COVID-19 has already caused wide-scale disruption to numerous industries both locally and globally. Whilst efforts are underway to stop the spread and impact of COVID-19, the financial and social impact of the virus will be felt for many months to come. As companies come to terms with working from home arrangements and the new landscape in which they operate, some business inevitably will experience financial difficulties (be it short term or long term). Governments are introducing economic reforms that will hopefully help to mitigate some of the side effects, but with the worldwide impact of the epidemic, it is likely that some companies will have to make hard decisions, regarding the future of the business.
UAE Bankruptcy Law
The UAE government has approved a federal law to regulate cases of insolvency aimed at enhancing the competitiveness of the UAE by ensuring the ease of doing business, creating favorable conditions for individuals facing financial difficulties, and protecting those who are unable to pay their debts from going bankrupt. The new law is part of the government’s efforts to ensure convenience for citizens and ex-pat residents and respond to their needs.
The law will support individuals who are facing existing or anticipated financial difficulties, rendering them unable to settle their debts. The law will help them reschedule their debts and provide them with the opportunity to be granted new concessional loans. For the business community and legal practitioners, the Bankruptcy Law was a welcome change as it has streamlined the insolvency procedures available for UAE enterprises in line with international best practice.
Amendments in the Bankruptcy Law
The new Bankruptcy Law is seen as a strategically improved law in comparison with previous insolvency laws. Having said that the Bankruptcy Law so far covers the following:
- Permits organizations in money related issues and provide the chance to rearrange their issues so as to stay suitable;
- Companies failing to stay financially viable offers them a chance to seek liquidation;
- Offers alleviation from the most cumbersome impact of criminal punishments that had recently been in power, that was being forced against the managers or directors of the company.
Nevertheless, the law imposes restrictions on those who file liquidation with an intention to avoid debt or in cases of those where the assets of the companies cannot suffice the liabilities. In such cases, the directors and managers of the companies are open to all criminal and civil suits.
Application of the Bankruptcy Law
The Bankruptcy Law mainly applies to commercial companies governed by the Commercial Companies Law (Federal Law No.2 of 2015) (that is, for-profit commercial enterprises), however, the scope of its application is much wider, as listed down below:
- UAE companies established under the Commercial Companies Law,
- Companies partly or fully owned by the UAE or individual Emirates’ government,
- Free zone companies that are not governed by existing bankruptcy laws (i.e.: not including the DIFC and ADGM),
- Civil licensed companies carrying out professional activities
- individuals who are classified as a “trader” under the commercial transaction law
Bankruptcy Filing Process in the UAE
The Bankruptcy Law provides various options which either the Debtor or its creditors may consider, including protective mechanisms designed to avoid full bankruptcy proceedings, including the following:
The preventative composition is the first step that may be considered in the pre-bankruptcy pathway. It is intended to give a financially distressed (but still solvent) Debtor breathing space to reach settlements with its creditors while it is still in the early stages of such financial distress. This option is only available on the condition that the Debtor has not defaulted on any debts owed to creditors for more than 30 days.
The restructuring process begins as a bankruptcy application to the court in relation to an insolvent Debtor, which can either be brought by the Debtor itself or by any of its creditors who has debts of more than AED 100,000 which have been due and unpaid for over thirty days despite written notice. The court will appoint a bankruptcy trustee (and sometimes other experts) who, while preparing a report about the Debtor’s business, may assess the possibility of restructuring the Debtor’s business and whether a restructuring scheme should be submitted to the creditors.
If the court nullifies the preventive composition or restructuring procedure or terminates a Protective Composition Plan or a Restructuring Plan, then the court will then proceed with the formal bankruptcy of the Debtor. It is also possible for either the Debtor or its creditors to apply directly for full bankruptcy proceedings, without any reference to the restructuring process. The courts may entitle the Debtor, under the supervision of the court appointed bankruptcy trustee, to continue its business until the bankruptcy is declared, particularly in circumstances where it is best to try to sell the business as an ongoing concern.
Advantages and Drawbacks of Filing for Bankruptcy
The positives of a Bankruptcy filing are as follows:
- At least temporary relief from creditors;
- Stay of certain specified criminal actions until process is complete;
- Opportunity to wipe away debts and potentially avoid personal liability;
- Avoidance of liability for failure to file for bankruptcy; and
- Possibility to rehabilitate company if circumstances warrant
The primary drawbacks are as follows:
- Possibility of rejection and criminal prosecution in the event of fraud or other bad faith (as the case may be);
- Subject to a 20% payment threshold – if this is not reached, the individual directors, shareholders, and managers may be personally liable; and
- The bankruptcy “stigma”
Important Note for Directors of Companies in Distress
Directors of companies under financial stress should:
- Make themselves aware of the risks involved in taking any action: whether it be to continue to trade, seek a turnaround, or file for bankruptcy;
- Familiarize themselves with their statutory duties, and in particular, the shift of their statutory duties to other stakeholders (employees, creditors, suppliers, and not just shareholders) in the “zone of insolvency”.
- Directors and shareholders (especially financial sponsors) should retain early on their own legal counsel (in addition to the debtor’s own counsel) when difficulties start to arise.
- If bankruptcy or liquidation of the debtor is ultimately reached the actions of its directors during the preceding period will undoubtedly come under close scrutiny.
How Riz and Mona Consultancy Can Help
It is obvious that no country wants to encourage any of its businesses to go through bankruptcy proceedings unless it is very much a last resort. It is no doubt that it will be detrimental to any country’s economy if a number of businesses file for bankruptcy.
From the information that we’ve given in this article, we, here at Riz and Mona Consultancy, recommend that businesses in UAE evaluate the financial position of their companies, devise debt recovery strategies, and formulate credit repayment strategies together with approved UAE liquidators. We can also provide you with tailor solutions based on your personal preferences. Call us today to book an Initial Consultation with our team on Company Liquidation and Bankruptcy Filing in Dubai or any other state in the UAE.