Insolvency 2024 Comparisons

There are two court systems in the UAE. The first is the mainland “onshore” courts which operate under a civil law system and apply the mainland or “onshore” regime, which is comprised of federal laws. The second is the “offshore” courts which comprise the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC) which both operate under a common law system and their own “offshore” regime.

While both bankruptcy and insolvency signify financial distress, their definitions and applications differ in the mainland “onshore” system compared to the “offshore” one and other jurisdictions. For the mainland “onshore” regime, insolvency is a legal process for individuals who do not have the capacity of a merchant, and it is governed by Federal Decree Law No 19 of 2019 on Insolvency.

Conversely, bankruptcy applies to three specific categories outlined in Article 3(1) of Federal Decree-Law No 51 of 2023 Promulgating the Financial Reorganisation and Bankruptcy Law (“the new Bankruptcy Law”):

• companies subject to the provisions of Federal Decree-Law No 32 of 2021 on Commercial Companies and companies incorporated in free zone areas (excluding the ADGM and DIFC);
• any individual with the capacity of a merchant, meaning anyone engaged in commercial activities; and
• licensed civil companies of a professional nature.

Insolvency in the DIFC is regulated by DIFC Law No 1 of 2019 (the Insolvency Law) while insolvency is governed by the Insolvency Regulations 2022 in the ADGM.

In terms of the recognition of UAE bankruptcy proceedings in other jurisdictions, the new Bankruptcy Law, unlike the DIFC and ADGM legislation, does not adopt the 1997 UNCITRAL Model Law on Cross-Border Insolvency which provides a procedure-based framework designed to streamline cross-border insolvency proceedings. Consequently, separate recognition of the UAE bankruptcy process will still need to be obtained in foreign jurisdictions.

The UAE has revamped its Bankruptcy Law to emphasise restructuring and preserving businesses rather than proceeding directly to liquidation. This shift has resulted in the introduction of mechanisms aimed at facilitating the recovery process for both creditors and debtors.

One significant aspect of the updated law is the preventive settlement which replaced the preventive composition regime, which was a feature of the old Bankruptcy Law. Preventive settlement is a court-supervised mechanism that allows debtors to maintain their business operations while negotiating and settling debts through an approved proposal with creditors.

To be eligible for preventive settlement, debtors must not have ceased to pay their due debts for more than 60 consecutive calendar days as set out in Article 15(1) of the new Bankruptcy Law. Under this new regime, the debtor retains control over business operations and assets while negotiating settlement terms with creditors, without the need for a court-appointed trustee.

Additionally, the debtor may benefit from a moratorium period of three to six months from the date of the court’s acceptance of the petition to initiate proceedings. While the debtor continues to manage the business, all legal actions against them are halted from the date the court accepts the application until either the restructuring plan is ratified or ten months from the court’s acceptance, whichever comes first.

It is important to note that other restructuring and liquidation options from the old law remain available under the new Bankruptcy law. Therefore, if preventive settlement is unavailable, the debtor may be subjected to restructuring or bankruptcy. Applications for these procedures can be initiated by the debtor, creditors, or the supervisory entity (if the debtor is subject to one).

The types of statutory officers who may be appointed in proceedings include trustees and controllers.

In terms of trustees, if the bankruptcy court accepts the application to open restructuring or bankruptcy adjudication procedures, it will designate the trustee nominated by the Bankruptcy Unit in the same decision.

When it comes to controllers, the bankruptcy court may, either on its own initiative or at the request of the debtor, creditors, or the Bankruptcy Unit (if the debtor is subject to a supervisory entity), assign the Bankruptcy Unit or creditors to nominate one or more controllers from the roster of experts and determine their fees. The court will then issue its decision on their designation and fee approval.

Article 179 of the new Bankruptcy Law classifies creditors into three classes, listed in the following priority ranking:

• secured creditors: have debts secured by mortgages, special liens on property, or general liens on the debtor’s assets, granting them priority in repayment;
• privileged debts: set out in Article 179(7); and
• creditors with ordinary debts: hold debts without specific security interests or debts that have disputed guarantee as stated in Article 104 of the new Bankruptcy Law.

In the event of a preventive settlement, new financing will receive priority over unsecured debts and can potentially be secured and prioritised over existing secured debts on the pledged assets. This priority depends on the court’s determination of whether the financing is necessary for obtaining essential materials or services to maintain business operations or generate returns that help repay outstanding debts.

According to Article 179(1) of the new Bankruptcy Law, creditors with debts secured by movable or immovable property are given priority over other creditors with privileged debts and ordinary creditors, up to the extent of their guarantees. Following these secured creditors, those with privileged debts are prioritised according to the order specified by Article 179(7) of the new Bankruptcy Law which outlines seven categories of priority for claims in bankruptcy proceedings, which are paid after the secured claims. These privileged debts are settled before ordinary debts in the following order.

• Judicial fees and expenses.
• Alimony debts.
• Government dues.
• Employee wages and salaries.
• Expert fees: fees agreed upon between the debtor and any appointed expert.
• Additional expert fees: fees for experts appointed since the commencement of the proceedings.
• Post-commencement fees, costs, and expenses: any fees, costs, or expenses incurred after the decision to commence proceedings for securing goods and services for the debtor, continuing any beneficial contracts, or maintaining the debtor’s business operations in accordance with the new Bankruptcy Law.

