Insolvency and Restructuring in the UAE

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Published December 2015

There has been an ongoing push over the years for the reform of UAE’s existing insolvency laws. Although statutory mechanisms relating to restructuring, bankruptcy and liquidation of insolvent individuals and companies do exist in the UAE, the law is not well developed and there is much uncertainty in the application of the laws, particularly in complex insolvency cases.

This article provides an overview of bankruptcy and liquidation proceedings under current UAE law and sets out the relevant conditions applicable to companies, their directors and their creditors. This article does not address the laws applicable in the free zones (eg. The DIFC) or the proposed new federal bankruptcy law.

Current Insolvency Legislation:

There are two primary pieces of legislation that set out the terms of insolvency and restructuring in the UAE: 

  • The Federal Law No. 18 of 1993 on the Law of Commercial Transactions also known as the Commercial Code, governs bankruptcy proceedings; and 
  • The Federal Law No. 8 of 1984 on Commercial Companies, also known as the Commercial Companies Law, governs liquidation proceedings.


Bankruptcy proceedings are considered a rehabilitation procedure through which the financially troubled company is able to reach an agreement with its creditors to discharge or refinance its debts. However, where the company is unable to reach an agreement with its creditors or is further unable to satisfy its debts, bankruptcy can then lead to liquidation of the company. 

What Constitutes Bankruptcy?

According to UAE federal laws, a “trader” can be declared bankrupt when it ceases payment of its commercial debts due to its financial instability.

Under Article 4 of the Commercial Code, a “trader” is any individual or company that conducts commercial activities in the UAE. It is important to note that government entities and government controlled entities may be exempt from bankruptcy laws as the Civil Procedures Code prohibits the seizure of government assets. 

Bankruptcy Proceedings:

Bankruptcy can be initiated by a trader, a public prosecutor, a court or the trader’s creditors. In voluntarily applying for bankruptcy, a trader must file within 30 days of the date on which it ceases to be able to pay its debts.  Failure by the trader to file within that period will be construed as committing the criminal offence of bankruptcy by negligence. 

Voidable Transactions in Bankruptcy Proceedings:

According to Article 696 of the Commercial Code, certain transactions made after suspension of payment and before the bankruptcy judgment may be set aside or “annulled” and are not binding against creditors. These transactions are as follows:

  • All donations excluding small gifts (the quantum of what constitutes a ‘small gift’ is not specified in law);
  • Payment of a term debt before its maturity, regardless of the manner of such settlement;
  • Payment of immediate debts other than in the manner agreed upon for payment;
  • Provision of guarantee or security to secure previous debt; and
  • Any transaction that reduces or harms the claims of creditors where the creditors are aware at the time of the transaction that the debtor was insolvent at the time of the disposal.

Director Liability:

In some instances, directors or officers of the bankrupt company can be found personally liable or guilty for “bankruptcy by negligence,” which is a criminal offence. 

In addition, the company’s directors or managers can be held personally liable and can face up to five years’ imprisonment if found guilty of:

  • Concealing, destroying or altering the books of the company;
  • Misappropriating or concealing part of the company’s property;
  • Knowingly acknowledging debts which are not payable by the company, or abstaining from presenting certain documents in their possession;
  • Obtaining special arrangements for the company by way of fraud; and
  • Disclosing untrue information on the subscribed or paid up capital, or distributing fictitious profits or receiving bonuses in excess of what is permitted under the company’s laws and articles.

Moreover, if a bankrupt company’s assets cannot satisfy at least twenty (20) per cent of its debts, and the directors are found guilty of any of the acts described above, the court can hold any or all of members of the board of directors to be jointly or severally liable for some or all of the company’s debts. A director can avoid liability by proving that he did not participate in such activities.

Creditors Priority and Rights:

Once bankruptcy has been declared, creditors generally do not have the right to engage in legal remedies against a trader and the assets of the trader can only be sold following an order from a judge. However, it is possible for the creditor’s rights to be reinitiated if bankruptcy proceedings end.

Although the Commercial Code does not set out an exact order of priority relating to debt payments, it does give preference to certain payments, especially those payments governed by UAE law.  During bankruptcy, priority of debts is generally given to:

1.Wages and salaries due to employees for the 30-day period preceding the declaration of bankruptcy;
2.Amounts due to a trustee in bankruptcy or a third party, where they paid a debt on behalf of the debtor from their own funds;
3.Government taxes due from the trader for the two years preceding the bankruptcy judgment; and
4.Certain rent payments to the owner of premises leased to the debtor.

Aside from the above, there is little guidance regarding priority rules, specifically as it pertains to secured creditors vs. unsecured creditors. Although secured creditors are considered “preferred” creditors, it is not clear whether they would be given priority over all unsecured creditors, or the priority sequence between two secured creditor claims where there is no contractual priority established.

Compositions with Creditors:

The Commercial Code outlines provisions to prevent the bankruptcy of a debtor through a composition (also known as an arrangement or restructuring). These can take the form of: a) protective compositions, which are preventative measures generally agreed to prior to any adjudication proceedings; or b) judicial compositions, which can be initiated by a judge following the declaration of bankruptcy by the debtor.

Protective Composition: According to the Commercial Code, any trader, excluding joint venture companies or companies in a state of liquidation, can apply for a voluntary protective arrangement to avoid bankruptcy within 20 days of being unable to make a payment, providing the applicant has practiced the business continuously for the one year preceding the application for the protective arrangement.

