The Legal Alternatives of Bankruptcy in the UAE Legislation

The desire of the UAE to achieve the highest ranks in terms of economic progress and achieve high rates of attracting investors and businessmen to the country and its desire to reach the highest standards of quality in legislation and economy to follow the rapid progress, has prompted the enactment of protective laws which make traders feel safe in commercial activities to reduce risks without a burden on its economy or budget.

This prompted the legislator to issue Law No. (9) of 2016, which gave a wide space of precautionary measures to protect the trader from bankruptcy by organizing alternative legal methods other than bankruptcy to contribute to solving financial problems and hardships through the law and not outside the courts.

In the absence of legal regulation, insolvent traders tended to reach contractual methods outside the legal framework, but the legislator by the new law gave powers and alternatives in a broad legal framework to third-party bankruptcy trustees, they often appointed for the benefit of the debtors in the precautionary conciliation's phases.

The Legal Alternatives of Bankruptcy Set by the UAE Legislator

First: Financial Restructuring

The legislator regulated the financial restructuring in the second chapter of the law, where Article (3) provides the mechanism of forming the committee, which shall be formed by a cabinet resolution, and that resolution shall set out the work of the committee. Article (4) defines the authority of the committee such as supervising the administrative procedures to facilitate amicable agreements between the debtor and the creditors with the assistance of an expert(s) and other functions mandated to the committee by the law such as establishing and organizing a register of persons against whom court orders are issued including any restrictions ordered by the court, or resulting disqualifications pursuant to the provisions of the bankruptcy law. It shall also submit periodic reports to the minister on its work, achievements and proposals to enable the committee to perform the duties entrusted to it by the bankruptcy law.

Second: The Protective Composition

The primary purpose of the protective composition is to assist the debtor in the financial settlement with his creditors in accordance with a composition plan under the supervision of the court and with the assistance of a composition trustee appointed pursuant to the provisions of the law. All of this shall be according to the objective stipulations we can extract from the text of the law and other stipulations mentioned explicitly by the legislator in the law texts, such as requiring the applicant for the protective composition to practice commercial activities, and most importantly that his business is in a state of unrest as the first paragraph in Article (6) of the bankruptcy law provided that only the debtor has the right to apply to the court to commence the protective composition procedure where he is experiencing financial unrest in his financial business, i.e., before he ceases to pay, or within thirty business days thereafter.

Once the debtor feels unrest in his financial business, he has to apply for composition in the first place, not to seek to stop paying and then to resort to the composition. If the protective composition is requested during this period and the application coincides with the application for ‎adjudicating bankruptcy, the court shall not adjudicate in the bankruptcy proceedings until the decision of the application for a protective composition is made. In addition to that, the trader's goodwill and misfortune must be fulfilled even though the law does not explicitly stipulate for the trader's goodwill and misfortune, but this can be derived from the text of Article (9) which obligates the trader to submit his accounting books in accordance with the rules:

• "The application for protective composition filed with the court shall set out the reasons for the application, and be accompanied by the following documents...
• A copy of the accounting books or financial statements relating to the debtor's business for the financial year preceding the filing of the application…”

As for the formality requirements of the bankruptcy protective composition, the idea behind the procedures established by the law to reach composition is the speed and reduction of expenses in order to decide on the composition quickly, without burdening the debtor with heavy expenses. Therefore, formality requirements of the bankruptcy protective composition are related to the submission of the composition application, and among the most important requirements:

• Recognition of his troubled financial situation and the cessation of payment to the court within a certain period of time starts from the disorder of the debtor’s financial condition, and if the debtor is not over-indebted. Article (6) of the law provides detailed procedures for composition. Article (8) also states the case of the debtor being subject to a competent custodial and supervisory authority, which shall be notified by the debtor 10 working days prior to the submission of the application, and the competent supervisory authority may submit any documents or pleadings thereon to the court.
• The legislator also stipulated that the debtor who stopped paying must attach his documents which prove his financial status regarding the budget, his economic and financial status, his financial information and detailed data about his employees, as well as other documents confirmed by Article (9) of the bankruptcy law. These documents must be dated and signed for validation and conformity by the applicant debtor.

Third: Procurement of New Financing

Article (181) of the law dealt with court permission, at the request of the debtor or the trustee in the protective composition procedure or the restructuring procedures, to allow the debtor to obtain new financing with or without security, and the new financing shall have priority over any ordinary debt payable by the debtor, as of the date of the decision to commence the procedures.

The legislator added also that the provisions of this law shall apply to the financial free zone companies in accordance with the provisions of Article (2) for the protection of all businesses within the country and for traders and their creditors alike. The bankruptcy law No. (9) of 2016 does not exclude this category of companies and institutions as it has been excluded from the provisions of the Federal Companies Law No. (2) of 2015.

Written by:

Dr Amira Al Bastaki | Dr Amira Al Bastaki Advocates and Legal Consultants