UAE laws allow security to be granted over qualifying property to individuals, corporations, and both licensed and unlicensed banks or financial institutions, irrespective of their national status.

There are different types of security available to creditors under UAE federal and local laws such as the federal Civil Transactions Code, federal Commercial Transactions Code, federal Maritime Code, Federal Law No 4 of 2020 on Securing the Rights in Movables, Dubai Law No 14 of 2008 Concerning Mortgages in the Emirate of Dubai, and Cabinet Resolution 29 of 2021 Concerning the Implementing Regulations of Federal Law No 4 of 2020 on Securing the Rights in Movables which empower creditors to take various types of security.

This includes the following.

Mortgage over Movable Property

Security over movable property is governed by Articles 45 to 52 of the Commercial Transactions Code and Article 3 of Federal Law No 4 of 2020 on Securing the Rights in Movables. The types of assets that can be pledged include:

• receivables;
• both current and deposit bank accounts;
• transferable bonds and documents (including commercial paper, bank deposit certificates, documents of carriage, and goods deposit certificates);
• equipment and work tools;
• business assets (both material and moral elements that are governed by commercial transaction and trade mark law);
• inventory and raw materials: goods intended for sale or rental, raw materials, and goods in the process of manufacturing or transformation;
• agricultural products (including animals and their products, such as fish and bees);
• immovable property by allocation (similar to the concept of fixtures in English law); and
• other movables (as stipulated by UAE laws capable of being subject to security).

Key Takeaways for Creditors

To ensure their claims on assets are validated against third parties, it’s crucial to register the mortgage over movable property with the Emirates Integrated Registries Company L.L.C (EIRC).

It should be noted that certain movables require the registration of security rights in specific registers according to applicable legislation. These include:

• company shares: registered with the relevant Department of Economic Development;
• vehicles: registered with the Traffic Department;
• ships: registered with the Ship Registration Administration; and
• aircraft: registered with the General Civil Aviation Authority (GCAA).

Mortgage over Ships

The maritime mortgages register, managed by the Ministry of Energy and Environment, is an official record and access to it is restricted to owners unless authorised by official documentation. Article 24(4) of the federal Maritime Code requires all legal transactions and rights, including mortgages, affecting a ship to be documented in the Ship Register.

The Ministry of Energy and Infrastructure is responsible for maintaining maritime mortgage registrations as per Article 13(1) of the federal Maritime Code.

Article 41(3) of the federal Maritime Code outlines the procedures for registering a maritime mortgage, even for ships under construction. Article 42 of the federal Maritime Code specifies that a ship mortgage must be accompanied by certified signatures of the parties involved, and modern technological means can be used for mortgage transactions.

Mortgage over Aircrafts

It is possible to register a mortgage over a UAE-registered aircraft. Mortgages must adhere to general guidelines outlined in Section 3 titled “Commercial pledge” of the Commercial Transactions Code. The GCAA facilitates the registration of mortgages, leases, or financing documents. The EIRC serves as the primary registry for registering security interests over aircraft in the UAE.

Mortgage over Immovable Property

Pursuant to Articles 1399 to 1410 and 1412 to 1447 of the Civil Transactions Code, creditors can secure debts using immovable property (real estate). For the mortgage to be valid, it must be documented with a notarised deed that specifies the debt amount.

Dubai Law No 14 of 2008 Concerning Mortgages in the Emirate of Dubai is a key piece of legislation that regulates the mortgage industry in Dubai.

Rights and Remedies

Under Article 3 of Federal Law No 4 of 2020 on Securing the Rights in Movables, the pledgees of movable assets listed can take possession of the secured property without court assistance. This right to self-help allows the pledgees immediate recourse against the pledged items, as outlined in Articles 27 and 28 of the same law. As for the other properties excluded by Article 4 of the same law, the pledgees must file a mortgage foreclosure case before the competent court.

However, once bankruptcy proceedings have commenced, secured creditors cannot enforce their rights outside of these proceedings. Creditors with security rights over the debtor’s assets must provide detailed information before the bankruptcy court or before the appointed trustee within the statutory time limit.

Special Procedural Protections and Rights

The new Bankruptcy Law outlines the payment priority for various debts in bankruptcy proceedings. The trustee in bankruptcy is responsible for selling secured assets and depositing the proceeds into a separate account to pay the creditor’s debt based on the priority of their security. The wages and salaries due before the issuance of the decision to open the proceedings take precedence over any other debt as stated in Article 146 of the new Bankruptcy Law. Priority will then be given to the new financing over any existing ordinary debt owed by the debtor on the date of the decision to initiate proceedings as per Article 257(1) of the new Bankruptcy Law.

Overall, secured creditors and tax are prioritised over unsecured creditors as stated in Articles 138 and 139 of the new Bankruptcy Law respectively. In practice, if multiple secured creditors hold claims on the same real estate asset, the creditor with the higher-ranking mortgage takes precedence. Priority is determined by the serial number assigned by the land registry at the time of registration, ensuring the first registered mortgage has priority over subsequent ones on the same property.

