Introduction
Effective May 1, 2024, Federal Law Decree No. 51 of 2023 on Financial Restructuring and Bankruptcy (New Bankruptcy Law) came into force in the UAE, replacing Federal Decree-Law No. 9 of 2016 (Old Bankruptcy Law) in its entirety. While much of the foundational structure of the Old Bankruptcy Law remains intact—including procedures for preventive settlement, financial restructuring, and bankruptcy—the New Bankruptcy Law strengthens several provisions introduced through amendments to its predecessor.
For instance, the emergency financial crisis provisions integrated into the Old Bankruptcy Law have been retained. Additionally, the definition of a “debtor” now explicitly includes both natural and legal persons under the New Bankruptcy Law.
This legislation also brings notable changes impacting both creditors and debtors, introducing measures that are expected to influence restructuring and insolvency cases in the UAE significantly. In this article, we explore some of these key changes and their potential implications.
Introduction of Dedicated Bankruptcy Courts
The New Bankruptcy Law establishes specialized Bankruptcy Courts at both federal and local levels to oversee preventative settlement, financial restructuring, and bankruptcy processes. This development reflects a commitment to enhancing the speed and efficiency of formal restructuring and insolvency cases in the UAE, aligning the country more closely with international best practices, such as the U.S. bankruptcy court model.
Under the New Bankruptcy Law, all unresolved claims, legal proceedings, grievances, and actions initiated under the Old Bankruptcy Law before May 1, 2024, will be transferred to the relevant Bankruptcy Court for adjudication.
Roles and Powers of the Bankruptcy Courts
The Bankruptcy Courts will play an active role in managing bankruptcy proceedings. Key responsibilities include:
- Oversight of Debtor Assets: Supervising the management of a debtor’s assets and business operations to ensure the efficient progress of proceedings.
- Engagement with Creditors: Convening meetings with creditors to address relevant matters and facilitate resolutions.
- Enforceability of Decisions: Decisions issued by the Bankruptcy Courts will be treated as writs of execution, enforceable immediately without the need for additional service. Importantly, the enforcement of these decisions cannot be challenged.
This reinforced authority of the Bankruptcy Courts addresses a previous challenge under the Old Bankruptcy Law, where onshore proceedings were often disrupted by parties initiating conflicting actions in other courts. By consolidating jurisdiction and streamlining processes, the New Bankruptcy Law aims to create a more robust and effective framework for managing insolvency and restructuring cases.
Abolishment of FRC and Introduction of New Administrative Units
The New Bankruptcy Law replaces the Financial Restructuring Committee (FRC) from the Old Bankruptcy Law with two new administrative entities: the Bankruptcy Department and the Financial Restructuring and Bankruptcy Unit. These additions aim to enhance the efficiency and organization of bankruptcy and financial restructuring cases in the UAE.
Roles of the New Administrative Functions
- Bankruptcy Department
- Positioned as an extension of the Bankruptcy Courts.
- Focused on supporting court operations and streamlining case management.
- Financial Restructuring and Bankruptcy Unit
- Operates under the Ministry of Justice.
- Manages administrative aspects of bankruptcy and restructuring cases.
- Provides opinions on specific applications to assist the Bankruptcy Courts.
- Responsible for establishing and maintaining a register of court judgments and insolvency applications against debtors, marking the first such registry in the UAE.
Advantages of the New Structure
These administrative units replace the FRC, addressing previous ambiguities about its judicial authority and the extent of protection afforded to debtors who filed applications with it. The new framework clarifies these uncertainties, particularly regarding moratorium protections under preventative settlement procedures.
By creating a centralized and streamlined system, the New Bankruptcy Law is expected to improve case processing times and enhance the overall infrastructure of the UAE’s bankruptcy regime. The establishment of a registry for judgments and insolvency applications is a significant step forward, offering transparency and accessibility that were previously lacking.
Revised Insolvency Test Under the New Bankruptcy Law
The New Bankruptcy Law introduces significant changes to the insolvency test for debtors, simplifying the criteria and providing greater clarity compared to the Old Bankruptcy Law.