The provisions of the Commercial Code legislating the terms and requirements of protective composition are found in Chapter VIII, Part Two of the Commercial Code, relating to “protective arrangement from bankruptcy,” specifically Articles 831 to 877.

If the court accepts the application for a composition and opens the proceedings, the debtor must submit a proposal that satisfies at least 50 percent of the debt to be paid within three (3) years from the date of acceptance of the composition. 

Once a decision is made by the courts to proceed with the composition procedures, all bankruptcy proceedings, claims, enforcement actions relating to the debtor are halted. The court may also issue orders to protect the assets of the company until the proposed composition is realized. 

All creditors whose debts have been accepted by the court may vote with respect to the proposed protective composition scheme. A majority of creditors must vote in favour of the arrangement, provided that the “majority” represents at least two-thirds of the trader’s debt value. Creditors who do not attend are not counted when determining whether a majority vote has been reached.

Creditors that do not participate in the composition are likely to require court approval to make or continue to make claims against the trader. 

Judicial Composition: Chapter V, Section 2, Articles 764 to 784 of the Commercial Code provide for, and outline the terms of, judicial composition. Judicial composition is an involuntary arrangement initiated by the court following a declaration of bankruptcy. The judge will invite creditors, the bankrupt company and the bankruptcy trustee to a creditors meeting. Creditors whose claims have been accepted by the court are also invited and will vote to approve the judicial composition of the trader’s debts. At the meeting, a composition scheme will be proposed, which must be accepted by a requisite majority.  Unlike with protective composition, creditors who do not attend the judicial composition meeting are deemed to have rejected the terms of the settlement, and will count as negative “votes” for purposes of determining whether a majority has been reached.

In the case of fraud or the trader rejecting the terms of the composition, the judicial composition can be terminated and the court can appoint a judge and a trustee to continue the bankruptcy proceedings.


Liquidation refers to the process of dissolving a company, subsequent to which assets are realized and liabilities are discharged.  While liquidation can be triggered to pay a company’s debts, not all circumstances involving liquidation are insolvency related. Although similar in process, liquidation differs from bankruptcy in their main objectives: liquidation aims to terminate a company’s corporate existence, while the objective of bankruptcy is to rehabilitate a debtor.

Liquidation is covered under Chapter 10 of the Companies Law. Specifically, Article 281 of the Companies Law provides that a company can be dissolved for the following reasons:

  • merger;
  • unanimous decision by shareholders to terminate (unless a specific majority is outlined in the Memorandum of Association);
    fulfillment of the company’s objectives;
  • expiry of the term of the company in accordance with its Memorandum of Association (unless renewed in accordance with the provisions in the Memorandum or the Articles of Association); and
  • depletion of all or most of the company’s funds to the extent that the investment of the remaining not feasible.

It is important to note that UAE liquidation proceedings can be applicable to foreign companies that conduct their primary activities in the UAE or have an administrative base of operations within the state.

Director’s Responsibilities under Liquidation:

Joint Stock Company: If a joint stock company’s losses amount to one half of its capital or more, the Board of Directors must convene a General Meeting to resolve whether the company should be maintained or dissolved. If the directors do not call a Meeting or cannot approve a decision,  any interested party may initiate proceedings to dissolve the company. 

Limited Liability Company: If a limited liability company’s losses amount to one half of its capital, the Board of Directors must convene a general assembly to resolve whether the company should be maintained or dissolved. To approve dissolution of the company, the same majority required for an amendment of the company Memorandum of Association is required.   If the limited liability company’s losses amount to or exceed three-quarters of its capital, shareholders holding 25 percent or more of the company’s share capital can request dissolution. 

Liquidation Proceedings:

For a company to be liquidated, it must: 

  • register in the Commercial Register;
  • publish its liquidation status in two local daily Arabic newspapers; and
  • add the term “under liquidation” to the company’s name.

One or more liquidators can be appointed by the company’s shareholders, its partners, or, if the liquidation is initiated by court decree, then by the court . Upon appointment of the liquidator, the powers of the Board of Directors cease and the liquidator acquires the powers to preserve the company’s assets and has the ability to raise and defend legal claims.

The liquidator is obliged to write to known creditors and invite them to present their claims within 45 days from the date of the notice of liquidation. The liquidator must then settle all the debts owed by the company. 

In the case that the company’s assets cannot settle all the debts, the debts will be paid proportionally between the creditors without prejudice to the rights of preferred creditors. Expenses of the liquidation itself shall be paid with the company’s funds. 

Once the debts have been satisfied, the liquidator will distribute any remaining funds to the shareholders according to their shareholding in the company. The liquidator will then provide a final account to the shareholders before registering the completed liquidation with the Commercial Register.

Conclusion and Additional Observations

Although the UAE legislation does provide certain guidelines for insolvency proceedings, it does not provide a conclusive answer for every possibility. Furthermore, the lack of tested court cases only adds to the ambiguity surrounding the insolvency regime in the UAE.  In addition, government controlled and government related entities may be subject to certain immunities and protections which could limit the applicability and efficacy of bankruptcy procedures against such entities.  Until there is further clarification or an amendment to the current framework, traders and creditors will continue to address restructuring and distressed debt situations outside formal statutory insolvency procedures. 


If you are interested in discussing the content of this article in more detail, please contact: Ian Gaitta, Partner ( or +9714-4529091). You may also visit:


Ian Gaitta
Tel: +9714-4529091


With contribution from: Bijan Motiwala