When multiple secured parties register their mortgages simultaneously, they share equal rank in distribution upon the property’s sale.

Articles 169 to 185 of the new Bankruptcy Law outline the rights and priorities of creditors. The trustee is responsible for developing a plan to liquidate the debtor’s assets and distribute proceeds to creditors. This plan must be prepared within 30 days of the creditors’ meeting and communicated to relevant parties, including the creditors committee, Bankruptcy Administration, and regulatory bodies if applicable. The bankruptcy court may extend this period up to three months upon the trustee’s request.

During creditors’ meetings, the trustee presides, and if necessary, a creditor or another party may be appointed to chair the meeting with the required majority’s approval. Approval of meeting issues is contingent upon more than half of the total debts being represented by attending creditors and at least two-thirds of the represented debts voting in favour.

Unsecured Trade Creditors

The new Bankruptcy Law does not explicitly require trade creditors to be classified into a separate class. However, the trustee has the authority to classify creditors based on the similarity of their rights, distinguishing between secured creditors and those with ordinary debts. However, the trustee is mandated to promptly pay the obligations of suppliers of goods and service providers essential for the debtor’s ongoing business operations, provided that the debtor’s assets are adequate for such payments on the agreed-upon dates.

Rights and Remedies for Unsecured Creditors

Prior to the proceedings, creditors with ordinary debts can apply to initiate restructuring or bankruptcy if the debtor fails to pay one or more of their debts. The debt must be unconditional, undisputed, and due for payment, and the creditor must have previously warned the debtor to pay within 30 days. If the debtor does not comply, the creditor can proceed with the application.

During the proceedings, pursuant to Article 70(1) of the new Bankruptcy Law, ordinary creditors whose debts have been finally accepted have an exclusive right to vote on the preventive settlement proposal. However, the bankruptcy court may permit creditors with temporarily accepted debts to vote on the proposal and may set conditions and limits for granting this authorisation.

However, in bankruptcy proceedings this class of unsecured creditors is often overruled by higher-ranking affected classes, commonly being deemed as “out of the money.”

Pre-judgment Attachments

According to Articles 133 and 135 of the new Bankruptcy Law, upon issuance of the decision to initiate bankruptcy proceedings, the debtor is prohibited from disposing of its assets or managing its business. The trustee assumes control over the debtor’s assets and business immediately. Any actions taken by the debtor on the day of the decision are deemed to occur after its issuance and actions contrary to this decision are considered null and void.

The trustee has the authority to file lawsuits with the bankruptcy court to invalidate debtor actions and can request precautionary measures to safeguard creditors’ rights. However, the debtor’s restriction does not prevent it from taking actions to protect its rights, provided they do not harm creditors’ interests.

Assets exempt from the restriction include those legally protected from seizure; assets owned by others; rights related to personal status; and compensation from valid insurance contracts initiated before the decision to commence bankruptcy proceedings. The trustee must be reimbursed all insurance premiums paid by the debtor from the date determined by the bankruptcy court as the cessation of payments.

Preventive settlement is a mechanism that allows debtors to maintain their business operations while negotiating and settling debts through an approved proposal with creditors. Creditors, especially banks, often prefer these proceedings over statutory ones because they provide a transparent and low-cost process that offers the same level of legal certainty as a judicial proceeding.

As a result, consensual and out-of-court restructurings are common, and mergers and acquisitions of financially troubled companies are frequently observed. These typically follow a thorough valuation and assessment of the company’s position and offer several advantages for both parties, such as:

• allowing debtors to retain control over the company’s operations;
• maximising credit recovery potential and minimising recovery costs; and
• preserving confidentiality about the debtor’s financial distress, thus preventing negative publicity that could damage the debtor’s reputation and allowing the business to continue operating as usual.

Out-of-court proceedings do not typically include a cram-down system. However, a debtor’s preventive settlement proposal can serve as a preliminary step to prepare for a court-supervised preventive settlement plan. This plan can then be implemented by the bankruptcy court where the cram-down mechanism is available. This approach necessitates substantial support for the plan.

It is important to note that precedents of consensual restructurings in the UAE are limited, especially considering that the new Bankruptcy Law has only recently come into force.

Consensual restructurings are regulated under the preventive settlement provisions in the new Bankruptcy Law. As a result, any such restructuring is subject to the contractual terms agreed upon between the debtor and their creditors, as set out in Article 56 of the new Bankruptcy Law. However, if the creditors reject the debtor’s proposal for a preventive settlement or a restructuring plan, the debtor may apply to the bankruptcy court to open preventive settlement procedures, provided the business is viable.

Under Article 4 of the new Bankruptcy Law, bankruptcy proceedings for regulated entities may only be initiated with the consent of the concerned government supervisory entity. Article 18 of the new Bankruptcy Law stipulates that a supervisory entity may apply to open restructuring or bankruptcy procedures for any debtor under its supervision.

