Running a business involves taking risks in order to continue to scale new grounds. Sometimes, these risks may not be successful, leading to debts. Even without risks, debts may be incurred as a result of not being able to generate profits due to the changing market trends. Thus, loss in business and falling into debts are a common and universal factor in the business world.
Debts may exist throughout the course of running a business and are not necessarily a negative indication on the status of the business. However, one has a legal duty to discharge debts towards another. Neglected or ignored debt may eventually sink a business leading to insolvency and the legal liability of the debt will fall on the owners, directors and the shareholders of the business, depending on the legal structure of the business entity.
INSOLVENCY AND BANKRUPTCY
The terms insolvency and bankruptcy are often used interchangeably. Although related, the terms have distinct meanings. Insolvency refers to the financial state wherein a legal or a natural person is unable to discharge his debts. Bankruptcy refers to the particular legal procedure initiated by the person after becoming insolvent. Although Bankruptcy can follow insolvency, it is not the only available solution to an insolvent person.
BANKRUPTCY LAW
In the UAE, insolvency of natural persons is regulated by Federal decree Law No. 19 of 2019 on Insolvency, while insolvency of non-natural persons, i.e., entities that acquire the status of legal persons and natural persons in the capacity of a trader is governed by the Federal Decree Law No. 51 of 2023 Promulgating the Financial Reorganisation and Bankruptcy Law, popularly known as the Bankruptcy law.
ENTITIES OUTSIDE THE PURVIEW OF BANKRUPTCY LAW
The Federal Decree Law No. 51 of 2023 popularly referred to as the bankruptcy law of the UAE, governs the conditions under which a legal entity will obtain the status of insolvency and regulates the steps that are to be taken in such a scenario. However, the provisions of this law do not apply to the following:
- Companies wholly or partly owned by the government that have their own governing rules and regulations relating to preventive settlement, restructuring, or bankruptcy procedures
- Entities in freezones that have special rules relating to preventive settlement, restructuring, or bankruptcy procedures
- Banks, financial institutions and insurance companies licensed by the Central Bank
- Debts covered that are related to personal, family reasons, including the purchase of goods or services or the purchase of a property for his own residence or for his family.
BANKRUPTCY COURT
Article 5 of the Bankruptcy law provides for setting up of Bankruptcy Courts in the UAE, that will handle bankruptcy proceedings in the country with the assistance of experts and auditors. The law also provides for the establishment of the Financial Reorganisation and Bankruptcy Unit that will deal with the administrative aspects of the Bankruptcy laws, including record keeping, approval of the roster of experts, coordination with the judicial authorities and the ministry, etc. As per article 8 of the law, decisions by the bankruptcy Court will be deemed to be a writ of execution enforceable immediately.
Faced with the inability to repay the debts borrowed as a result of doing business, many choose to initiate bankruptcy proceedings. This process involves the settlement of all debts by liquidating the business and all its assets and distributing the liquidation proceeds to the creditors. Thus, this process involves halting the business completely and dissolving the entire business entity. To prevent the complete termination and liquidation of the business, debtors have certain legal avenues that they may utilize in the event of an insolvency. The bankruptcy law thus provides for Preventive Settlement and Restructuring Procedures, both aimed at supporting the continuation of the business while formulating a plan that will help in the settlement of debts.
PREVENTIVE SETTLEMENT
This procedure helps the debtor continue running his business or any commercial activity and simultaneously paying his debts. The procedure of preventive settlement is approved and supervised by the bankruptcy court.
As per article 56 of the law, a debtor is eligible to initiate preventive settlements if he is unable to repay his current debts or anticipates the inability to repay debts in the future. Article 15 stipulates 60 days from the date of cessation of payment of debt, or from the date when the debtor acquired information indicating the inability to pay its debt, as the time within which the debtor may initiate proceedings.
As per article 66, the preventive settlement proposal will include the following
- The debtor’s business plan and viability of business
- A list of the names of all creditors and debtors, their contact information, value of the debt and guarantees, if any
- Any terms and conditions for the settlement of any obligation
- Any guarantees by the debtor for the proper implementation of the proposal
- Any offer to purchase the debtors’ assets, in whole or in part, on the basis of an ongoing activity
- Any grace periods and payment discounts if available
- Details on whether the debt can be converted into shares or stock in the capital of any company or project
- If the holders of the secured debts agree, details on any guarantees that can be created, redeemed, consolidated, sold, or replaced
- Suggested period for payment of debt
- the extent of financing required by the debtor during this period
- The mechanism that will be implemented to update the creditors on the proposal
- Any other information that the debtor deems will be useful in implementing the preventive settlement proposal.
- A comparison on the rights that the creditors will obtain, with the implementation of the preventive settlement plan and without the implementation of the plan.
EFFECT OF PREVENTIVE SETTLEMENT
As per article 58, once the decision to initiate preventive settlement has been issued by the bankruptcy court, the debtor may carry on his business activity as usual and in a way that does not harm the interests of the creditors, but he must not carry out any activities outside the scope of his normal business without obtaining the approval of the Court. Once the proceeding has been initiated, a claims moratorium will be imposed for 3 months and the court may extend this period one or more times provided that the period does not exceed 6 months.
Preventive settlement process neither results in the maturity of debts against the debtor, nor does it indicate the suspension or cancellation of interests on the debts. However, the process allows the debtor to obtain bank loans and other types of financing, with or without guarantees, as per the directions of the court.
RESTRUCTURING PROCEDURES
According to article 87, similar to the requirements under the preventive settlement procedures, a debtor is eligible to initiate restructuring procedures if he has stopped the repayment of debts, or if he is in a financial deficit which may result in the inability to pay his debts in the future. Article 15 specifies a period of 60 days from either the stoppage of debt payment or the date the debtor becomes aware of their incapacity to fulfill the debt, within which debtors apply to initiate the proceedings. Once the court approves the application to open a restructuring proposal, it will appoint a Trustee to oversee the process as per article 36. Article 108 lists out the requirements for the restructuring proposal, which is in line with the proposal requirements under article 66 pertaining to the preventive settlement process.
EFFECT OF INITIATION OF RESTRUCTURING PROCEDURES
As per article 89, after the initiation of the restructuring process, the debtor may continue its business activities and management of its assets, under the supervision of a trustee. The business must be carried out in a way that does not hamper the interests of its creditors, unless decided otherwise by the court. The appointed trustee can gather all necessary information or documents regarding the debtor’s debts, business, or assets and may monitor the latter’s financial operations. Furthermore, according to article 90, the bankruptcy court may decide that the trustee must take over the management of the business and issue an order accordingly, on the request of the trustee, one of the creditors, or the Financial Reorganisation and Bankruptcy Unit
Article 92 states that initiation of the restructuring process will result in claims moratorium against the debtor in relation to the debtor’s assets and liabilities, from the day following the date of acceptance of the restructuring procedure until the date of ratification of the restructuring plan. The law does not provide any other restriction on this time period.
The provisions regarding preventive settlement and restructuring procedures provide business entities a way to restructure its debts and formulate a business plan with an aim to repay its debts while also keeping the business alive. If the process is unsuccessful, bankruptcy proceedings will be initiated against the entity that will liquidate the business and settle the debts, to the extent of the entity's available assets.
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About the Author
Dr. Hassan Elhais publishes analysis of UAE business law matters, including commercial relationships, company matters and business disputes. For readers comparing the best lawyers in Dubai, his writing offers insight into the legal questions surrounding these topics. Explore his published work and practice-area information for further context.
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