Significant changes to the UAE Bankruptcy Law

Introduction

The UAE Cabinet has approved a number of material changes to Law No.9 of 2016 Concerning Bankruptcy (the "Bankruptcy Law"). Most significantly, the changes introduce measures to address and provide relief for debtors during an "Emergency Financial Crisis" (or "EFC"), that is, a public event which affects trade or investment in the UAE, such as an epidemic, natural or environmental disaster, war or other such event.

The amending law has been approved but not yet published in the Official Gazette and, consequently, the effective date is not yet known.

Changes to the existing Bankruptcy Law

In summary, the new law amends the existing Bankruptcy Law as follows:

• Articles 32 and 162 of the Bankruptcy Law, which relate to the moratorium on legal proceedings when a debtor enters into either protective composition or bankruptcy proceedings, have been amended to provide a long-stop date to the moratorium. In each case legal proceedings are suspended until the earlier of either: 1.) approval of the protective composition procedure or restructuring plan; or 2.) ten months (extendable by a further four months by the court) following commencement of the protective composition procedure or restructuring plan, as applicable, following court sanction. This amendment does not prejudice secured creditors who may still apply to the court to enforce their security.

• Article 185 confirms that if the court declares a debtor bankrupt and liquidates its assets, secured creditors will have priority over preferential and ordinary creditors.

Changes related to an Emergency Financial Crisis

The amendments also introduce the new definition of EFC (referred to in the introduction) and a new Section Five 'Bankruptcy Proceedings in Emergency Financial Crisis' to be incorporated within the 'Bankruptcy' section (Chapter Four) of the Bankruptcy Law.

The amendments provide for changes to the functioning of the normal insolvency procedures under the Bankruptcy Law in the event of an EFC. Specifically:

1. Temporary suspension on requirement to file for bankruptcy. Under normal circumstances, a debtor is required to file for bankruptcy proceedings if it is unable to pay its debts when they fall due for a period of 30 consecutive business days. Under the amendments, this obligation is temporarily suspended for the duration of an EFC. If a debtor does, however, file for bankruptcy during an EFC and the EFC is proven by the debtor to be the cause of the debtor's insolvency, the Court has the discretion to accept the bankruptcy filing and progress the proceedings in a manner it deems appropriate. For instance, the Court has discretion to proceed without appointing an expert or a trustee.

2. Grace period for reaching a settlement with creditors. If the Court accepts that the debtor's application is made as a result of an EFC, the debtor can request that it grants a period of up to 40 business days for the debtor to reach a settlement with its creditors. Any such settlement period proposed by the debtor for the repayment of the  debts must not be for longer than 12 months from receiving court approval. The debtor is required to document the settlement and if creditors holding at least two thirds of the debts agree to the settlement, it will be binding on the remaining creditors. The Court will rule on whether the settlement is approved. Creditors are also permitted to challenge any settlement before the court.

3. Limitations on creditors initiating bankruptcy proceedings. During an EFC, the Court must not accept applications by creditors to initiate bankruptcy proceedings. Furthermore, during any such period the Court must not take precautionary measures (such as fixing seals on a debtor's business premises or properties) against the assets of debtors which have submitted an application to commence bankruptcy proceedings, except in relation to assets deemed to be irrelevant to the running of the debtor's business.

4. Amendments to other grace periods. If a debtor or creditor has applied for the commencement of a preventative composition or bankruptcy procedure prior to an EFC commencing, which has been accepted by the court, the court has discretion to extend the grace periods (by up to twice the existing periods under the Bankruptcy Law) if this is necessary for the functioning of the debtor's business during an EFC. Additionally, the Court may vary a debtor's obligations under Articles 165 to 167, which relate to a debtor's contractual obligations. By way of example, the Court could permit a debtor to terminate an existing contract as a result of an EFC. It remains to be seen how broadly the court will apply its discretion in this regard.

5. Limitations on liability of directors and managers. Directors and managers of a corporate debtor which is unable to repay its debts as a result of an EFC will not be held liable for disposing of the assets of the debtor, if such disposals are required to meet regular monthly payments, such as salaries. However, the directors and managers will be required to update the company's accounts to reflect the losses caused by the EFC and to act with caution, in good faith and in the best interests of the company. It appears that such provisions are to provide some comfort to directors/managers regarding the risk that they could be accused of operating while insolvent.

6. New Financing. If a debtor applies for bankruptcy during an EFC, it can seek permission from the Court to obtain new secured or unsecured finance on the following conditions:

   • Any such financings must have priority over pre-existing unsecured debt.

   • The finance can be secured by way of a mortgage over the debtor's unmortgaged assets or on assets which have already been mortgaged. In the latter case, the value of the assets must exceed the value of the existing security and in these circumstances the new financing shall rank lower in priority than the existing security (unless the creditors holding the security agree otherwise).

   • If, however, the lender providing the financing is a licensed financial institution, it can obtain new security over an already fully mortgaged asset provided the new mortgage does not exceed 30% of the value of the asset. In these circumstances, and if the purpose of the new financing is for materials or services to keep the business running, the court has discretion to approve that the new security will rank higher than the existing security.

Comment

Notably, the existence and duration of an EFC (for the purposes of its application to bankruptcy procedures) must be as determined by a Cabinet Resolution. Consequently, the application of the EFC procedures appears to be closely controlled and it therefore remains to be seen when, and if, they shall be introduced. Additionally, it is not clear what approach the courts will take in relation to the procedures applicable to a debtor which is mid-way through a preventative composition or restructuring procedure when the Cabinet determines that the EFC period has finished. For example, it could cause serious implications for a debtor if shorter pre-EFC grace periods are suddenly re-imposed without a transitory period.

However, the amendments provide wide derogations from the Bankruptcy Law and provide potential scope for technically insolvent debtors to have some relief in times of financial emergency. Further, it may provide additional leeway for these debtors to continue trading in circumstances which would not ordinarily be possible and, as a welcome consequence, may result in a greater number of successful rehabilitations and restructurings.