Here are a few things that you need to know about the soon to be passed bankruptcy law.
What is the bankruptcy law?
The new law provides, for the first time, a comprehensive legal framework to help distressed companies in the UAE avoid bankruptcy and liquidation. Drafted by the Ministry of Finance, the law draws on best insolvency and bankruptcy protection practices from several jurisdictions, including France, Germany, the Netherlands and Japan. It seeks to safeguard the rights of both creditors and debtors in insolvency situations, including measures that prioritise secured creditor rights and enable companies to restructure without unanimous creditor approval.
Why is it important?
The lack of a modern, comprehensive bankruptcy law has long been cited as a major shortfall of the UAE’s business climate. Companies large and small that run into financial trouble are all but unable to persuade the local courts to offer a moratorium on debt claims while they restructure their business and finances, leaving them at the mercy of creditors. Although there are more than 250 articles 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 offer few options to companies threatened with insolvency beyond liquidation, and are therefore hardly ever used.
When will it be implemented?
After several years of scrutiny by a series of committees, 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, as both financial free zones have their own internal legislation covering insolvency and bankruptcy. The law contains provisions related to senior employees and directors of insolvent companies, but does not cover private individuals.
What are the key features of the new law?
The law will establish a new regulatory body, the Committee of Financial Restructuring (CFR), which will oversee the procedures of financial restructuring outside the scope of the courts, have responsibility for the appointment of experts in the field of financial restructuring, and establish and maintain a national electronic database of individuals who have had bankruptcy rulings against them.
The new law sets out four broad 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.
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