Restructuring and Insolvency in UAE 2024

Restructuring and Insolvency in UAE 2024 – UAE’s Supreme Court

RESTRUCTURING AND INSOLVENCY 2024

UNITED ARAB EMIRATES

Tabasam Faqir

(Freshfields Bruckhaus Deringer)

GENERAL

Legislation

1. What main legislation is applicable to insolvencies and reorganizations?

UAE Federal Decree Law No. 9 of 2016 on Bankruptcy, as amended pursuant to Federal Decree Law No. 19 of 2019, Federal Decree Law No. 23 of 2019, Federal Decree Law No. 21 of 2020, Federal Decree Law No. 35 of 2021 and other amendments (the UAE Bankruptcy Law), contains the main legislation applicable to insolvencies and reorganizations in the United Arab Emirates. It was published in the Official Gazette on 29 September 2016 and came into force on 29 December 2016. The UAE Bankruptcy Law repeals and replaces Book 5 of Federal Law No. 18 of 1993 (the Commercial Code).

Certain aspects of Federal Law No. 5 of 1985 (the Civil Code) and Federal Law No. 11 of 1992 (the Civil Procedures Code) also apply. Provisions relating to corporate liquidation of companies can be found in Federal Law No. 2 of 2015 (the Companies Law). Certain provisions of Federal Law No. 10 of 1980 concerning the Central Bank, the Monetary System and the Organization of Banking apply to the bankruptcy or liquidation of banks and financial institutions.

In some circumstances, specific decrees have been issued to manage specific restructuring situations. An example of one such special regime is the Dubai Decree No. 57 of 2009 (the DWG Decree) that applies to matters relating to the Dubai World Group (DWG).

The DWG Decree was issued by the ruler of Dubai to facilitate the restructuring of the DWG. The DWG Decree is a customized version of the Insolvency Law DIFC No. 3 of 2009 (the DIFC Insolvency Law) and the insolvency regulations of the Dubai International Financial Centre (DIFC), a financial free zone created by the Emirate of Dubai (for which laws and regulations were recently replaced by the DIFC Insolvency Law, Law No. 1 of 2019 and related regulations). The DWG Decree disapplies many of the provisions of the DIFC Insolvency Law, with the apparent intention of ensuring that the restructuring of DWG will be carried out in a particular manner.

DWG has a unique status as a decree corporation (established by decree by the ruler of Dubai) and as such was unable to restructure its debts under existing legislation. The DWG Decree was therefore issued to provide for a formal framework that did not otherwise exist. The DWG Decree does not have wider application, and it is yet to be seen how or if the framework will be utilized elsewhere in future.

The federal laws mentioned earlier apply at a federal level. However, there are a number of free zones within the United Arab Emirates, which have created an independent legal framework, including the DIFC. The DIFC has created its own legal and regulatory framework for all civil and commercial matters. UAE federal criminal laws, however, continue to apply within the DIFC.

The DIFC Authority and the Dubai Financial Services Authority develop laws and regulations applicable to the operation of the DIFC and these laws are generally based on common law, rather than civil law. The Emirate of Abu Dhabi has created a similar financial free zone in the Abu Dhabi Global Market (ADGM), which also has its own legal and regulatory framework.

Excluded entities and excluded assets

2. What entities are excluded from customary insolvency or reorganization proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

The UAE Bankruptcy Law applies to companies that are governed by the Companies Law, free-zone companies (other than free-zone companies incorporated in free zones that have their own insolvency laws that provide for preventive composition, restructuring or bankruptcy procedures (eg, DIFC and ADGM)), licensed civil companies conducting professional activities and individual traders.

The UAE Bankruptcy Law does not apply to companies wholly or partially owned by the federal or local government unless they have opted into the UAE Bankruptcy Law in their constitutional documents.

The Civil Procedures Code prevents seizure of ‘public or private assets owned by the State or any of the Emirates’ and this may be interpreted to prevent bankruptcy proceedings against state entities. Also, state entities may be incorporated by decrees and these decrees may contain restrictions that prevent insolvency proceedings from being instituted.