Article 16 of the new Bankruptcy Law stipulates that a creditor or group of creditors or the supervisory entity (if the debtor is subject to one) may file a restructuring or bankruptcy application before the competent court requesting the opening of restructuring or bankruptcy proceedings in the event that the debtor fails to pay its debt to the creditor provided that this debt is unconditional, undisputed, and due for payment after being served with a 30-day notice.

A creditor, debtor, or supervisory entity may initiate restructuring procedures if the debtor’s business is viable under these conditions.

• The debtor has stopped payments.
• The debtor is in a financial deficit.
• Resubmission of an application is permitted after three months if a previous restructuring plan was rejected by creditors or the bankruptcy court.
• If restructuring procedures were previously terminated, a new application may be submitted after three months.
• No application can be made if the debtor has a final bankruptcy judgment, unless rehabilitated as per the new Bankruptcy Law.

Applications can be submitted anytime with evidence of prior restructuring plan approval by the required majority. After initiating restructuring procedures, the debtor can manage its business and assets under trustee supervision, conducting necessary activities that safeguard creditor interests, unless directed otherwise by the bankruptcy court which may suspend the debtor’s management upon trustee, creditor, or supervisory entity request, transferring such authority to the trustee, who assumes all powers unless stated otherwise.

Upon restructuring initiation, a claims moratorium starts until plan ratification or termination by the court. The Bankruptcy Administration provides a moratorium statement upon request.

Within ten days of trustee appointment, the Bankruptcy Administration informs the trustee and provides debtor information. The trustee publishes a summary of the decision to initiate proceedings, inviting creditor claims within 30 days and notifying creditors. Simultaneously, the debtor provides outstanding creditor, debt, contract, and legal proceeding information as requested by the trustee.

The trustee maintains a register of:

• creditor addresses, claim amounts, and due dates;
• secured creditor details, including guarantees; and
• settlement requests and other relevant data.

All creditors must submit debt documents within the specified timeframe. The trustee may request additional information or verification. Debt verification by the trustee must be completed within 30 days of the submission deadline. The trustee submits a debt list detailing accepted and rejected debts, with annotations on approved debts. The court finalises a list of undisputed debts for approval, with provisional debt acceptance possible pending resolution of grievances.

If the bankruptcy court opens restructuring procedures, the debtor drafts a plan within three months, extendable upon court approval. Failure to submit may lead to procedure termination upon creditor or supervisory entity request.

The debtor must notify creditors, the creditors committee, the supervisory entity (if applicable), and the Bankruptcy Unit of the restructuring plan meeting details, including date and location. The meeting must be convened within 30 days of notifying the committee and its members. The debtor presides over the meeting and with majority approval, the trustee, a creditor, or others may chair it.

If the debtor fails to convene the meeting as required, the bankruptcy court, upon trustee, creditor, or supervisory entity request, will summon creditors to the meeting. The trustee will chair this meeting.

Within ten days of the restructuring plan being approved or rejected by the required majority, the trustee must notify the Bankruptcy Administration and, if applicable, the Bankruptcy Unit. This notification includes the approved or rejected plan; meeting minutes; attendance records; and, if approved, the plan must be ratified by the bankruptcy court.

Within ten days of receiving the trustee’s notification, the Bankruptcy Administration must inform the debtor and all creditors about the decision and its accompanying documents.

If the restructuring plan is rejected, the Bankruptcy Court may, within ten days of being notified, either:

• ratify the rejected plan upon the debtor’s request, ensuring creditors’ rights are not diminished compared to bankruptcy proceedings, after consulting the trustee and hearing creditors’ objections; or
• terminate the restructuring procedures upon request from the debtor, supervisory entity, or creditors, adhering to the procedures outlined in the new Bankruptcy Law for opening bankruptcy adjudication.

During the validity of the restructuring plan and until its completion, the trustee oversees its implementation. If the debtor is under a supervisory entity, co-ordination between the trustee and the Bankruptcy Unit is mandated for supervision, as per Article 116 of the new Bankruptcy Law.

The bankruptcy court may, upon request submitted during the ratification period of the restructuring plan and before its completion, decide to terminate restructuring procedures under two conditions.

• The debtor requests termination due to no longer meeting restructuring criteria or an inability to implement the plan as specified.
• The debtor or supervisory entity requests to initiate bankruptcy adjudication procedures.

Within ten days of receiving the termination request, the Bankruptcy Administration notifies creditors and the trustee. The bankruptcy court then decides to approve or reject the request within ten days of submission.

If the bankruptcy court decides to terminate restructuring procedures, it may, upon request from the debtor, trustee, supervisory entity, or creditors, decide to initiate bankruptcy adjudication procedures. Within ten days of issuing this decision, the Bankruptcy Administration announces and registers it as per Article 35 of the new Bankruptcy Law, with registration in the Bankruptcy and Commercial Registers deemed sufficient.

Restructuring or Reorganisation Agreement

All proposals accepted by a majority of creditors must be ratified by the bankruptcy court to ensure fairness. The reorganisation plan should aim for the best results for creditors while treating all parties impartially.

