UAE’s New Bankruptcy Law Part 1: Steps and Aims under the Preventive Composition Procedures

27 June 2018

In 2016, the United Arab Emirates (UAE) passed a unified and fully codified new Bankruptcy Law (i.e. law no. 9 of 2016). The new Bankruptcy Law has entered into force in December 2016 and offers enterprises and tradesmen a choice between two different sets of insolvency procedures. This choice includes procedural options that were unknown to the Emirates’ insolvency law previously, but are notably guided by the latest international legal developments in insolvency law.

In this series of articles titled “UAE’s New Bankruptcy Law” we will explain to you the legal techniques of how the new Bankruptcy Law aims at governing entrepreneurial insolvency as well as the specific aspects that entrepreneurs and investors ought to bear in mind with respect to the new legal regime.

  • Apart from classic insolvency proceedings the new Bankruptcy Law offers a new set of forehanded restructuring proceedings – the so called preventive composition procedures.
  • The preventive composition procedures are designed to facilitate the formation of a settlement agreement restructuring the respective debtor’s obligations and assets.
  • This so called preventive composition plan will be approved and thereby concluded by a majority decision on behalf of the creditors, thus making the debtor significantly less dependent on the full consent of all creditors.

Preserving the competitive edge and contestability of enterprises constitutes a legal concern with high relevance for society as a whole. Creditors, business partners and employees are highly likely to benefit from the successful financial rehabilitation of distressed but survivable enterprises just as well as the societal reticulation each enterprise is embedded into and interconnected with.

Hence, many modern developments in insolvency law aim at providing efficient and constructive procedural options in order to preserve technical and entrepreneurial know-how as well as jobs, and to ameliorate the damage to the respective enterprises reputation. On one hand this – as is anticipated – may intensify business culture and innovational strength. On the other hand it shall countermand the paralyzing effect of impending total loss in case of insolvency.

Settlement by Majority Decision

The UAE’s new Bankruptcy Law pursues exactly these objectives. Most interestingly, it provides a new set of forehanded restructuring proceedings that has been unknown to the Emirates’ insolvency law hitherto. These so called preventive composition procedures offer entrepreneurs the viable option to utilize a court led procedure in order to reach a settlement and thereby restructure obligations and assets.

This settlement agreement called “preventive composition plan” will be concluded by approval of a majority of creditors that will render the plan effective and enforceable even against such creditors who did not approve of the plan (cf. Art. 47 para. 1 and Art. 49). Effective majority approval requires majority in number provided that the majority holds at least two thirds of the total debts subject to the preventive composition procedures. It is this possibility to outvote dissenting groups of creditors and to bypass the necessity of obtaining full creditor consent for restructuring obligations and assets that gives point to the new preventive composition procedures as an alternative restructuring tool.

Distinct exemptions apply, however, for specific claims and obligations, for example such obligations secured by mortgages or liens (cf. e.g. Art. 32 and 46).


Steps and Duration of Preventive Composition Procedures

The new Bankruptcy Law defines fixed terms and deadlines for nearly all procedural steps in order to provide for the highest possible level of transparency regarding the course of procedures as well as a dependable basis for all aspects of entrepreneurial strategy and planning. Accounting for these terms and deadlines, the new law calculates the preventive composition procedures to last up to 160 workdays, i.e. 32 calendar weeks, starting from the day of submittal of the application until the first day of the implementation and execution of the plan. In cases of financial distress that present a less complex state of affairs and a relatively low potential for conflicts between the involved parties, the procedures may be completed within a course of about 100 workdays, i.e. 20 calendar weeks.

According to Art. 41 the implementation and execution term ought to last three years. However, in a given case it may be extended to up to six years with the consent of the necessary majority of creditors.

The debtor alone is entitled to apply for the opening of preventive composition procedures. Pursuant to Art. 6 para. 2 the application must be filed within 30 work days from the first day of cessation of payment of his due debts or insolvency on balance sheet. As of the 31st day the debtor may merely – and must – apply for the opening of regular insolvency proceedings (cf. Art. 68 para. 1). Accordingly, the application for and opening of preventive composition procedures ist limited to a rather narrow timeframe. As the case may be, this will likely require a decision at short notice to be made by the respective entrepreneur. Hence, preparatory examination and analysis of the procedural options under the new Bankruptcy Law – ahead of any actually impending insolvency threat – appear to be highly recommendable.

Upon receipt of the application the competent court will decide to dismiss the application or to open preventive composition procedures. Dismissal of the application may occur especially if there are other insolvency proceedings pending with respect to the debtor, if the application documents were incomplete or inaccurate, or if the court becomes convinced that preventive composition procedures are be inadequate to restructure the debtor’s obligations and assets (cf. Art. 15).

In case the court opens the proceedings, it will appoint one or more trustees simultaneously (cf. Art. 17). The trustee will be ordered to commence his tasks by taking inventory of the debtor’s assets (cf. Art. 22), compiling a table of creditors and corresponding obligations (cf. Art. 37) and drafting a preventive composition plan together with the debtor (cf. Art. 41). According to the new Bankruptcy Law the period between opening of procedures and finalization of a first draft plan shall not exceed a period of 65 work days.

The draft preventive composition plan then has to be submitted to the court for review. After a maximum term of 20 work days the court has to come to a decision regarding the opening of procedures and the submittal of the plan to a vote by the creditors (cf. Art. 42). This decision will at the same time entitle and oblige the trustee to summon all concerned and eligible creditors to an assembly at a term of 15 days.

If the required majority of creditors approves of the preventive composition plan, the court will examine the plan again in order to ensure that the plan is substantially fair and equitable towards all involved parties and that it will not effect any disadvantages for certain creditors. Provided that these requirements are fulfilled, the court will issue its decision of approval of the plan (cf. Art. 49).

Eventually, the trustee will file for registration of the preventive composition plan with the commercial register. The registration marks the endpoint to the court led preventive composition procedures as well as the commencement point of the implementation phase (cf. Art. 54).


Conclusion: There Remain Open Questions

Based upon this overview of the procedural steps of the new preventive composition procedures, there appear to be various aspects throwing doubts on the practicability of the new procedures. These include procedural costs that seem to be non-transparent in advance as well as a lack of applicability of the new procedures to specific types of obligations. Hence, such aspects must be born in mind carefully when considering the utilization of preventive composition procedures. Furthermore the new Bankruptcy Law fails to address highly relevant issues of transnational insolvency, thereby presenting internationally active investors and entrepreneurs with fierce legal challenges.

Accordingly, few elements of the new Bankruptcy Law may be assessed to be yet less than ideal, giving rise to some expectation of legislative engagement to resharpen the relevant aspects of the new law.

However, the new law does in fact offer a modern set of procedures in addition to classic insolvency proceedings, aiming at increasing efficiency and transparency, altogether. In addition, entrepreneurial insolvency has been de-criminalized for the most part by virtue of the new law. This calls for legitimate hopes that the new insolvency law will foster the entrepreneurial culture and economic environment of the UAE.