• The United Arab Emirates has enacted Federal Decree – Law No. 51/2023 on Financial Restructuring and Bankruptcy (the “Bankruptcy Law”).
• The Bankruptcy Law aims to enhance economic activity and regional stability by improving restructuring and bankruptcy proceedings.
• The Bankruptcy Law introduces "preventive settlement" and "restructuring" procedures, enabling debtor companies to prepare settlement or restructuring plans for creditor approval. The new procedures incorporate features commonly associated with U.S. and UK bankruptcy/restructuring law, including the ability to obtain new money financing and a moratorium.
• A specialised Bankruptcy Court, supported by a dedicated Bankruptcy Unit, has been established under the Bankruptcy Law to efficiently oversee proceedings.
• The new legislation is expected to come into force on 1 May 2024.

Summary

On 31 October 2023, the United Arab Emirates (UAE) passed Federal Decree – Law No. 51/2023 on Financial Restructuring and Bankruptcy (the Bankruptcy Law) which replaced Federal Decree – Law No. 9/2016 on Bankruptcy. The Bankruptcy Law is a significant development and aims to facilitate increased economic activity whilst promoting greater stability in the region. It provides a framework for the rescue of distressed companies at the earliest opportunity whilst seeking to balancing the interests of stakeholders and improve the efficiency of insolvency and restructuring proceedings in the UAE.

The Bankruptcy Law is expected to come into force on 1 May 2024 and will apply to “onshore” companies but not to companies in the Dubai International Financial Centre or the Abu Dhabi Global Markets, which have their own standalone insolvency laws and courts. The Bankruptcy Law introduces a new preventive settlement proceeding and a separate restructuring proceeding. The Bankruptcy Law also establishes a standalone bankruptcy court and a bankruptcy unit to assist the Court with proceedings and expands upon the rules regarding reviewable transactions and the liability of directors.

Preventive settlements

The preventive settlement process introduced by the Bankruptcy Law is a court-supervised process commenced following a court application made by a debtor that is, or expects to be, unable to pay its unsecured debts as they fall due. Under the proceeding, a debtor prepares a settlement proposal in relation to existing liabilities to be approved by two-thirds in value of those ordinary creditors present at the meeting (provided that creditors holding at least more than half of the company’s debts attend the meeting).

Pursuant to the preventive settlement, a debtor may propose terms typically included in European restructurings such as maturity extensions, payment deferrals or haircuts, or the ability to convert debt into equity. Secured creditors cannot vote on the terms of the preventive settlement unless the proposal expressly seeks to alter the rights of secured creditors.

Key features of the preventive settlement proceeding include:

Debtor-in-possession: Once proceedings are opened, the debtor company retains the ability to manage its business and assets (similar to Chapter 11 proceedings in the United States) provided that no actions are taken that are detrimental to the body of creditors.

Moratorium: Following the commencement of proceedings, a three-month moratorium on creditor claims comes into effect, although this may be extended by one month with permission from Bankruptcy Court (see below) provided the moratorium does not exceed six months in total.

New money financing: A debtor may obtain additional financing as part of the process. This may be in the form of interim financing between the making of an application and the proceedings being commenced or following the commencement of the proceeding. New money financing may be provided on a super-senior basis. Security may also be provided in respect of the financing, although security taken over any assets already secured by a pre-existing debt must rank behind the existing security unless the existing creditor consents to the new security ranking equally or ahead.

Creditors’ Committee: A debtor is required to assemble a creditors’ committee comprising the largest creditors in each category of the debtor’s debt.

Restructurings

In addition to the preventive settlement procedure, the Bankruptcy Law also allows a debtor to open restructuring proceedings pursuant to which a debtor may propose a restructuring plan to be approved by its creditors. The restructuring proceeding is similar to the preventive settlement (including the ability obtain new money financing) save that the key differences include: (i) the moratorium during a restructuring being valid until the plan is ratified (or the proceeding is terminated) by the Bankruptcy Court, (ii) a court-appointed trustee supervising management in the running of the company, the restructuring process and subsequent implementation, and (iii) the Court having the ability to ratify a plan that has been rejected by the creditors provided that the creditors are not worse off in respect of their rights than they would be in the event of a bankruptcy.

Regarding the timing of preventive settlement and restructuring proceedings, the debtor company has three months to submit a proposal or plan from date on which the proceedings are commenced. However, the time periods for notices to be given to creditors for voting purposes, as well as (in the case of preventive settlements) the time periods for creditors to subsequently appeal are comparatively short (10 days), meaning that creditors are required to act quickly so as to avoid missing deadlines.

Bankruptcy Court and Bankruptcy Unit

A significant change as a result of the Bankruptcy Law is the introduction of a specialised Bankruptcy Court (the Court) to adjudicate and oversee restructuring and bankruptcy proceedings (similar to bankruptcy court in the United States). To promote greater efficiency, the Court will be supported by the Bankruptcy Unit (the Unit).

The role of the Unit includes opining on applications made by debtors to open proceedings, as well as proposals prepared by debtors in both Preventive Settlement and Restructuring proceedings. The Unit also assists the Court with administrative matters such as maintaining a bankruptcy register, vetting documents filed by debtors at court to ensure they comply with procedural requirements and notifying the relevant parties of court decisions.

Judgments issued by the Court shall be immediately enforceable thereby further improving the speed and efficiency of insolvency and restructuring proceedings.

Reviewable transactions and directors’ liability

During the six-month period preceding a company becoming insolvent (or two years in the case of a connected party) a transaction entered into by the company will be rendered void and unenforceable if it involves:

• a donation or a gift;
• a transaction under which its obligations are significantly unbalanced with that of the counterparty;
• a prepayment on an existing debt prior to the due date;
• a payment for an existing debt in other than in the agreed-upon consideration; or
• the granting of security in respect of an existing debt (unless commercially justifiable).

The Bankruptcy Law also expands the potential liability of directors to also apply to managers or any person responsible for the actual management of the company. This is similar to the liability of shadow directors in the United Kingdom. If a person, in the two-year period preceding a company’s insolvency (i) takes any undue risks in relation to the company’s affairs, (ii) disposes of any assets at an undervalue, or (iii) enters into a preference transaction with a creditor, that person may be liable to pay any amount to put the company in the same position as if that act had not taken place.

Other notable changes

The Bankruptcy Law includes certain provisions that supersede or enhance existing legislation to facilitate quicker and more efficient bankruptcy proceedings (including the ability to file documents electronically). There are specific provisions to address emergency financial crises and provisions relating to small companies, which aim to ensure the small enterprises can access and benefit from the new regimes.

Conclusion

The introduction of the Bankruptcy Law is anticipated to improve restructuring and bankruptcy proceedings in the UAE, with a view to promoting investment and the efficient recycling of capital. Preventive settlements and restructuring plans are intended to be ratified on an expedited basis. However, dissenting creditors will have minimal time to appeal any settlement or restructuring plan they object to.

With the addition of restructuring concepts similar to those used internationally as well as a specialised court, the reforms are fundamental in providing greater certainty to both distressed businesses and their key stakeholders, as well as promoting a greater rescue culture in light of challenging economic conditions. Furthermore, extending the scope of liability for directors to managers and “de-facto” directors should separately ensure effective stewardship of companies and mitigate against corporate failures as a result of mismanagement.