The trustee, with court approval, can rescind contracts unfavourable to the debtor’s assets. The trustee may also request the court to assign or nullify contracts deemed fraudulent or harmful and nullify actions granting certain creditors preferential treatment unless these actions are within the normal course of business, involve fair and reasonable transactions, or do not diminish the debtor’s assets available for creditors.

Failure to Observe the Terms of Agreements

Pursuant to Article 118 of the new Bankruptcy Law, if the debtor anticipates that the restructuring plan will not be implemented as per its terms, the bankruptcy court may, upon a request submitted within the period following the decision to ratify the restructuring plan but before its full implementation, decide to terminate the restructuring proceedings.

Upon the issuance of a decision to initiate restructuring procedures, a claims moratorium will commence the following day and remain in effect until the restructuring plan is ratified or if the bankruptcy court decides to terminate the restructuring procedures. According to Article 89 of the new Bankruptcy Law, once the restructuring procedures are initiated, the debtor will continue to manage its business and assets under the supervision of a trustee. The debtor may perform all necessary commercial activities provided they do not harm creditors’ interests, unless the bankruptcy court dictates otherwise.

Restrictions on a Company’s Use of Its Assets

As outlined in Article 89 of the new Bankruptcy Law, when restructuring procedures commence, the debtor remains in charge of managing its business and assets, but this occurs under the oversight of a trustee. The debtor is permitted to conduct all necessary commercial activities, if these activities do not compromise the interests of the creditors, unless the bankruptcy court intervenes with different instructions.

The trustee has the authority to take all necessary actions to monitor the debtor’s financial operations and ensure the proper management of its assets and business. Nonetheless, the bankruptcy court holds the power to step in.

Acting on its own initiative or based on a detailed request from the trustee, a creditor, or a relevant supervisory entity, the court can decide within ten days of the request to remove the debtor, its board of directors, or its managers from their management roles. In such cases, management responsibilities are transferred to the trustee, who then assumes all the powers typically held by the debtor, its board, and executive management, unless the court specifies otherwise.

Asset Disposition and Related Procedures

Asset disposal during a restructuring process aligns with the reorganisation plan and is carried out by the debtor or the bankruptcy trustee. Business managers oversee the sale of assets, ensuring that purchasers acquire clear title free from claims under the supervision of the bankruptcy trustee. Asset sales may occur through public auctions where creditors can bid, or pre-negotiated transactions can be conducted with the trustee’s approval if they benefit all creditors involved.

New Money

If it is necessary for the continuation of the debtor’s activity or the preservation of assets, the debtor may obtain loans or banking facilities with or without a guarantee. Secured financing obtained with the court’s approval has priority ranking. It is important to note that the new financing may be secured by a mortgage on any of the debtor’s unmortgaged or mortgaged assets. In the latter case, the mortgage will rank next to existing mortgages on those assets.

Trustee

In cases with multiple trustees, they must work together and are jointly responsible for their tasks. They may delegate to each other but not to others without the bankruptcy court’s permission. The trustee and their representative share joint responsibility, though the court may divide work among trustees or assign specific tasks, in which case a trustee is only responsible for their assigned work.

If a legal entity is designated as a trustee, it must nominate one or more representatives to assume the duties of the trustee, with the entity remaining responsible for its representatives.

The trustee can request the Bankruptcy Administration to take decisions that assist in performing their tasks, including designating or delegating additional trustees.

Trustees operate under the supervision of the Bankruptcy Administration, ensuring prompt follow-up procedures and protection of the debtors’ and creditors’ interests.

When managing the debtor’s assets and business, the trustee must preserve the assets and act on behalf of the debtor. If the debtor is supervised by a supervisory entity, the trustee must co-ordinate with the entity and the Unit to ensure that funds in the debtor’s account are the debtor’s and not customers’ funds held in trust.

For companies, the trustee has the powers granted to the board of directors, chairman, CEO, and company director as per the company’s memorandum of association. For actions requiring general assembly approval, the trustee must request the Bankruptcy Administration to present the matter to the bankruptcy court, which will decide within ten days.

Controller

The controller prepares reports on the progress of the procedures when requested by the bankruptcy court, without interfering in the procedures.

If a legal entity is designated as a controller, it must nominate one or more representatives to assume the duties of the controller, with the entity remaining responsible for its representatives.

Roles of Creditors

According to Article 90 of the new Bankruptcy Law, a creditor may submit a reasoned request to the bankruptcy court to prevent the debtor, its board of directors, or its managers from managing its assets and business, and to transfer such management to the trustee.

Under Article 98 of the new Bankruptcy Law, all creditors, regardless of whether their debts are due, secured by a mortgage or lien, or fixed by final provisions, must submit their debt documents to the trustee within the timeframe specified in the invitation addressed to them.

The new Bankruptcy Law states that the creditors have the right to participate in the reorganisation process through their involvement or representation in the creditors committee and the restructuring plan approval meeting.

Claims of Dissenting Creditors

The new Bankruptcy Law stipulates that the bankruptcy court must consider the objections of creditors if they believe their interests are not being adequately addressed in the restructuring proceedings. For example, Article 117 of the new Bankruptcy Law states that any dissatisfied creditor has the right to challenge the decision to ratify an amended plan.

