Revealed: What you need to know about the UAE bank...

Revealed: What you need to know about the UAE bankruptcy law

The lack of a comprehensive bankruptcy law has often been cited as the weakest link in the UAE’s otherwise solid business climate. So the news that the government is set to usher in a new bankruptcy law in 2017 is a welcome boon for the nation’s corporate landscape.

Although there are more than 250 articles already existing in the country’s commercial transactions law dealing with insolvency, the existing provisions are more suited to the resolution of insolvency of smaller, local companies, rather than international companies with complicated international funding structures. Such provisions have offered few options to companies threatened with insolvency beyond liquidation, and are therefore hardly ever used.

Paul Leggett, a director of restructuring services at Deloitte Financial Advisory in Dubai, told The National newspaper that the new law would bring new options to distressed businesses: “Having such a framework gives greater clarity about potential outcomes of distressed situations for both creditors and debtors, giving them options of how to proceed and allowing them to make rational decisions, which has been largely missing from the local restructuring process.”

Here are a few things that you need to know about the soon to be passed bankruptcy law.

What is the bankruptcy law?

For the first time, the new law will provide a comprehensive legal framework to help distressed companies in the UAE avoid bankruptcy and liquidation.

When will it be implemented?

The UAE’s cabinet approved the new law on September 4. Laws approved by cabinet are then usually referred to the FNC for consultation, before being sent to the President’s office for final approval. However, the UAE’s constitution allows laws to be referred directly to the President’s office when the FNC is in recess, as is currently the case until mid-October. Upon receiving the President’s signature, the law will be published in the UAE’s official legal gazette, coming into effect three months later. So it may come into effect as early as the first quarter of 2017.

Who does it apply to?

The law applies to companies established under the commercial companies law, companies that are partly or fully owned by the federal or the local government, and companies and institutions established in free zones that are not governed by existing bankruptcy provisions. The new law does not apply to companies registered in the DIFC and the Abu Dhabi Global Market.

What are the key features of the new law?

The new law sets out four pathways for insolvent companies to avoid bankruptcy:

  1. Financial reorganisation, an initial solution available to financial entities regulated by the Central Bank and/or the Securities and Commodities Authority, overseen by experts appointed by the CFR.
  2. A pre-emptive settlement, overseen by the courts, which allows a bona fide debtor to agree a settlement with creditors, which will be nullified if the debtor fails to abide by the settlement terms agreed.
  3. Financial restructuring, whereby the company’s debts are restructured to the satisfaction of a majority of creditors holding at least two-thirds of the outstanding debt, in a process overseen by the courts.
  4. The raising of new funds, according to criteria determined by the courts.