Public enterprises

3. What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

There are no special rules for the insolvency of government-owned enterprises. If a government-owned enterprise has opted for the application of the UAE Bankruptcy Law in its constitutional documents, the procedures of the UAE Bankruptcy Law will apply.

Protection for large financial institutions

4. Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

The United Arab Emirates has not enacted general legislation to deal with financial difficulties of institutions that are considered ‘too big to fail’; however, the UAE Bankruptcy Law introduced a Financial Restructuring Committee (the Committee).

Cabinet Resolution No. 4 of 2018 (the Cabinet Resolution) came into force on 1 March 2018 and sets out further detail surrounding formation of the Committee. The role of the Committee will include, among other things, overseeing the management of out-of-court restructuring procedures for licensed financial institutions. These restructurings will take place outside of a formal insolvency process but with the support of an insolvency expert.

The scope of what could constitute a financial institution is likely to include retail and investment banks and possibly insurance companies. Other duties of the Committee include maintaining registers of disqualified directors and bankrupt companies. It is unclear from the Cabinet Resolution whether the various registers will be searchable by the public.

Some companies in financial difficulty have been considered for assistance on a specific case-by-case basis. The Dubai government issued the DWG Decree in relation to the DWG restructuring. This decree adopted the DIFC Insolvency Law as its basic legal framework but made a number of amendments to the DIFC Insolvency Laws that were only applicable to the DWG. A similar decree – Decree No. 61 of 2009 (Decree No. 61) – was also passed to establish a special judicial committee to consider and settle any petition or claim raised against Amlak Finance PJSC or Tamweel PJSC.

Decree No. 61 effectively removes the jurisdiction of the Dubai courts (the Court of First Instance, the Court of Appeal and the Court of Cassation), preventing them from hearing any claims in connection with Amlak Finance PJSC or Tamweel PJSC, and further imposing the referral of all such cases to the special committee.

Courts and appeals

5. What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

The United Arab Emirates does not have a specialized bankruptcy court system. Bankruptcy processes are dealt with by the competent court according to the jurisdiction rules provided in the Civil Procedures Code. The UAE Bankruptcy Law provides that no decisions or judgments of the court may be appealed unless there is a specific provision to this effect in the UAE Bankruptcy Law.

The debtor or the creditor may appeal a judgment of the court in respect of the approval or rejection of initiating procedures according to section 3 (preventive composition) and section 4 (bankruptcy) of the UAE Bankruptcy Law. The Court of Appeal, at the request of the appellant, may decide to stay the appealed decision until the appeal is decided.

In that case, the court may request the appellant to provide security to mitigate against any adverse effects should the application for appeal not be upheld. A debtor who is a natural person or any dependents may appeal a court decision regarding the sale, pledge or disposition of any property allocated for their support.

Appeals related to bankruptcy proceedings should follow the procedures and periods stipulated under the Civil Procedures Code. In summary, the Civil Procedures Code stipulates that in relation to the three levels of courts (Court of First Instance, Court of Appeal and Court of Cassation):

• appeals are dealt with in articles 150 to 188 of the Civil Procedures Code. The time for appealing against a judgment runs from the day after the passing of the judgment (unless the UAE Bankruptcy Law provides otherwise), and there is a time limit for making appeals of 30 days (or 10 days in expedited matters); permission to make an appeal is not required – it is an automatic right, but it is dependent on the sum in dispute (over 20,000 dirhams for the Court of Appeal, and over 200,000 dirhams for the Court of Cassation, except for where the sum claimed has not been evaluated); and
• appeals against a decision of the Court of First Instance can be made in relation to issues of fact or law, whereas appeals against a decision of the Court of Appeal or Cassation can only be made in relation to matters of law.

TYPES OF LIQUIDATION AND REORGANIZATION PROCESSES

Voluntary liquidations

6. What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

The United Arab Emirates distinguishes between:

• voluntary liquidation, which provides for the termination of the corporate existence of a company and the realization and distribution of its assets to satisfy any liabilities (where possible); and
• liquidation within bankruptcy procedures.