However, once the required majority approval is obtained, the reorganisation plan is ratified by the court after hearing the dissenting creditors, and the plan becomes enforceable against all creditors, including those who dissent.

Trading of Claims Against a Company

The new Bankruptcy Law does not explicitly prohibit the assignment of rights, thus allowing a creditor to assign its claims to a third party at any stage of the proceedings. Consequently, the rights of a creditor assignor can be transferred ipso jure to its successive assignee, in accordance with the general rules set out in Articles 1106, 1109(1), and 1110 of the Civil Transactions Code.

Existing Equity Owners

Although shareholders’ rights remain unaffected unless the business is terminated during liquidation, Article 227 of the new Bankruptcy Law stipulates that after the decision to commence proceedings, the debtor or the trustee cannot distribute profits to shareholders and partners without the permission of the bankruptcy court.

Application Submissions

By the debtor

The debtor can apply to the Bankruptcy Administration for bankruptcy within 60 days of ceasing payments or recognising the inability to pay debts, provided no creditor or supervisory entity has applied within this timeframe. Late submissions are still acceptable.

By creditors

Creditors can request bankruptcy if the debtor fails to pay a clear, undisputed debt that meets the legal minimum, following a 30-day payment warning to the debtor.

By supervisory entities

Supervisory entities can apply for bankruptcy for debtors under their supervision, presenting evidence of financial distress and allowing the debtor 30 days to respond. Late submissions remain valid.

Multiple applications

If multiple applications are submitted for the same debtor, they will be combined. Restructuring applications take precedence over bankruptcy ones, and the court will not accept preventive settlement applications.

If the debtor submits multiple applications, preventive settlement takes priority, followed by restructuring, and then bankruptcy adjudication. The court will consider the original application before any precautionary ones.

If the bankruptcy court accepts the application to open restructuring or bankruptcy adjudication procedures, it will designate the trustee nominated by the Bankruptcy Unit in the same decision. Additionally, the court will assign a Bankruptcy Administration employee to, within ten days, affix seals on the debtor’s premises, books, papers, and assets. The employee must then prepare and submit a report on the sealing to the court.

The trustee must invite the debtor and creditors to a meeting within 20 days of receiving the debtor’s assets to discuss liquidation and distribution proposals, notifying them at least ten days before. The trustee will chair the meeting unless a majority approves another chair.

If the debtor is under a regulatory body, the Bankruptcy Unit must also be invited. The bankruptcy court will resolve any disputes regarding the meeting within ten days of an application. If the trustee fails to convene the meeting, the court may assign the Bankruptcy Unit to do so.

The trustee must draft a liquidation and distribution plan within 30 days of the creditors’ meeting and notify relevant parties, with a possible extension of up to three months. The trustee will also call a meeting for creditors to approve the plan within 30 days of notification.

The bankruptcy court may approve the plan, including proposals to sell the debtor’s assets through various methods. The debtor or any relevant party may submit an offer to purchase the debtor’s assets if those assets are being sold through a public auction.

The trustee must develop a plan to liquidate the debtor’s assets and distribute the proceeds to creditors within 30 days of the creditors’ meeting and communicate this plan to the creditors’ committee. During meetings, the trustee presides but may be replaced by a creditor or another party with majority approval. For approval of issues, more than half of the total debts must be represented by the attending creditors, and at least two-thirds of the represented debts must vote in favour.

If the bankruptcy proceedings are halted due to insufficient funds before the conciliation is ratified, the bankruptcy court may decide to close the case.

When the bankruptcy is closed due to lack of funds, each creditor retains the right to pursue individual legal actions as permitted by law.

If a creditor’s claim has been validated and accepted in bankruptcy, they may enforce the claim against the debtor as outlined by the provisions of the new Bankruptcy Law.

The bankruptcy trustee is responsible for the documents provided by creditors for a period of three years following the closure of the bankruptcy. The bankrupt party or any interested party can request the bankruptcy court to reverse the closure decision if it is demonstrated that there are sufficient funds to cover the bankruptcy expenses or if an adequate amount is provided to the trustee.

After preparing the final list of creditors as required by the new Bankruptcy Law, the bankruptcy court may, at the request of the bankrupt party or the trustee, issue a declaration of bankruptcy termination if one of the following conditions is met:

• all debts on the final list of creditors are paid; or
• adequate funds or a bank guarantee are deposited to cover the debtor’s debts.

The Bankruptcy Administration must announce the closure decision in accordance with Article 35 of the new Bankruptcy Law and register it in both the Bankruptcy Register and the Commercial Register within ten days of its issuance.

Rights of Set-Off

Under Articles 224 and 225 of the new Bankruptcy Law, debts incurred after the decision to commence proceedings may not be set off unless it is based on the execution of the preventive settlement proposal, the restructuring plan, or a decision by the bankruptcy court issued within ten days from the date of a request submitted by the trustee or creditor.

Set-off agreements on a net basis are final and enforceable according to their terms and conditions and cannot be suspended or stayed. The provisions of Federal Decree-Law No 10 of 2018, which applies to all qualified financial contracts and netting agreements specified under the new Bankruptcy Law, will govern set-offs on a net basis where there is no specific provision in the new Bankruptcy Law.

