- Current insolvency regime repealed
- Application is wider – not just commercial traders
- New financial restructuring committee to be appointed
- New balance sheet insolvency test
- Modernized restructuring and insolvency procedures, although still court-driven "Bankruptcy by default" (also known as the 30 day rule) has been rescinded
- Proceedings for bounced checks stayed if rescue procedures initiated
- New minimum threshold (AED100,000) for creditor-initiated insolvency proceedings
Statistics show that insolvencies in the UAE are generally more time-consuming, and result in significantly lower recovery rates than in other jurisdictions. The UAE's current insolvency regime were contained in Federal Law 18 of 1993 - the commercial code. Its provisions are largely untested and generally regarded as needing modernization. The UAE government has been considering amending the insolvency regime since 2009, and a previous draft insolvency law was published in 2011.
Repeal of the current regime:
Chapter V of the commercial code, which sets out the UAE's current insolvency regime, will be repealed, together with various bankruptcy-related crimes set out in the penal code.
The new law applies more widely than the current commercial code, covering:
- Companies governed by the Commercial Companies Law (CCL)
- Most free zone companies
- Sole establishments
- Civil companies conducting professional business
- Government-owned companies not established under the CCL, such as companies formed by decree, may opt-in to the provisions of the new law
- Companies in the DIFC and ADGM have their own insolvency provisions
There are no provisions addressing individuals acting in a private capacity.
- A financial restructuring committee will be formed under the authority of the Ministry of Finance.
- The committee will maintain a list of insolvency experts and a register of insolvencies.
New insolvency test:
- The new law introduces an alternative "balance sheet" test to test if the assets of a business are sufficient to cover its liabilities.
Processes and procedures:
Three main procedures for a business in financial difficulty:
- A debtor-led, court-sponsored process
- Designed to facilitate the rescue of a business which is in financial difficulty but not yet insolvent
- Requires the approval of both a majority in number and two-thirds by value of the unsecured creditors
- Must be implemented within three years of court approval
- Can be extended for a further three years with creditor approval.
Insolvency with restructuring:
- If a debtor is insolvent but the court determines that the business is capable of being rescued, it may approve a restructuring scheme.
- Similar to the protective composition described above, requiring the same levels of creditor approval
- A longer period of five years (extendable by a further three years) is allowed for implementation.
Insolvency and liquidation:
- The court can order the insolvent winding-up of a business if:
- A protective composition or restructuring scheme is inappropriate, not approved or terminated
- A debtor is acting in bad faith to evade financial obligations
- A "trustee", independent of the debtor, is appointed to manage the process.
- The law includes strict time limits for making filings and lodging objections.
- It is expressly provided that the relevant process continues while the court considers any objections.
- Otherwise time-consuming proceedings could prove to be a practical obstacle.
- Procedures are not substantially different from those currently available under the commercial code.
- The new law does not include provisions for an out-of-court financial restructuring procedure – although this may be addressed by the financial restructuring committee in future.
Other areas addressed:
Removal of bankruptcy by default:
- A trader unable to pay its debts must apply to be declared bankrupt within 30 days.
- Failure to do so is a criminal offence (bankruptcy by default) and may result in fines and potential imprisonment.
- The risk of imprisonment may have encouraged business owners in financial difficulty to abscond.
The new law decriminalizes this behavior:
- A debtor which fails to repay due debts for over 30 business days, or which is insolvent on a balance sheet basis, is required to initiate insolvency procedures.
- Failure to do so may result in a disqualification order against the debtor in certain circumstances - but it is not a criminal offence.
- Non-UAE nationals who sign checks that bounce are potentially subject to criminal charges
- This is often cited as a reason why traders in financial difficulty ‘skip’.
The new law:
- Stays proceedings in respect of bounced cheques issued by a debtor:
- Once a protective composition or restructuring scheme has been initiated
- Provided the cheque in question was written prior to the application.
- The stay continues until the relevant procedure is completed
- The cheque holder is treated in the same way as the debtor's other creditors
- Settlement will be in accordance with the scheme discharging the debt and potentially rectifying the criminal breach.
- This is a particularly helpful change which is likely to encourage debtors to take proactive steps to address their financial difficulties.
Under the current law:
- Any creditor regardless of amount may apply to have a trader declared bankrupt
- The new law introduces specific new requirements:
- Before filing insolvency proceedings against the debtor, a creditor or group of creditors must:
- Hold debts of at least AED 100,000
- First notify the debtor in writing to discharge the debt(s), allowing 30 consecutive business days for repayment.
Provisions allow priority to new finance following a protective composition or restructuring scheme, with safe-guards for existing secured creditors.
KPMG view of the new law
- The new law represents a step forward for the UAE's insolvency regime and contains much to be welcomed. The law remains complex and requires insolvency expertise.
- The removal of the criminal offence of bankruptcy by default, provisions for bounced checks and new requirements for creditor-initiated insolvency proceedings are likely to be particularly helpful.
- Protective composition and insolvency with restructuring rescue schemes should encourage corporates to ‘not bury their heads in the sand’.
- The ultimate success of the new regime will depend on the availability, expertise and willingness of both the local courts and UAE-based insolvency experts to implement it and application of the law to real life cases.