The Law of Restructuring and Insolvency in the United Arab Emirates

The United Arab Emirates is an international business hub that attracts a lot of ventures across the globe. Over the past few years, the number of foreign companies has increased. These trends can be attributed to Dubai being one of the most business-friendly countries globally.

Also, the location of the UAE is strategic for global companies and start-ups. However, operating a company in the UAE means you are under their jurisdiction. As a result, it is essential to have sound knowledge of the restructuring and insolvency law in Dubai.

Primary Legislation Governing Insolvency and Restructuring

In 2016, UAE's legislators introduced a Restructuring and Insolvency Law. The Bankruptcy Law NO.9, 2016 covers most of the companies in the UAE and various free zones. These include the Abu Dhabi Global Markets and the Dubai International Finance Centre.

Initiating Restructuring and Insolvency Procedures

The Bankruptcy Law in Dubai focuses on two options for financial hardships for businesses. These are Bankruptcy and Preventative Composition. Companies have to apply to the court to initiate such proceedings. 

Preventative Composition

The debtor is responsible for initiating preventative composition. The process revolves around asking the court for assistance in settling debts with creditors. Usually, the debtors will do so while working to improve their financial situation. 

Bankruptcy

Bankruptcy entails liquidation or a rescue procedure. As per this law, company directors must file for bankruptcy when the company fails the Bankruptcy Test. 

Reasons for Insolvency

There are several reasons for insolvency in the UAE. The first one is bankruptcy, and it hinges on the Bankruptcy Test. 

The court deems a company bankrupt if its liabilities are more than its assets. The relevant authorities also administer a cash flow test. It determines whether a company is meeting its financial obligations in due time. For example, when a company cannot pay its debtors for over 30 days, its directors need to initiate insolvency proceedings.

Creditors are the other reasons for insolvency. When a creditor has a debt exceeding AED 100,000 and has not received payment 30 days after issuing the last demand, they can seek a court's assistance. Usually, this will be through a bankruptcy petition to recover their dues.

Types of Restructuring and Insolvency Proceedings 

Restructuring and Insolvency Law in the UAE takes shape in various ways. These include:

Preventative Composition 

Some companies in the UAE do not pass the formal Bankruptcy Test. However, the directors may feel that their indebtedness is curtailing business operations. The preventative composition allows the directors to apply to the court, describing how their financial hardships affect the company's trading position. 

The aim is for the court to allow the directors to apply their preventative composition plan. Then, if they are to clear their debts when the plan is in motion, they can resume their everyday business operations. When the court accepts such an application, it suspends the company's debts.

However, the court identifies trustees to oversee the corporation's progress in question. They also ensure that the directors manage the company as per the court's directives.

Bankruptcy

Under bankruptcy, there are two ways of structuring and insolvency. These are:

Formal Restructuring

The company presents its first position to the court for assessment. The judge examines whether the company's directors can restructure the business, clear its debts, and get back to profitability. Conventionally, the company will work with court-appointed trustees to evaluate its financial positions and list all the creditors. 

If the position and strategy of the company satisfy the court and the other relevant parties, the trustee assumes an executive position in the company. They play an integral role in executing the restructuring plan as per the court's directives.

Insolvent Liquidation

Sometimes, the Restructuring and Insolvency Law can be complicated. If restructuring is not a viable option, the court may declare the company bankrupt. Consequently, the judge will order the liquidation of the company's assets.

Again the court appoints trustees to liquidate the company's assets and pay creditors. The remaining funds from the sale of assets go to the shareholders. 

Who is Responsible for Initiating Bankruptcy? 

The debtor is responsible for initiating restructuring and insolvency. Failure to do so within the legal time frame may lead to the company's management facing criminal and civil penalties. Other punishable offenses include doctoring books, embezzlement, fraud, distributing fake profits, etc. Directors caught in this act face a jail term of up to 5 years and AED 1 million in fines.

The UAE continues to be one of the best places to open and run a global company. If you want to relocate your business, open a regional branch, or start a new business in Dubai, we can help you get started. Contact us today for more information.