Voluntary liquidation to terminate the corporate existence of a company is provided for in Federal Law No. 2 of 2015 (the Companies Law). The initiation of liquidation proceedings is at the court’s discretion within the bankruptcy proceedings as provided in Federal Decree Law No. 23 of 2019 and subsequent amendments (the UAE Bankruptcy Law).

As to liquidation of companies pursuant to the Companies Law, a company enters into liquidation if it is dissolved. Joint liability, simple commandite (a company established by limited and unlimited partners) and joint-stock companies may be dissolved at the request of a shareholder where it appears to the court that there are serious grounds warranting the dissolution, or on the grounds of a shareholder’s failure to meet its obligations. Events triggering dissolution include:

• expiry of the term set out in the constitutional documents;
• completion of the company’s objectives;
• loss of all or most of the company’s assets;
• a merger; or
• a unanimous decision of the shareholders (subject to the terms of the company’s constitutional documents).

Until the company is officially dissolved, it retains its corporate existence to the extent necessary for the acts of liquidation. While the Companies Law sets out general guidelines in relation to the process of liquidation, a company is permitted to set out in its constitutional documents the manner in which it should be liquidated, or alternatively the shareholders may agree on these details at the time of liquidation.

The liquidator, upon appointment, assesses the company’s liabilities and assets. Also, upon liquidation, all debts owed by the company become immediately due and payable.

The liquidator is required to notify all creditors and to invite them to present their claims in the liquidation within a period of not less than 45 days. If the liquidated estate does not have sufficient assets to discharge all outstanding debts, the debts are discharged between the creditors (and there is the potential for bankruptcy liquidation proceedings to commence in that instance).

Any value that remains after all debts have been discharged is returned to the shareholders in proportion to each shareholder’s equity in the company. Once the liquidation has been completed and recorded on the commercial register, it may be admissible as a defense against other parties, and the liquidator is required to request the deletion of the company from the Commercial Register.

Voluntary reorganizations

7. What are the requirements for a debtor commencing a voluntary reorganization and what are the effects?

The UAE Bankruptcy Law provides a debtor who is in financial difficulty with the opportunity to agree a compromise with its creditors (a preventive composition). The preventive composition is only available for a debtor who is not insolvent (ie, who has not ceased making payments on due debts for more than 30 consecutive business days because of its financial instability or whose assets are insufficient to cover its due liabilities at any time). Preventive composition cannot be applied for if the debtor has already entered bankruptcy proceedings.

An application for preventive composition can only be made by the debtor or ordered by the court and it cannot be made by creditors. As part of the application, the debtor must submit, among other things, a brief description of its economic and financial position, details of its properties, employees and creditors, and projections for cash flow and profit and loss. A shareholders’ resolution approving the application must also be submitted to the court.

Once the debtor has applied for a preventive composition and submitted the necessary documents, a court-appointed expert will prepare a report on the debtor’s financial condition, determining if the conditions for a preventive composition have been met and if the debtor has sufficient funds to cover the costs of the preventive composition process.

Grounds to reject an application include the court deciding that the debtor’s position is not suitable for preventive composition and that it should instead be placed into bankruptcy. There is a risk with an application for preventive composition that the court may order bankruptcy proceedings instead.

If the court accepts the application, it will appoint a trustee designated by the debtor in the application for preventive composition. Once appointed, the trustee will assess the debtor’s assets and liabilities. Control of the company remains with the debtor who continues to manage its business, albeit under the supervision of the trustee who has wide powers on the preservation of assets and the continuation (or otherwise) of the debtor’s business.

A moratorium on creditor action comes into effect until the preventive composition scheme in relation to the debtor has been approved. Secured creditors, however, are still able to enforce their security with the court’s permission.

Successful reorganizations

8. How are creditors classified for purposes of a reorganization plan and how is the plan approved? Can a reorganization plan release non-debtor parties from liability and, if so, in what circumstances?

The trustee is obliged to advertise a summary of the preventive composition application in two newspapers (one in English and one in Arabic) within five business days of their appointment with an invitation to creditors to submit proofs of claim within 20 business days of the date of publication. The trustee will then lodge the list of creditors with the court for approval along with the trustee’s opinion on whether to accept, amend or reject the debt and any propositions as to the way of repayment (if possible).