Any remaining debt owed to the creditor after set-off will be included in the debtor’s debts and will have the same rank as the original debt. Any remaining amount owed to the debtor will be included in the debtor’s assets and will be managed by the person overseeing the debtor’s assets and business.

The principal legislation governing cross-border restructuring and insolvency cases involving the UAE is the 1997 UNCITRAL Model Law on Cross-Border Insolvency. However, unlike the DIFC and ADGM legislation, the new UAE Bankruptcy Law does not adopt the UNCITRAL Model Law on Cross-Border Insolvency.

Recognition of foreign proceedings within the UAE may still be possible, albeit untested, under the “conduit” route. Using the DIFC as a conduit allows enforcing parties to bypass the stricter requirements of “onshore” courts, where demonstrating reciprocity of recognition with foreign courts typically requires proof in the form of an international treaty.

The UAE courts’ stance on reciprocity has eased in recent years, particularly following the enforcement of UAE court judgments in England in Lenkor Energy Trading DMCC v Puri [2020] EWHC 75; Invest Bank PSC v El-Husseini & Ors [2023] EWCA Civ 555; and Khaleefa Butti Omair Yousif Almuhairi, Re [2024] EWHC 535 (Ch), where recognition of Abu Dhabi-based bankruptcy proceedings was sought in England to obtain relief under the UK’s Cross-Border Insolvency Regulations.

However, since there is no long running or established track record of successfully achieving recognition of foreign proceedings held in “onshore” UAE via the DIFC courts, this route should be approached with caution.

Jurisdiction over insolvency cases hinges on the debtor’s place of incorporation. Most insolvency filings in the UAE are handled by the mainland courts, reflecting the fact that most businesses operating in the UAE are incorporated on the mainland.

Under the mainland regime, insolvency applies to individuals without merchant status and is governed by Federal Decree-Law No 19 of 2019 on Insolvency. Bankruptcy, however, pertains to three specific groups outlined in Article 3(1) of the new Bankruptcy Law:

• companies regulated by Federal Decree-Law No 32 of 2021 on Commercial Companies and those established in free zone areas (excluding the ADGM and DIFC);
• individuals engaged in commercial activities (merchant capacity); and
• licensed civil companies of a professional nature.

In the DIFC, offshore insolvency is regulated by DIFC Law No 1 of 2019 (the Insolvency Law) and by the Insolvency Regulations 2022 in the ADGM.

Unlike the DIFC and ADGM laws, the new Bankruptcy Law does not follow the 1997 UNCITRAL Model Law on Cross-Border Insolvency. Recognition of UAE bankruptcy proceedings in other jurisdictions must therefore be pursued separately.

Recognition and Enforcement of Foreign Judgments

Before “onshore” courts

Foreign bankruptcy judgments are subject to a court declaration of enforceability (exequatur), provided they fulfil the conditions set out in Article 222 of the Civil Procedure Code. In addition, the UAE is a party to the following multilateral treaties for the reciprocal recognition and enforcement of foreign judgments.

• The 1983 Arab League Treaty on the Enforcement of Judgments.
• The 1996 Arab Gulf Co-operation Council Convention on the Enforcement of Judgments.
• Reciprocity with England and Wales following the enforcement of a Dubai Courts judgment in England in Lenkor Energy Trading DMCC v Puri [2020] EWHC 75.

Before offshore courts

The DIFC and ADGM legislation adopted the 1997 UNCITRAL Model Law on Cross-Border Insolvency.

DIFC courts

The DIFC Courts are required to adhere to UAE treaties for the mutual enforcement of judgments. Additionally, the DIFC courts have established bilateral memoranda of understanding with several foreign courts, including:

• the High Court of England and Wales;
• the High Court of Hong Kong;
• the Supreme Court of Singapore; and
• the Federal Court of Malaysia.

In addition, to enforce a foreign judgment, it must be final and conclusive; not related to taxes, fines, or penalties; and the foreign court must have had proper jurisdiction. Challenges to enforcement are limited to fraud, public policy violations, or lack of natural justice.

ADGM courts

Unlike the DIFC Courts, the ADGM courts are more restrictive, requiring established reciprocity for the enforcement of foreign judgments, orders, and awards.

There are no cross-border bankruptcy rules implemented within the new Bankruptcy Law. Additionally, the UAE has not adopted the 1997 UNCITRAL Model Law on Cross-Border Insolvency, in contrast to the DIFC and ADGM jurisdictions. Using the DIFC Courts, for instance, as a “conduit” route to facilitate the co-ordination of insolvency proceedings against companies that are part of a member country could be a workable solution.

If the DIFC Courts are used as a “conduit” route, foreign proceedings must be recognised in line with the UNCITRAL Model Law on Cross-Border Insolvency, provided certain requirements are fulfilled, subject to the usual public policy limitations.

The new Bankruptcy Law treats domestic and foreign creditors equally. As a result, foreign creditors enjoy the same rights and treatment as local creditors when it comes to initiating or participating in any bankruptcy proceedings within the UAE.

