Published July 2017
Whilst the UAE was ranked number 26 in the World Bank’s ‘Ease of Doing Business Rankings, 2017’, it was unfortunately ranked a staggering 104 out of 190 on the ease of resolving insolvency, which was one of the determining measures used. Such disparity reflects the much-needed bankruptcy and insolvency reforms that were brought by the Federal Law No. 9 of 2016 on Bankruptcy (the “New Insolvency Law”) which came into force on 29 December 2016.
The New Insolvency Law repealed some provisions of the Federal Law No. 3 of 1978 and title 5 of the Federal Law No. 18 of 1993.
It applies to all companies, including those that are wholly or partially owned by the Federal or local government that have specifically opted in. Companies based in free zones (except those registered in the two financial free zones of the DIFC and ADGM), licensed civil companies offering professional services and persons carrying out trading activities as individuals, are all also subject to the New Insolvency Law.
New insolvency test – the Balance Sheet test
The New Insolvency Law introduces a new test of insolvency, where insolvency proceedings can be commenced if the debtor’s assets cannot meet its liabilities (Balance Sheet Test). This is in addition, to the existing cash flow test where a debtor is unable to pay its debts due to financial difficulties.
Insolvency procedures
There are two insolvency procedures under the New Insolvency Law:
This is a debtor led procedure, which aims to prevent insolvency. A debtor may apply to court for a preventive composition, however, such an application cannot be made by a creditor.
In order to qualify for the preventive composition, the debtor must not be in a situation of cessation of payment of his due debts for a period exceeding thirty (30) consecutive working days as a result of a difficult financial position or in case of insolvency.
Debtors operating in regulated businesses are required to first notify the relevant regulator before applying to court.
Upon acceptance of the application, a moratorium comes into force prohibiting any enforcement actions by unsecured creditors. It is important to note that this moratorium will not prevent a secured creditor who has court’s permission from enforcing his action against the debtor.
The court then appoints a trustee who prepares a protective composition plan in consultation with the debtor.
For the proposed preventive composition plan to pass, it must be:
Once ratified the preventive composition plan should be implemented within a period of three years with an option to extend for a further three years with creditors approval.
A debtor is required to apply to court to commence bankruptcy proceedings if he ceases the payment of his debts for a period exceeding thirty consecutive working days as a result of his difficult financial position or in case of insolvency. (Again, debtors operating in regulated businesses are required to first notify the relevant regulator before applying to court)
Unlike the preventive composition procedure, a formal bankruptcy can be commenced by a creditor (both secured and unsecured). A creditor or a group of creditors with ordinary debt of not less than AED 100,000.00 (USD 27,300.00) may apply to court to commence bankruptcy proceedings procedures against the debtor, provided the creditor has already warned the debtor in writing to settle the due debt and the debtor failed to settle it within thirty consecutive working days.
The main objective of the New Insolvency Law is to try and rescue financially distressed companies from liquidation. The bankruptcy process offers two distinct procedures:
The court appointed trustee will compile a report highlighting the possibility of restructuring the debtor’s business and the possibility of selling the debtor’s business in the event of liquidation. The court decision is based upon merit. Highlights of the two procedures are as follows:
Restructuring procedure
This is procedure is aimed at rescuing the insolvent company from liquidation. The steps to be followed are similar to those of a preventive composition procedure, save that the implementation of a restructuring plan is five years with a three-year extension with creditor approval.
Liquidation
A court shall render a judgement declaring bankruptcy of a debtor and liquidation of his assets in the following scenarios:
Upon adjudication of bankruptcy, the court shall appoint a trustee who shall undertake the liquidation of the debtor’s assets. It is important to note that the court may authorize the debtor (upon request of the trustee) to recommence all or some of his business activities in order to sell such business at the best possible price. In such cases, the debtor shall be supervised by the trustee.
After completion of distribution of a debtor’s assets to the creditors, the court shall issue a winding up order.
Preferential debts
In accordance with the New Insolvency Law, the following debts are treated as preferential:
All other creditors shall be paid after settlement of the above preferential debts.
Bounced cheques
Previously a signatory of a bounced cheque would face criminal liability under the UAE Penal Code. The New Insolvency Law stays criminal proceedings from being brought against such a debtor on commencement of a preventive composition plan or a restructuring plan. The stay extends up to the implementation of either the preventive composition plan or the restructuring plan, at which point the debtor can apply for the proceedings to be terminated.
Personal liability of directors
Directors and managers whose nefarious and inappropriate conduct caused the company’s bankruptcy, could face penalties of up to five years’ imprisonment and AED 1 Million (USD 273,000) fine.
Directors, managers or liquidators that are proved to be uninvolved in such acts of crime or established their reservation on such decisions shall be exonerated.
In addition, if it is found that the company’s assets are not sufficient to meet twenty percent of its debts, the court may compel all or some of the directors or managers to pay all or some of the company’s debts in cases where they are proved to be liable.
Conclusion
The focus on rescuing financially distressed debtors is long overdue. Whilst the New Insolvency Laws are progressive, their application and implementation remains to be tried and tested.
Authors:
Sunita Singh-Dalal, Partner, ssingh-dalal@ach-legal.com
Edward Macharia, Associate, emacharia@ach-legal.com
Disclaimer:
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