Within three consecutive business days of the day of lodging the creditors’ list with the court, the trustee must also publish a list of the breakdown of debt in two widely circulated daily newspapers. The debtor and any creditor will then have the opportunity to object to the debt breakdown list within seven business days of the date of publication. The court will consider any objection and its decision may be appealed to the Court of Appeal. Pending final judgment from the Court of Appeal, the relevant claim may be admitted on a temporary basis and such creditor will be included in the voting process.

The debtor and the trustee will then work together on the restructuring plan. Within 45 business days of the date on which the court accepts the application for preventive composition, the trustee must submit a draft preventive composition scheme to the court (subject to extensions not exceeding in aggregate 20 business days). The court has 10 business days to review the preventive composition scheme and ensure that it observes all parties’ interests. The court may make amendments and the trustee must implement these within 10 business days (subject to one extension not exceeding 10 business days).

Once the court approves the draft preventive composition scheme, the trustee must advertise the scheme to creditors within five business days of approval by the court and call for a meeting of creditors within 15 business days of publication (timing subject to the court’s discretion to postpone or hold further meetings).

Creditors are generally classified as secured or unsecured creditors. At the creditors’ meeting, the preventive composition scheme is presented to the creditors by the debtor and the trustee, and the creditors may propose amendments to the scheme. The court may order further meetings to consider the amendments and may approve or reject any of the amendments.

The creditors will then vote on the preventive composition scheme. Unsecured creditors and secured creditors, if the plan affects their secured rights, may vote on the preventive composition scheme. For the scheme to be approved, the creditors (whose debts are finally or temporarily admitted) must vote in favor of the scheme both by a majority in number and two-thirds in value of total ordinary admitted debts.

The vote will be binding on non-consenting unsecured creditors. Failure to obtain approval in the two majorities results in the creditors’ meeting being postponed for seven business days.

Failure to obtain approval at the second creditors’ meeting is deemed to be a rejection of the preventive composition scheme. Any creditor, whose debt is admitted and rejects the scheme in the vote, may object to the scheme within a further three business days of the trustee’s submission of the scheme to the court and the court must decide on any such objection within five business days. The law states that the scheme must not affect the priority rights of secured creditors.

After creditor approval, the court must approve the preventive composition scheme. The trustee must present the approved preventive composition scheme to the court within three business days. The approval by the court of the preventive composition scheme binds all unsecured creditors. The trustee must advertise the court’s approval within seven business days of approval.

If the court does not approve the preventive composition scheme, the court must return it to the trustee for amendment within 10 business days, after which the trustee must resubmit the amended scheme to the court. Creditors have a right to object to the court’s rejection or amendment (to be decided upon by the court within 10 business days of objection).

The deadline for implementation of a preventive composition is three years, which may be extended for another three years with majority creditor approval.

UAE law does not provide guidance on the release of non-debtor parties from liability through a reorganization plan.

Involuntary liquidations

9. What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

The liquidation procedure provides for the voluntary termination of a company’s corporate existence, while the principal method for involuntarily winding up a debtor is through the bankruptcy liquidation proceedings as set out in the UAE Bankruptcy Law. Bankruptcy proceedings are split into two procedures:

• a bankruptcy restructuring process, which is a rescue process within formal bankruptcy proceedings; and
• a formal liquidation procedure for the winding up of insolvent companies.

Although creditors may apply for the commencement of bankruptcy proceedings against a debtor, the initiation of bankruptcy liquidation procedures remains at the discretion of the court if it decides that a bankruptcy restructuring procedure is not appropriate.

A liquidation is undertaken by one or more court-appointed trustees. Once the trustee is appointed, all the powers and authorities of the company’s board of directors vest in the trustee. The trustee is also required to notify all creditors and to invite them to present any final claims (which have not already been notified in accordance with the bankruptcy application) within 10 business days of the date of notice. The trustee is required to liquidate all the debtor’s assets and distribute the proceeds among the creditors according to the order of priority under the UAE Bankruptcy Law.

