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Coronavirus - A snapshot of the insolvency process - UAE

  • UAE
  • Banking and finance
  • Coronavirus - Country overview
  • Financial institutions

05-05-2020

Whilst the UAE Government has launched economic stimulus packages to minimize the disruption, the financial and social cost of the virus will be felt for many months, if not years, to come. In light of this severe economic disruption, companies of all sizes are likely to feel the impact of this disruption in some form.

Knowing the current practical options for insolvency and applying careful thought to the most appropriate approach is more important than ever before, and these circumstances may well prevail for some time.

This legal update provides a brief snapshot of the current insolvency laws in the UAE and specifically focuses on the following:

  1. the background to the insolvency regime;
  2. the types of restructuring processes available to companies;
  3. director duties and liabilities under UAE law;
  4. related shareholder duties and liabilities under UAE law; and
  5. practical guidance to consider.

Background

The current insolvency regime in the UAE, the Federal Law No.(9) of 2016 on Bankruptcy (the “Bankruptcy Law”), came into force on 29 December 2016.

The Bankruptcy Law applies to companies incorporated pursuant to the Commercial Companies Law, including corporate entities and individuals trading for profit (such as lawyers and accountants) that are not incorporated in Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM).

Governmental bodies and entities wholly or partially owned by the local or federal government are excluded from the scope of the Bankruptcy Law, unless they choose to opt in. The Bankruptcy Law does not apply to companies incorporated within Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), both of which have their own insolvency regimes, which is beyond the scope of this article.

Until the Bankruptcy Law came into force, the UAE had no single source of law governing the insolvency process. Instead, the process was governed by multiple sources and, as a result, did not reflect the growing global trend towards restructuring. The Bankruptcy Law is introduced to streamline the insolvency regime, making it more user-friendly and thereby promoting restructuring. 

Process

There are three insolvency and restructuring procedures applicable to companies under the Bankruptcy Law, outlined in the table below. These are:

  1. Protective Composition;
  2. Bankruptcy and Restructuring; and
  3. Liquidation

(together the “Bankruptcy Procedures”).

Procedure

 

Overview of the Process

Protective Composition

  • If a company is in financial distress but still able to meet its payment obligations (i.e., is not bankrupt, as described below) for more than 30 business days and not yet over-indebted (where the value of its assets is less than its liabilities), it can apply to the court for protective composition.
  • This suspends its obligation to declare bankruptcy, and any proceedings against it, in order to allow it to find a solution to its financial problems. If the protective composition is approved by the court, the court will appoint a trustee that will propose a contractual rescheduling of the company’s debt to the company’s creditor(s), the majority required for approval of such is a majority in number and two-thirds in value of the unsecured creditors (note, secured creditors will not be bound by the protective composition provided they apply to the court to enforce their security).
  • The plan must be implemented within three years of approval by the court. This term can be extended for a further three years with creditors’ approval.

Bankruptcy and Restructuring

  • Either the company, its creditors or the public prosecutor may petition for the bankruptcy of the company. The company is considered bankrupt if it is in cessation of payment for more than 30 business days, or is over-indebted (where the value of its assets is less than its liabilities).
  • If bankrupt, a company must petition the court. Creditors may petition the court for bankruptcy of a company if they have served a notice for payment of a debt (of minimum AED 100,000) on the company, but the payment has not been paid within 30 business days of the demand.
  • Restructuring is available if, in the opinion of the court, the company can be rescued. The court will appoint a trustee that will set up a restructuring plan, which must be approved by a majority in number and two-thirds in value of the unsecured creditor(s) (note, secured creditors will not be bound by this, provided they apply to the court to enforce their security) and ultimately by the court.
  • The aforementioned plan must be implemented within five years of approval by the court. This can be extended by three years by approval of a majority in number and two-thirds in value of the unsecured creditor(s). The trustee must publish the decision of the restructuring, within seven business days from approval by the court, in two widely distributed local daily newspapers.

Bankruptcy and liquidation

  • If the above mentioned protective composition or restructuring plan is rejected by the required majority, fails, is terminated, or the applicant in respect of such is found to have been acting in bad faith, the court can declare the debtor bankrupt and order the liquidation of its assets.
  • In its judgement, the court will appoint a trustee that must publish the judgement in two widely distributed local daily newspapers within three business days of its appointment.

