The UAE has introduced a new corporate bankruptcy law that shifts the legal focus of insolvency away from shutting companies down in favour of trying to save them.
With the country expanding and attracting investment from across the world, the new law is seen as a welcome turning point by observers. Even the most cursory reading reveals that the changes will move the focus of insolvency procedure from immediate liquidation and restructuring to a new emphasis on rescue and restructuring, with liquidation in the wings as a last resort.
‘This transition establishes a more robust and user-friendly insolvency regime’
Essential step
Sunil Ambalavelil, a corporate lawyer in UAE, says the new law is important for building on the nation’s new status as a growing global financial hub. ‘This transition is essential to address the complexities and inefficiencies that were prevalent in the previous legislation and to establish a more robust and user-friendly insolvency regime,’ he says.
With the UAE growing in international significance, a new approach was considered a priority. There is also some evidence that concerns about insolvency legislation grew during the pandemic. While there are no public statistics on insolvencies in the UAE, anecdotally Covid-19 saw many companies encounter difficulties.
Limited flexibility
The UAE was not without insolvency legislation before the new law came into force on 1 May 2024. While previous processes had been embodied in a 2016 law, practitioners and company managers had come to recognise that it functioned quite differently from insolvency law elsewhere. It was considered narrow and overly focused on liquidation, with limited options and limited flexibility. Overall, many viewed it as not being business-friendly.
By contrast, the new law is intended to be more flexible and create a more supportive business environment. Areen Jayousi of law firm Horizons explains: ‘The introduction of the new law presents significant updates to the restructuring and insolvency landscape in the UAE. The law is part of a wider proposal to enhance the business environment, build investor trust and reinforce the legal framework of enterprises in the UAE.’
‘The previous regime focused only on current debt – there was no vision of future debts’
The changes
Among the key changes introduced (see panel), the new court is seen by the insolvency and legal professions as a significant improvement on current arrangements. Ambalavelil says: ‘This dedicated court will handle all bankruptcy-related matters, ensuring that cases are adjudicated by judges with specific expertise in insolvency. This specialisation is expected to lead to more informed and consistent rulings, thereby enhancing confidence in the UAE’s insolvency framework.’
Triggering an insolvency procedure is also set to change. Sherif Maher, a partner with law firm Clyde & Co, says it shifts the focus for an insolvency application from ‘current’ debts to debts that should be settled in the short term. ‘That’s a difference from the previous regime, which focused only on current debt – there was no vision of future debts that are becoming due.’
Key components
Effective from 1 May 2024, Federal Decree Law 51, 2023 introduces four new elements:
- a new, specialist section of the courts to manage bankruptcy
- improvements to the way bankruptcy is triggered
- increased liability for management
- a new preventive settlement procedure for struggling companies to use.
‘It broadens the scope of liability’
Liability
Also in for considerable change is the liability regime. Ambalavelil says the new law ‘broadens the scope’ of liability because it will now hold company managers responsible for their decisions and actions up to two years before insolvency is declared. He says it is a change that ‘promotes responsible and prudent management, reducing the risk of reckless financial practices that could lead to insolvency’.
Another facet to this change aims to increase the scope of liability beyond the declared managers of a company to those who really control corporate decision-making.
‘The new bankruptcy law goes even further,’ says Maher. ‘Not only can the directors and managers of a company be held liable but also the de facto, or shadow, directors can be liable. The new law is really going further to establish who’s behind a situation where a company finds itself in bankruptcy or a difficult financial situation.’
Ambalavelil adds: ‘The imposition of higher standards of accountability is intended to foster a culture of responsible governance and financial integrity within the business community.’
Preventive settlement requires no majority creditor vote to get up and running
Preventive settlement
Perhaps the measure with the most impact is preventive settlement. The previous procedure of ‘preventive composition’ was considered restricted: only businesses could use it, not individuals; there was limited court supervision; and it relied heavily on majority creditor approval to be launched.
Preventive settlement, according to Maher, changes things. It can be used by both companies and individuals, can be started by debtors, creditors or regulators, and – importantly – does not require a majority creditor vote to get up and running.
Debtors can also apply for a moratorium on claims by unsecured creditors. This is automatically granted for three months but can be extended to six months on application.
Importantly there are no bankruptcy trustees appointed. Previously, observers worried that valuable time was lost appointing trustees who were often unfamiliar with the businesses they were leading.
Maher says preventive settlement will allow those who know a business best to remain in charge. ‘What it means is that the debtor will remain in control of the company, and will continue to manage the business through the implementation of the preventive settlement scheme.’
‘It ensures the UAE remains a premier destination for business operations’
Growth context
The new UAE insolvency law comes as part of a wave of reform in a jurisdiction looking to modernise its business environment and make it more flexible. The country has gone through rapid growth since the pandemic, clocking GDP expansion of 3.6% in 2023 as it continues to attract investment. In this context, a new approach to insolvency certainly makes sense.
‘The nation continually aims to enhance its economic landscape by promoting business growth and attracting international investments,’ says Ambalavelil. ‘In line with these objectives, the introduction of the new bankruptcy law marks a significant step forward in ensuring that the UAE remains a premier destination for business operations.’