Involuntary reorganizations

10. What are the requirements for creditors commencing an involuntary reorganization and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

Bankruptcy proceedings can be applied for by a creditor or a number of creditors who hold an unpaid debt of not less than 100,000 dirhams, have served a statutory demand on the debtor and such demand has remained unpaid for at least 30 consecutive business days. To meet any expenses and costs of the initial proceedings and the consideration of the application by the court, the creditors must also pay an amount to be determined by the courts (not to exceed 20,000 dirhams) or submit a bank guarantee in that amount.

The court will then appoint an expert to prepare a report on the debtor’s financial position including the expert’s opinion on whether a bankruptcy restructuring is a viable option and whether the debtor’s assets are sufficient to cover the cost of a restructuring. The court will then decide whether to approve the application and start bankruptcy proceedings.

If the court decides to initiate proceedings, the debtor will be placed under the supervision of a court-appointed trustee who will take control of the management of the company and is granted wide-ranging powers in relation to preservation of assets, dealing with claims and any other actions required to achieve the purpose of the procedure. Similar to the preventive composition, a moratorium comes into effect and all enforcement action relating to the debtor is automatically stayed. Secured creditors are required to obtain court approval to enforce their security over any secured assets.

Once appointed, the trustee must, within five business days of the date of being notified of their appointment, publish a summary of the court’s decision to initiate bankruptcy proceedings against the debtor in two daily newspapers (one issued in Arabic and one issued in English), including an invitation to the creditors to submit their claims within 20 business days of the date of publication. The trustee must then lodge a list of creditors with the court.

The trustee is then given time to prepare and submit to the court a report on the debtor’s business including their assessment of either restructuring or selling the debtor’s business in the case of liquidation. If the trustee believes there is a reasonable prospect of restructuring the debtor’s business, a restructuring plan should also be prepared for submission to the creditors.

The creditors are then given an opportunity to comment on the report ahead of a court hearing to be attended by the trustee, the debtor and creditors. At this hearing, the court will examine the report and decide whether to initiate either restructuring or liquidation proceedings. The court will only initiate restructuring proceedings if the debtor expresses a willingness to continue the business and the court believes there is a possibility for the debtor’s business to be profitable again within a reasonable period.

If restructuring proceedings are initiated, a final restructuring scheme must be prepared and voted on by creditors. For the restructuring to be approved, a majority of unsecured and secured (to the extent their rights are affected by the scheme) creditors must vote in favor of the arrangement, provided that such majority represents at least two-thirds of the total debt by value.

The procedural aspects described above in respect of preventive composition process are also applicable to restructuring proceedings; however, the deadline for implementation of a restructuring is longer (five years, which may be extended for another three years with majority creditor approval).

Expedited reorganizations

11. Do procedures exist for expedited reorganizations (eg, ‘prepackaged’ reorganizations)?

The United Arab Emirates does not provide for ‘prepackaged’ reorganizations in any formal manner, although it remains open to the bankruptcy trustee to support, and request of the court, any specific requests to expedite the procedure.

Otherwise, expedited reorganizations often take place consensually outside of the legislative framework.

Unsuccessful reorganizations

12. How is a proposed reorganization defeated and what is the effect of a reorganization plan not being approved? What if the debtor fails to perform a plan?

The proposed preventive composition or bankruptcy restructuring is defeated if it does not receive the requisite approval from voting creditors. This is a dual-track test requiring a majority in number and those who hold two-thirds of the ordinary debt to approve the preventive composition or restructuring scheme.

The court has an ongoing power to terminate the preventive composition procedure and convert it into bankruptcy proceedings if at any time it finds (either of its own discretion or on application of an interested party) that either:

• the debtor was in payment default for more than 30 consecutive business days or was insolvent on the date of commencement of the preventive composition proceedings, or if this becomes clear to the court during the implementation of the preventive composition scheme; or
• it becomes impossible to apply the preventive composition and ending the same would result in payment default for more than 30 consecutive business days or result in the debtor’s insolvency.

There is no further guidance in the law as to what would constitute ‘impossible’.

The court may order bankruptcy liquidation if the debtor applies for preventive composition or bankruptcy restructuring in bad faith.

