UAE Bankruptcy Law: How to better protect your company?

The new Bankruptcy Law will impact all firms in the United Arab Emirates, regardless of how well their finances are doing.

UAE Bankruptcy Law : Under Federal Law No. 51 of 2023, companies operating in the United Arab Emirates will be subject to new regulations as effective May 1. It’s a reform aimed at improving the bankruptcy system’s efficiency, transparency, and balance to enable more effective restructurings. This law applies to you whether your finances are doing well or not. It’s not just about getting by during difficult times; it’s also about taking preventative action, developing more precise plans of action, and being aware of your position.

Introduction

The United Arab Emirates (UAE) recently introduced a UAE Bankruptcy Law, which brings significant changes to the country’s bankruptcy framework. The new law, known as the UAE Bankruptcy Law, aims to streamline the bankruptcy process, enhance protection for both creditors and debtors, and provide opportunities for businesses in financial distress.

The New Law’s Contents : UAE Bankruptcy Law

A new Bankruptcy Court will be established in accordance with the Bankruptcy Law, with the authority to make decisions on bankruptcy-related matters. It is anticipated that this will result in more specialized, effective case management. Provisions for a “restructuring” procedure are included in the amended Bankruptcy Law, enabling debtor corporations to create and submit settlement or restructuring plans for approval by their creditors. The restructuring and bankruptcy laws of the United States and the United Kingdom are often referenced in these new proceedings.

The law allows a moratorium, pausing creditor actions during restructuring. Companies can secure new funding. If unable to pay unsecured debts promptly, the law offers a court-supervised “preventive settlement.” To pursue it, draft a settlement proposal accepted by two-thirds of ordinary creditors present, granting protection for three months, extendable by six months.

What creditors should know about the new law?

Good news for creditors worrying about their capacity to collect: the new law makes it easier to make direct claims to the Bankruptcy Court for unpaid debts. It will be simpler for secured creditors to enforce their security without requiring independent enforcement actions. It’s a quicker and more efficient route to recovery, making sure you receive your money more quickly.

Senior managers and directors are accountable

Now, poor judgments taken up to two years prior to a bankruptcy filing can be held accountable for by directors and senior managers. This seems to be an attempt to stop the kind of careless financial risks that cause businesses to fail. If you are in charge of the company, maintain strict and orderly governance. Now, negligence has a personal cost, and it may be high.

Understanding the New UAE Bankruptcy Law

Major Changes Introduced by the Law

The new UAE Bankruptcy Law introduces several major changes to the country’s bankruptcy framework. It establishes a dedicated Bankruptcy Court to handle bankruptcy proceedings, replacing the previous system where such cases were heard by general courts. The law introduces a preventive settlement procedure, which allows debtors to continue operating their business and paying off their debts. It also emphasizes the importance of financial restructuring and introduces guidelines for the preparation and implementation of restructuring plans. These changes aim to streamline the bankruptcy process, enhance protection for creditors and debtors, and promote financial stability in the UAE.

Streamlining the Bankruptcy Process: UAE Bankruptcy Law

The new UAE Bankruptcy Law brings significant changes to streamline the bankruptcy process in the country. The key aspects of the streamlined process include:

• Establishment of a dedicated Bankruptcy Court: The law establishes a specialized court to handle bankruptcy-related matters, replacing the previous system where such cases were heard by general courts. This dedicated court ensures expertise and efficiency in handling bankruptcy proceedings.
• Introduction of a Bankruptcy Unit: The law establishes a Bankruptcy Department within the Bankruptcy Court’s headquarters. This unit is responsible for receiving and registering applications under the Bankruptcy Law, serving relevant notices, and facilitating discussions between creditors and the court.
• Simplified bankruptcy procedures: The law introduces streamlined procedures for bankruptcy cases, including the appointment of trustees, determination of their powers, and documentation of all actions taken in connection with the management of a debtor’s assets and business.

Enhanced Protection for Creditors and Debtors

The new UAE Bankruptcy Law emphasizes the protection of creditors’ and debtors’ rights and introduces measures to enhance this protection. The key aspects of enhanced protection include:

• Protection for secured creditors: The law recognizes the rights of secured creditors and allows them to initiate enforcement proceedings against secured assets, even if bankruptcy proceedings have been initiated.
• Clarity on debtor’s assets: The law expands the definition of debtor’s assets to include all movable and immovable properties owned by the debtor inside and outside the UAE. This ensures comprehensive protection of the debtor’s assets during bankruptcy proceedings.
• Moratorium period: The law introduces a moratorium period, during which creditor claims are suspended. This period allows debtors to continue operating their business and provides them with the opportunity to financially reorganize and pay off their debts.