An application by a company to the UAE courts for bankruptcy suspends any claims, judicial proceedings and judicial enforcement actions taken against that company’s assets pending approval of the restructuring plan by the court.

Director duties and liabilities

Directors must file for bankruptcy if the company has ceased to make payment of the company’s debt(s) on their respective due dates for more than 30 business days due to the company’s financial problems or if the debtor is in a state of over-indebtedness (i.e. where the company’s assets do not cover its liabilities). The court will then decide whether to proceed to restructuring or insolvency.

During a protective composition procedure, the directors and staff of the company are responsible for the management of the company’s business under the supervision of the composition trustee and have the powers set out by law and the company’s articles of association. Under bankruptcy (whether restructuring or liquidation), the directors’ powers cease and the court appoints a trustee in bankruptcy that takes control of the company’s affairs.

Transactions at an undervalue and preferences

Certain disposals (such as donations, gifts, transactions where the obligations of the company exceed the obligations of the counterparty, early settlement of debts etc.) which occurred within two years prior to the date of commencement of any procedure pursuant to the Bankruptcy Law are unenforceable against third parties and are challengeable by the creditors of the company. This is especially the case where the disposition is detrimental to the creditors, and the counterparty was aware, or should have been aware, at the time that the company has ceased payment of its debts or is over-indebted.

If a director is found guilty of the below, that director can be disqualified and their name registered in a registry of disqualified directors held by the government. Directors can also be held liable for all or any of the company’s debts if the court finds that the company’s assets are insufficient to settle at least 20% of its debts, or if the company declares bankruptcy and the court finds that the members of the board of directors or the managers carry out certain activities within a two year period prior to the date of the commencement of the bankruptcy procedure.

Fine of up to AED 1,000,000 and imprisonment for up to 5 years if they do any of the following acts once the bankruptcy procedure has commenced:

Fine of up to AED 60,000 and imprisonment for up to 2 years if they do any of the following acts and the company has declared bankruptcy:

• conceal or destroy company’s books with the intention to cause harm to creditors fail to keep company’s books up to date and accurate
• embezzle, with the intention to cause harm to creditors • withhold information required by a trustee following their appointment, or provide false information to the trustee
• acknowledge debts which are not company’s debts • dispose of the company’s assets after its cessation of payment, with the intention to conceal assets from creditors
• procure protective composition or restructuring by deceit • prefer one creditor over the other(s) with the intention to cause harm to other creditor(s)
• declare false facts on subscribed or paid up capital or distribute false dividends or receive remuneration exceeding amount provided by law • dispose of the company’s assets at undervalue
• gamble or enter into speculative ventures outside of the scope of the company’s business
• enter into undertakings with third parties without consideration of the company’s assets and its ability to enter such undertakings

Read more about directors duties across the global here.

Shareholder liabilities

Under UAE law, principally, each legal entity has a separate legal personality. As a result, shareholders of limited liability companies and public joint stock companies are not liable for the debts of their company if it becomes insolvent.

Having said this, UAE case law suggests that they may in fact be liable for outstanding amounts of their respective shares, capital or stock or in other limited circumstances, such as in situations involving fraud, deceit, negligence or serious error with the company’s creditors. This area of law remains undeveloped and few cases have been published to date. Additionally, such judgments have not been directly related to insolvency or restructuring cases. Furthermore, unlike other jurisdictions, there is no binding system of precedent in the UAE.

It is worth noting that the Bankruptcy Law introduces the concept of a ‘shadow directorship’ whereby if a person (including a shareholder) instructs the management of a company, that person may be liable under the Bankruptcy Law if any of the offences detailed in section 3 above are committed.

Practical guidance

In light of the information outlined in this article, we would recommend that companies:

  1. evaluate their financial position (both as a creditor and as a debtor);
  2. devise a debt recovery strategy (considering the trade-off of being at the forefront of debt recovery which may yield an early result against the damaging of a commercial relationship); and
  3. devise a credit repayment strategy (e.g. negotiate short term deferments, or increase the length of a repayment plan);

In the event that a company is unable to pay its debts, we advise seeking financial and legal advice, particularly in light of the personal liability imposed on directors and on shadow directors under the Bankruptcy Law.

For more information contact

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