Key Changes to the Insolvency Test
- Unified Assessment for Preventive Settlement and Bankruptcy Procedures
Under the Old Bankruptcy Law, the insolvency test included both cashflow and balance sheet tests, with separate criteria for initiating preventive settlement and bankruptcy procedures. The New Bankruptcy Law eliminates this distinction, adopting a unified cashflow insolvency test. - Clarification of “Cessation of Payment”
Article 15 of the New Bankruptcy Law defines “cessation of payment” as the failure to pay a due debt within 10 days of its specified deadline, regardless of whether the debtor’s assets are sufficient to cover its debts or whether the unpaid debt is secured by valuable collateral. This clarification establishes a clear benchmark for assessing insolvency throughout the law. - Extended Window for Solvency Assessment
The New Bankruptcy Law increases the assessment period from 30 consecutive working days to 60 days. This extension provides debtors with additional time to explore options and potentially stabilize their financial situation before initiating proceedings. - Shift from Mandatory to Discretionary Filing
Under the Old Bankruptcy Law, a debtor was obligated to file for financial restructuring or bankruptcy if insolvency criteria were met. The New Bankruptcy Law changes this to a discretionary approach, stating that a debtor “may submit” an application for preventive settlement or bankruptcy proceedings within 60 days of becoming aware of their inability to pay debts when due.
Notably, failure to file within this 60-day period does not result in automatic rejection of the application. This shift could create ambiguity for insolvency practitioners and management teams, as there is no fixed point or legal obligation for debtors to file for bankruptcy, even when the insolvency test is met.
- Creditor-Initiated Applications
Creditors retain the ability to initiate financial restructuring or bankruptcy proceedings against a debtor, subject to demonstrating that the debt is unconditional, undisputed, and payable. The exact threshold for creditor applications will be detailed in the forthcoming Executive Regulations.
Implications for Debtors and Creditors
- Debtors benefit from increased flexibility and time to address financial difficulties but may face uncertainty without a clear obligation to file for bankruptcy.
- Creditors are offered safeguards through stricter requirements to prove the legitimacy of claims but may encounter delays due to the lack of a mandatory filing requirement for debtors.
The revised framework is designed to strike a balance between flexibility and accountability, but its practical application will likely require careful navigation by insolvency practitioners in the UAE.
Recognition of UAE Bankruptcy Proceedings in Other Jurisdictions
Despite expectations that the UAE might adopt the UNCITRAL Model Law on Cross-Border Insolvency, as seen in the DIFC, ADGM, and more recently Saudi Arabia, the New Bankruptcy Law does not incorporate this framework. The UNCITRAL Model Law offers a streamlined process for recognizing foreign insolvency proceedings, simplifying cross-border cases. Its absence in the New Bankruptcy Law means separate recognition of UAE bankruptcy proceedings in foreign jurisdictions will still be required.
Concerns and Implications
The lack of adoption raises concerns about the ease of recognition and enforcement of UAE bankruptcy proceedings abroad. However, recent legal precedents indicate that UAE bankruptcies may still find recognition in foreign courts despite this gap.
English Court’s Approach: Re: Almuhairi and Another
In the Re: Almuhairi case, the English courts demonstrated a willingness to recognize UAE bankruptcy proceedings, even without the UNCITRAL Model Law framework. Recognition was sought for Abu Dhabi-based bankruptcy proceedings under England’s Cross-Border Insolvency Regulations 2006 (CBIR), which incorporate the UNCITRAL Model Law.
The court evaluated the application based on two key criteria:
- “Foreign Proceedings” under Article 2 of Schedule 1 of the CBIR:
The proceedings had to be:- Collective judicial or administrative proceedings in a foreign state;
- Conducted under insolvency law;
- Involving control or supervision of the debtor’s assets and affairs by a foreign court;
- For the purpose of reorganization or liquidation.
- “Foreign Main Proceedings”:
The proceedings had to occur in the state where the debtor has its center of main interests (COMI).
The English court found that UAE bankruptcy proceedings met both criteria. As a result, the appointed trustees were granted authority to realize the debtor’s assets in Great Britain.
Broader Implications
This decision aligns with the trend of English courts enforcing UAE judgments, as seen in Invest Bank PSC v. El-Husseini & Ors [2023]. While the absence of the UNCITRAL Model Law in the UAE may complicate recognition in some jurisdictions, the English courts’ willingness to recognize UAE proceedings offers a precedent that other jurisdictions might follow.
Moreover, the UAE’s continued alignment of its bankruptcy and restructuring frameworks with international standards enhances the likelihood of recognition in foreign jurisdictions. While uncertainties remain in jurisdictions beyond England, these developments represent progress in integrating the UAE’s insolvency regime into the global framework.
Trustee Powers, Supervision, and Creditor-Driven Tools
The New Bankruptcy Law retains the overarching framework where the Bankruptcy Department, the Financial Restructuring and Bankruptcy Unit, and the Bankruptcy Courts hold primary oversight and control over preventative settlement, financial restructuring, and bankruptcy processes. However, the law introduces provisions that appear to expand the powers and responsibilities of Trustees compared to the Old Bankruptcy Law. For example, Trustees are now empowered to manage the debtor’s assets, but their actions will still be subject to the supervision of the Bankruptcy Court and the relevant administrative units, ensuring that Trustees do not hold complete control over the process.