Upon issuance of the bankruptcy adjudication decision, the debtor will be prohibited from managing or disposing of their assets and business. The trustee will then take over management of these assets and operations. Any actions taken by the debtor on or after the date of this decision will be considered as having occurred post-issuance, and any actions contrary to this decision will be deemed invalid.

The trustee has the authority to petition the bankruptcy court to invalidate the debtor’s actions and request necessary precautionary measures to safeguard creditors’ rights. However, this restriction does not prevent the debtor from taking steps to protect their own rights, provided these actions do not adversely affect the interests of creditors.

In addition, the bankruptcy court may, at the request of either the trustee or the debtor, allow the debtor to continue operating their business if it serves the public interest, the debtor’s interest, or the creditors’ interest. The court will appoint a manager for the debtor’s business and wages if requested by the trustee.

The debtor may be appointed as the manager, with their wage considered part of their pension. The trustee will oversee the appointed manager and provide the court with a monthly report on the status of the debtor’s business operations.

Directors and board members may be held personally liable to the extent of their personal assets if they incur obligations on the company while knowing that the company will not be able to meet those obligations upon maturity. Liability may be established if these obligations were incurred due to their gross negligence or wrongdoing.

If the company is declared bankrupt, the bankruptcy court, at the request of the trustee, the unit overseeing the debtor (if subject to regulatory oversight), or a creditor, may require board members, managers, or any person responsible for the actual management of the company, or those in charge of liquidation (in proceedings outside the framework of the new Bankruptcy Law), to pay an amount proportionate to the fault attributed to them.

Upon the initiation of bankruptcy proceedings, the trustee will assume responsibility for defending the company against any claims filed against it and will act as the company’s representative in court. If the debtor is engaged in a criminal case or a lawsuit concerning their personal status, the trustee must be involved if the case includes financial claims. The court may also permit the debtor to participate in lawsuits related to bankruptcy adjudication procedures and allow a creditor with a vested interest to take part in these proceedings.

Any trustee who embezzles funds from the debtor during their management will face imprisonment and/or a fine of up to one million dirhams. The court will mandate the return of the embezzled funds and may, upon request from the affected parties, also order compensation if deemed necessary.

If a company is declared bankrupt, the bankruptcy court, at the request of the trustee, regulatory body, or any creditor, may require board members, managers, or other responsible individuals to compensate the company based on their fault. This compensation aims to address the company’s debts if it is proven these individuals engaged in any of the following within two years before insolvency:

• reckless business practices like selling assets below market value to avoid bankruptcy;
• transactions involving mismanagement of funds with inadequate compensation; or
• preferentially paying certain creditors.

Claims for liability must be filed within two years of the bankruptcy judgment, or the right to claim is lost. Those who provide written evidence of their objections will be exempt from liability.

Following a final judgment declaring a company bankrupt, the board members, managers, and auditors may face imprisonment and/or a fine up to 500,000 dirhams, if they are found guilty of:

• granting excessive bonuses to board members, the CEO, or managers in the three years before the company ceased payments, if this contributed to the insolvency;
• failing to maintain proper commercial records to reflect the company’s true financial status or neglecting to conduct required inventories;
• refusing to provide requested data to the trustee, bankruptcy court, or appellate court, or intentionally providing false information;
• misusing company funds after payments have ceased, with the intent to protect these funds from creditors;
• settling any debt in violation of the proposed preventive settlement or approved restructuring plan, or misusing funds contrary to the terms of the proposal or plan;
• paying off one creditor after the company has stopped payments in a way that harms other creditors or granting unfair advantages to one creditor to gain approval for a settlement or restructuring plan;
• selling company assets at significantly below market value to delay or obstruct the company’s payment suspension, bankruptcy declaration, or the termination of a proposed settlement or restructuring plan; or
• excessive spending on speculative transactions beyond what is necessary for the company’s operations.

Historical Transactions

The bankruptcy court can invalidate and annul any historical transaction if it was conducted with the intent to defraud creditors and transactions made by the debtor that unfairly favoured one creditor over others.

Look-Back Period

It is not permissible to enforce any of the historical transactions mentioned above against creditors if they were conducted by the debtor during the six months preceding the date of cessation of payment, or up to two years if the debtor ignored the decision to open bankruptcy adjudication procedures. This extended period applies if the actions in question occurred between the debtor and an insider or related party.

In both reorganisation and bankruptcy proceedings, any interested party (such as the trustee, the creditors’ committee, or a creditor) can seek to set aside or annul certain transactions. These transactions may include:

• donations or gifts (except for minor or customary gifts);
• transactions where the debtor’s obligations are disproportionately higher compared to the other party’s obligations, whether in kind or cash;
• early payment of debts, regardless of the payment method, or using a different method than usual. Creating a commercial paper for an early payment is considered as paying before its due date, unless justified by commercial reasons;
• payment of debts with amounts different from the agreed-upon consideration. Payments made through commercial papers or bank transfers are treated like cash payments, unless commercially justified; and
• providing new guarantees on assets to secure the payment of prior debts, unless there are valid commercial reasons for such arrangements.