Being an entrepreneur is being prepared for both the best and the worst scenarios. SMEs, like any other companies, must be ready for times of hardship, when a partial or complete interruption of your financial flow could result in your own failure and cessation of payments – making you vulnerable to financial distress and even bankruptcy. As a fiduciary of your company, you best know what you can and cannot legally do in such circumstances.
This is all the more relevant that, last October, the UAE government published the Federal Decree-Law No. (51) of 2023 on Financial Restructuring and Bankruptcy, replacing the outdated Federal Law No. 9 of 2016 on Bankruptcy.
Scheduled to come into force on May 1, 2024, this reform aligns with the country’s efforts to become more business-friendly. Balancing creditors’ and debtors’ interests, it modernises and streamlines the UAE’s business restructuring and insolvency legal framework in line with international standards and addresses precisely a variety of situations:
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Crisis management provisions, including:
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Specific provisions during financial crises;
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The negotiation period with creditors allowed to debtors;
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The extension twofold of deadlines and the facilitation of debtors’ financing.
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Special procedures for small debtors if the debtor’s assets fall below a certain threshold – the criteria are to be determined by executive regulations.
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Criminal penalties for negligence and fraud leading to bankruptcy, including imprisonment of up to five years and fines of up to AED1 million.
Most importantly, the Decree Law outlines three scenarios based on the severity of the financial situation, offering tailored solutions to each:
1. Protective Settlement
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The debtor applies in case of default or potential default and retains power with court supervision.
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Claims are suspended and operations can continue for a maximum of six months, during which the debtor must diligently seek their creditors’ approval for settlement, providing all necessary documents and information regarding their financial status.
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The Court approves the settlement proposal if the required conditions are fulfilled; if not, or if the debtor fails to meet these conditions post-approval, the proceedings are terminated.
2. Financial Restructuring
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The debtor, creditors, or regulatory authority can apply in case of default or insolvency.
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Claims are suspended and operations can continue from the day after the Bankruptcy Court decides to commence restructuring until either the Court approves the restructuring plan or terminates the proceedings.
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The debtor manages assets and business operations under trustee supervision, as long as creditors are not harmed; the Court, trustee, or creditors may suspend these management activities for a compelling reason and specified considerations.
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The Court approves the settlement proposal if the required conditions are fulfilled; if not, or if the debtor fails to meet these conditions post-approval, the proceedings are terminated.
3. Bankruptcy
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The debtor, creditors, or regulatory authority can apply only in case the debtor defaults on payment for 60 days, is financially insolvent, and is unable to continue operations.
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Following the decision to commence bankruptcy proceedings, the debtor’s management of assets and operations is suspended, rendering all subsequent transactions null and void.
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The bankrupt is allowed to regain their status after the bankruptcy is announced, either one year after bankruptcy concludes or upon fulfilling all obligations, including debt settlement.
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