Limited Role of Creditor-Driven Processes
Unlike in some other jurisdictions, the New Bankruptcy Law does not establish a creditor-driven process or allow for the out-of-court appointment of an independent office-holder. This may be viewed as a missed opportunity for creditors who have been frustrated with the lengthy and sometimes cumbersome restructuring processes in the UAE.
However, creditors still have the ability to petition for the initiation of financial restructuring or bankruptcy proceedings, provided the conditions set out in the law are met. While the absence of a fully creditor-driven process might be seen as a limitation, the law’s framework allows creditors to actively participate in the formal procedures when necessary.
Changes to Preventative Composition Procedure
Under the New Bankruptcy Law, the preventative composition procedure from the Old Bankruptcy Law has been renamed the “preventative settlement” procedure. While the overall concept remains unchanged—allowing the debtor to create a composition, scheme, or restructuring plan with its creditors—there are notable adjustments in how the process operates.
One key change is that the New Bankruptcy Law no longer automatically requires the appointment of a Trustee when the debtor files for preventative settlement, as was mandated under the previous law. Instead, the debtor is allowed to continue managing its business and affairs, provided that such actions do not harm the interests of creditors. A Trustee can only be appointed with permission from the Bankruptcy Court, which offers greater flexibility for the debtor. This change is likely to be welcomed by the business community in the UAE and aligns the preventative settlement procedure with similar tools in other jurisdictions, such as the “protective settlement” procedure under the Saudi Arabian bankruptcy regime. One key distinction, however, is that the UAE’s preventative settlement automatically triggers a moratorium, while the KSA procedure does not.
The New Bankruptcy Law also shortens the moratorium period for preventative settlement proceedings from the previous ten months (with a four-month extension) to three months. However, debtors may request one or more extensions with the Bankruptcy Court’s approval, provided that each extension is no longer than one month, and the total moratorium period does not exceed six months. This change reflects the law’s broader goal of improving the speed and efficiency of bankruptcy proceedings.
Debtors must carefully assess whether the preventative settlement process is suitable for their situation, as the reduced moratorium period of six months may not provide sufficient time to negotiate a restructuring plan with creditors while ensuring adequate moratorium protection.
Antecedent Transactions
Under the Old Bankruptcy Law, Article 168 outlined various types of antecedent transactions, including donations, gifts, early debt payments, the creation of new security for existing debts, and any transactions where the debtor’s obligations significantly exceeded those of the counterparty, whether in cash or kind. The New Bankruptcy Law, under Article 148, introduces several changes to the treatment of antecedent transactions, such as:
- A reduced examination period, now covering a six-month window prior to the cessation of payment, extendable to two years if the transactions involve insiders or related parties.
- The introduction of a “commercial considerations” defense for certain transactions, such as the early repayment of negotiable instruments, provided they can be justified on legitimate business grounds. However, the court retains the authority to annul transactions that are deemed harmful to creditors.
Similar to the defenses under the Old Bankruptcy Law, the Bankruptcy Court can approve a transaction that would otherwise be considered an antecedent transaction if the debtor can demonstrate it acted in good faith, with the intent to continue its business, and with reasonable grounds to believe that the transaction would be beneficial to the business (Article 150(1)).
Conclusion
The introduction of the New Bankruptcy Law marks a significant investment in and enhancement of the UAE’s bankruptcy infrastructure. Establishing dedicated Bankruptcy Courts, a Bankruptcy Department, and a Financial Restructuring and Bankruptcy Unit is a major step forward, aligning the UAE’s regulations with international best practices. Additionally, progress is being made in gaining recognition for UAE bankruptcy proceedings in other jurisdictions, even without the explicit adoption of the UNCITRAL Model Law under the new legislation.
While creditors may feel that further improvements could have been made in certain areas, it is clear that the “rescue” framework from the Old Bankruptcy Law has been retained. The Executive Regulations supporting the New Bankruptcy Law will provide further clarity and are expected to be published in due course.
Bottom Line
The New Bankruptcy Law (Federal Law Decree No. 51 of 2023) came into effect in the UAE on 1 May 2024, replacing the previous Federal Decree-Law No. 9 of 2016. While it preserves much of the original law’s framework, it introduces key changes for both creditors and debtors, notably recognizing both natural and legal persons as ‘debtors’. The law also retains provisions addressing emergency financial crises from the previous law and is anticipated to have a significant impact on restructuring and insolvency cases in the UAE.
