The New UAE Bankruptcy Law creates a new system of "life support" for businesses experiencing financial difficulties. The law will encourage foreign investment and instil confidence in the international markets that the UAE continues to evolve and develop to face the modern day challenges of business, says an analysis by Addleshaw Goddard's Dubai Office.

Addleshaw Goddard assesses the impact of the law and highlights some key provisions in the long anticipated change to UAE Federal Law in the following article:

New UAE Bankruptcy Law
Federal Law No. 9 of 2016 (the New UAE Bankruptcy Law or the Law) was promulgated by decree by UAE President His Highness Sheikh Khalifia bin Zayed Al Nahyan on September 20, 2016 and published in the Official Gazette on September 29, 2016. The Law will come into effect at the start of 2017 and introduces widespread changes to the previous insolvency regime, which provided very few options to creditors and insolvent companies beyond liquidation and was rarely relied on in practice.

Applicability
The New UAE Bankruptcy Law shall apply to (Article 2):
•    Companies established under Federal Law No. 2 of 2015 (the Commercial Companies Law) – including limited liability companies and both public and private joint stock companies;
•    Corporations that are partially or solely owned by federal or local government in the UAE (to the extent that the byelaws or the legislation of their establishment state that the Law is applicable to such corporations);
•    Companies established in free zones that are not subject to provisions in such free zones which already organise the procedures of bankruptcy (i.e. Dubai International Financial Centre and Abu Dhabi Global Markets);
•    An individual who is classified as a "Trader" under Federal Law No.18 of 1993 relating to commercial transactions; and
•    Civil companies,
(in each case the Debtor).

Petitions for Bankruptcy
The New UAE Bankruptcy Law sets out two routes into the bankruptcy provisions contained therein:
•    By the Debtor who (Article 6):
•    Faces financial difficulties such that they require assistance in reaching reconciliation with its creditors; and
•    Has ceased paying its debts due for a period in excess of 30 consecutive working days;
OR
•    By a creditor owed at least Dh100,000 by a debtor who (Article 69):
     * Has already warned the debtor to fulfil such a debt; and
     * Such a debt has not been fulfilled within 30 consecutive working days from the date of such warning.

The financial threshold for creditor petition is subject to review by the Council of Ministers, upon the recommendation of the minister.

New Regulation, New Options
The New UAE Bankruptcy Law establishes a new regulatory body, the Committee of Financial Restructuring, whose mandate is to oversee financial restructuring procedures outside of the courts, appoint experts in financial restructuring and establish, for the first time in the UAE, an electronic record of individuals with bankruptcy rulings against them.  

The Law further outlines four key pathways for companies to avoid insolvency:
•    Financial reorganisation;
•    Financial restructuring;
•    A pre-emptive settlement; or
•    The raising of new funds.

Penalties
A broad array of penalties (both financial and penal) are included in the New UAE Bankruptcy Law, some of which provide a broad discretion to the courts as to penalty.

If the court finds that the debtor's funds are not sufficient to fulfil at least 20 per cent of creditor claims, the court has discretion to obligate all or some of the directors or managers of the debtor to pay all or part of the debts where their responsibility for the debtor's losses is "…evident…" by reference to the Commercial Companies Law.

It would appear likely that the Law will encourage higher standards of corporate governance given that one of the penalties (Article 200) imposes a maximum sentence of one year imprisonment or a fine not exceeding Dh30,000 for those who receive a bankruptcy judgment and did not maintain sufficient commercial records to establish their financial position prior to the bankruptcy. Corporate governance is increasingly being regarded as an important consideration in the region and we expect this to continue with the implementation of the New UAE Bankruptcy Law.

General Managers, in particular should continue to implement appropriate systems for managing the cash flow and working capital of the business if facing financial difficulties.

Recognition of Secured Creditors and Preferential Claims
The Law recognises the rights of secured creditors to rank ahead of those with unsecured claims (Article 185). Further, certain claims shall be treated as preferential including:
•    Judicial fees or expenses relating to the bankruptcy process as well as any expenses incurred for the benefit of creditors to preserve and liquidate the Debtor's money;
•    End of service gratuity, unpaid wages and salaries (but not bonus or allowances) up to a maximum of 3 months; and
•    Amounts due to government bodies.

* Addleshaw Goddard is an international law firm that offers a full range of commercial legal services from its offices in Dubai, Doha, Muscat, Hong Kong, Leeds, London, Manchester, Singapore and Tokyo (in association with Hashidate Law Office)