping the business afloat.

• Mandatory Mediation

Before any official bankruptcy proceedings begin, the law calls for mediation between the debtor and creditors. The idea is to reach an out-of-court agreement, making it easier to resolve issues without the need for a full court case.

• Specialized Bankruptcy Court

The new law also establishes a Bankruptcy Court that specifically deals with financial and bankruptcy cases. This specialized court is designed to handle these matters more efficiently and ensure that complex cases get the expertise they need, keeping the process consistent and fast.

• Creditor Protection

The law makes sure that creditors are treated fairly. It sets clear rules for how assets are divided during liquidation, making sure that no one gets preferential treatment, so all creditors get their fair share.

• Debt Settlement and Liquidation

If a business can’t restructure, the law provides clear steps for debt settlement or liquidation. This ensures that assets are sold and debts are repaid in a way that’s fair and organized, so creditors are properly compensated.

• International Standards

The UAE’s bankruptcy system is now aligned with global best practices, giving businesses and investors confidence that there are solid legal processes in place to deal with financial distress. This helps create a stable environment for businesses and supports long-term growth.

SIMPLIFIED PROCEDURES FOR SMALL DEBTORS

For small debtors, the procedure is simplified, allowing the Bankruptcy Court to implement less burdensome and more streamlined processes. According to the New Bankruptcy Law UAE, this applies to individuals with assets under AED 1,000,000 and legal entities with assets below AED 2,000,000, as defined by the Executive Regulation.

In such cases, the Bankruptcy Court may initiate preventive settlement, restructuring, or bankruptcy procedures, either on its own or at the request of the debtor, creditor(s), or trustee, utilizing the simplified process set out in the law.

PENALTIES AND REHABILITATION

The New Bankruptcy Law UAE continues to recognize the concepts of negligent bankruptcy, gross negligent bankruptcy, and fraudulent bankruptcy from the previous law, but it imposes stricter penalties with increased fines for such offenses. Under this updated law, individuals convicted of these offenses can be prohibited from managing, operating, or supervising a commercial enterprise for a maximum of three years, a reduction from the previous five-year restriction. 

Additionally, their names will be flagged in the appropriate commercial or professional registries once the insolvency proceedings conclude. Debtors now have the opportunity for rehabilitation after only one year from the closure of their insolvency case, compared to the five-year waiting period in the previous law. This process can occur even sooner if the debtor repays all their debts, negotiates a settlement with creditors, or receives a waiver from them.

MANAGEMENT LIABILITY IN BANKRUPTCY CASES

As per the New Bankruptcy regime, liability isn’t just limited to directors and managers. It now extends to anyone who is actively involved in the company’s management or liquidation process. If the company goes bankrupt, the Bankruptcy Court can hold these individuals responsible for decisions made up to two years before the company stopped paying its debts. 

If it’s proven that their actions played a role in the company’s financial problems, they may be required to cover part of the unpaid debts. For example, if the company can’t pay 20% of its debts and their actions contributed to this, they could be liable for that portion. There’s a two-year window after the bankruptcy judgment to take legal action against them, but they can avoid liability if they can prove they took reasonable steps to prevent losses or formally objected to harmful decisions.

CLAW BACK PROVISIONS

While the Prior Law allowed certain transactions to be reversed if they were made within two years before the start of bankruptcy proceedings, the New Bankruptcy Law UAE tightens this window to six months before the debtor’s cessation of payments. However, if the transaction involves a related party, the time frame can still be extended to two years.

The law also introduces an exception for transactions where valid commercial considerations justify the actions. The Bankruptcy Court has the authority to rule that any transfer or disposition made by the debtor is void if it is determined to be harmful to creditors.

LIQUIDATION PROCEDURES

Liquidation is the process of closing down a company when restructuring is no longer an option. The court can order liquidation when:

• A preventive composition or restructuring plan isn’t suitable, gets rejected, or is terminated.
• The debtor is acting in bad faith or trying to avoid financial responsibilities.

Once liquidation starts, the court appoints a liquidator who takes over the company’s management and:

• Handles legal actions
• Identifies and manages the company’s assets and liabilities
• Sells the company’s assets to pay off creditors

The liquidator is responsible for distributing the proceeds among creditors according to the priority set by the law. If the company’s assets cover less than 20% of its debts, the court may hold directors personally liable for part of the debts if they contributed to the company’s financial problems. After the liquidation process is complete, the court closes the proceedings, and the liquidator publishes a notice about the distribution of funds to creditors.