Challenges for Small and Medium Enterprises (SMEs)

Small and medium enterprises (SMEs) face unique challenges when it comes to financial difficulties and insolvency proceedings. The new UAE Bankruptcy Law addresses these challenges by providing specific provisions to protect the interests of SMEs. However, SMEs may still face difficulties, particularly when the majority of their creditors are not supportive of restructuring or preventive settlement plans. In such cases, SMEs may need to navigate complex negotiations and legal processes to reach a favorable outcome.

Tools and Mechanisms for Preventive Restructuring

The new UAE Bankruptcy Law provides businesses with tools and mechanisms for preventive restructuring and financial reorganization. The key tools and mechanisms include:

• Preventive composition: The law introduces a preventive settlement procedure, which allows debtors to propose a composition plan to their creditors. This plan outlines how the debtor intends to pay off its debts and continue operating its business.
• Settlement proposal: Debtors can submit a settlement proposal to their creditors, outlining the terms and conditions for repayment of their debts. This proposal is subject to the approval of the creditors and the Bankruptcy Court.
• Restructuring plan: The law provides guidelines for the preparation and implementation of restructuring plans. These plans outline the steps and measures the debtor intends to take to restructure its operations and address its financial difficulties.

Legal Compliance and Risk Management

Legal compliance and effective risk management are crucial for businesses in the face of the new UAE Bankruptcy Law. Key aspects of legal compliance and risk management include:

• Board oversight and responsibility: The board of directors plays a significant role in overseeing legal compliance and risk management. Board members should be knowledgeable about the provisions of the new law and actively engage in risk assessment and mitigation.
• Compliance programs and policies: Businesses should develop comprehensive compliance programs and policies that address the specific requirements of the new law. These programs should include regular training, monitoring, and reporting mechanisms to ensure compliance.
• Risk assessment and mitigation: Conducting regular risk assessments, identifying potential risks, and implementing mitigation strategies are essential for effective risk management. Businesses should proactively identify and address potential financial risks to minimize the impact of financial difficulties.

Conclusion

In conclusion, the New UAE Bankruptcy Law marks a significant shift in the legal landscape, offering both challenges and opportunities for businesses. With streamlined processes and improved creditor protections, companies facing financial distress can now navigate restructuring more effectively. Small and Medium Enterprises (SMEs) may encounter hurdles but can benefit from preventive restructuring measures. Understanding the legal framework, compliance, and proactive financial assessments are key to preparing your business for these changes. By embracing the new law and leveraging its provisions, businesses can adapt to the evolving economic environment and emerge stronger in times of financial difficulty.

About Arnifi

Arnifi is digital first Corporate service provider helping companies enter the Middle East region, starting with UAE and Saudi Arabia markets. Founded and backed by professionals from Amazon, Souq and other large companies operating in KSA – the team understands what it takes to succeed as a startup in both UAE and Saudi Arabian markets, apart from going through the setup process multiple times. Arnifi will provide a truly digital experience to entry and scale up of companies both UAE and Saudi Arabia. Discover tailored solutions and strategic partnerships that propel your business forward. Check out at – www.Arnifi.com for more details.

Frequently Asked Questions (FAQ)

What are the immediate steps a business should take under the new law?

Under the new UAE Bankruptcy Law, businesses should take immediate steps to ensure legal compliance, implement preventive measures, and review their business strategy in light of the new law’s requirements. It is crucial to seek professional advice and develop a clear plan to navigate potential financial difficulties and preserve the business’s financial health.

How does the new law affect foreign investors and companies?

The new UAE Bankruptcy Law applies to all businesses operating in the country, including foreign investors and companies. It provides a comprehensive framework for financial restructuring and bankruptcy proceedings, ensuring transparency and legal protection for all stakeholders. This enhances the investment climate in the UAE and provides a stable and reliable legal framework for international business.

Can businesses still operate while undergoing bankruptcy procedures?

Yes, businesses can continue to operate while undergoing bankruptcy procedures. The new UAE Bankruptcy Law introduces a preventive settlement procedure, which allows debtors to continue operating their business and paying off their debts. This ensures the continuity of the business’s operations during the restructuring process and provides an opportunity for financial recovery.

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