PROTECTING CREDITORS’ RIGHTS

A key focus of the law is the protection of creditors’ rights through strengthened legal safeguards and clear procedures. The law sets strict guidelines for the fair distribution of assets during insolvency proceedings, ensuring that no creditor is given preferential treatment over others. 

These measures promote transparency and fairness in creditor-debtor relations, aiming to build greater trust among investors and businesses. By fostering accountability and openness in the handling of insolvency cases, the UAE reinforces its reputation as a stable and reliable jurisdiction for both business operations and investment.

ROLES AND APPOINTMENT OF TRUSTEES AND CONTROLLERS

The New Bankruptcy Law UAE details the procedure for appointing both a trustee—an individual or entity responsible for managing the bankruptcy proceedings under the supervision of the Bankruptcy Department—and a controller, who oversees the preventive settlement process and monitors bankruptcy-related actions.

All decisions made regarding the management of the debtor’s assets and business must be properly documented and accessible to creditors for review. Creditors are also entitled to request specific documents held by the trustee and can raise objections with the Bankruptcy Court if they disagree with any proposed actions of the trustee.

TIMELINE FOR INITIATING LEGAL PROCEEDINGS

According to the new insolvency framework, debtors must submit a preventive settlement or bankruptcy application to the Bankruptcy Department within 60 days of:

• Ceasing payments, or
• Becoming aware that they will not be able to meet their debts as they fall due.

Once the application is filed, the debtor is restricted from disposing of any assets unless otherwise directed by the court.

Additionally, the law allows creditors to initiate bankruptcy proceedings under the following conditions:

• The debt must be unconditional, undisputed, and payable.
• The creditor must serve a notice to the debtor, requesting payment of the outstanding debt.
• If the debt remains unpaid for 30 days after receiving the notice, the creditor may file for bankruptcy.

Regulatory authorities can also apply for bankruptcy proceedings, provided:

• They have notified the debtor, and
• 30 days have passed since the notification without any action taken by the debtor.

If more than one application is submitted by different parties, the applications will be merged into a single action. The law also outlines the specific details that must be included in both debtor and creditor applications.

ECONOMIC STABILITY:

The new bankruptcy law introduces significant reforms to support economic stability and growth in the UAE. By establishing a comprehensive legal framework for handling insolvency, it instills confidence in both local and international investors. The law promotes easier access to finance and fosters entrepreneurship, helping businesses to recover and flourish even during challenging times.

Key changes include:

• Preventive Restructuring: Instead of filing for bankruptcy right away, companies can now propose debt reorganization plans under court supervision, allowing businesses to restructure and continue operating.
• Mediation First: The law requires mediation between debtors and creditors before court action, making it easier to resolve disputes without lengthy legal battles.
• Specialized Bankruptcy Courts: New courts specifically for bankruptcy cases ensure that experts handle these matters, speeding up the process and providing consistent rulings.
• Clear Debt Settlement Rules: The law sets clear procedures for repaying creditors, ensuring fairness and transparency.
• Stronger Creditor Protections: New protections prevent favoritism, ensuring all creditors are treated fairly, making it safer for investors and lenders to operate in the UAE.

The new law offers a clearer and more flexible approach to help businesses deal with financial trouble. It gives bankruptcy courts more power to make decisions and introduces simpler processes for small businesses, preventive settlements, and handling financial crises. This helps businesses stay afloat while working through their financial challenges, giving them a better chance to recover instead of heading straight into bankruptcy.

The new law also strengthens the overall system by setting up a specialized Bankruptcy Court and giving creditors more protection. It includes clearer rules for things like claw backs, set-offs, and moratorium periods to make sure everything is handled fairly. 

On top of that, senior managers are now held more accountable for their actions, ensuring they take responsibility. The law also includes penalties for hiding assets from creditors, making it crucial for businesses to follow the rules. In the end, this law provides a more transparent, balanced, and efficient way to manage insolvency in the UAE.

Frequently Asked Questions (FAQ)

1. What is the main goal of the new bankruptcy law in the UAE? The main goal is to provide a structured process for dealing with insolvency, allowing debtors to restructure or settle their debts while protecting creditors’ rights.

2. How does preventive composition work? Preventive composition allows debtors to propose a restructuring plan to creditors before being declared insolvent, helping them avoid liquidation.

3. Who can file for bankruptcy under the new law? Both individuals and businesses can file for bankruptcy if they are unable to meet their financial obligations.

4. What role does the bankruptcy court play? The bankruptcy court oversees the process, making binding decisions on debt restructuring and liquidation cases.

For more information on corporate law and commercial law, contact Raya Al Ameri Advocates.