Failure to comply with the terms of the preventive composition or bankruptcy restructuring scheme may lead to nullification and an order by the court to convert the proceedings to bankruptcy liquidation. Furthermore, the preventive composition or bankruptcy restructuring may be annulled for any fraud or criminal action by the debtor.

Corporate procedures

13. Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

The Companies Law sets out the procedures for liquidating a company, while the UAE Bankruptcy Law regulates the bankruptcy liquidation of the entities subject to it. The aim of the two proceedings is somewhat different, as a liquidation involves the dissolution and termination of the corporate existence of a company (irrespective of its solvency position), while the preventive composition and bankruptcy restructuring proceedings aim to rehabilitate debtors in financial difficulties and liquidate the debtor’s estate if no rehabilitation is possible.

Conclusion of case

14. How are liquidation and reorganization cases formally concluded?

A preventive composition or bankruptcy restructuring is formally concluded once the scheme has been implemented and all the debtor’s obligations have been discharged in accordance with the scheme. The court will then, at the request of the trustee, the debtor or an interested party, issue a judgment of completion of the preventive composition or bankruptcy restructuring scheme, which will be published in two widely circulated daily newspapers (one in English and one in Arabic).

In a bankruptcy liquidation procedure, once the trustee has made the final distribution, the court will issue a decision to close the proceedings. The trustee is then required to publish a notice including a list of creditors whose debts were accepted, the amounts of those debts and any unsettled amounts in two newspapers.

In a voluntary liquidation, the liquidator is required to pay all the debts owed by the company in liquidation. Once this has been completed, the liquidator must present a final account to the company’s shareholders or the general assembly. Following presentation of the final account, the liquidator registers the completion of the liquidation on the commercial register.

Registration on the commercial register is deemed notification to the public. The final step in a liquidation is the formal removal of the company’s registration from the commercial register that follows on from the registration of the liquidation.

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

15. What is the test to determine if a debtor is insolvent?

Under Federal Decree Law No. 23 of 2019 and subsequent amendments, a debtor is considered to be insolvent if it has ceased making payments on due debts for more than 30 consecutive business days because of the debtor’s financial instability or the debtor’s assets are insufficient to cover its due liabilities at any time.

Mandatory filing

16. Must companies commence insolvency proceedings in particular circumstances?

If a debtor fails to make payments on its debts as they fall due for a period of over 30 consecutive business days because of its financial instability or its assets being insufficient to cover its due liabilities at any time, it is mandatory for the debtor to apply to the court to commence bankruptcy proceedings, although this requirement is seldom enforced in practice. A debtor cannot apply for preventive composition in these circumstances.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

17. If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

Under Federal Decree Law No. 23 of 2019 and subsequent amendments (the UAE Bankruptcy Law), failure to file for bankruptcy is no longer a criminal offence. Although there appear to be no sanctions or penalties that apply to directors who do not file for bankruptcy, it is not clear if directors of the business will be subject to specific sanctions if they fail to file for bankruptcy before submission of a bankruptcy application on the part of the creditors.

However, if the director’s failure to act led to the debtor’s eventual bankruptcy, the director may be penalized for failing to complete a mandatory filing, and they will be prohibited from taking part in the management of any company or transacting any business up until the time that the debtor becomes rehabilitated pursuant to the UAE Bankruptcy Law.

Federal Law No. 2 of 2015 (the Companies Law) provides that corporate officers and directors are liable towards the company shareholders and third parties for acts of fraud, abuse of power, violation of the Companies Law or the company’s constitution and mismanagement of the company. Corporate officers may be liable to pay amounts owed by their corporations where the liabilities arise from any of the above circumstances. This provision applies regardless of whether the company is in an insolvency situation.

The UAE Bankruptcy Law provides that if, following the declaration of bankruptcy liquidation, it is found by the court that the assets of the debtor are not sufficient to pay at least 20 percent of its debts, the court may order all or part of the directors, jointly or severally, to pay all or part of the debt of the debtor in the event that they are held liable for the loss of the company in accordance with the Companies Law.

After the declaration of bankruptcy, the directors or managers of the debtor may be held liable to repay the debts of the company if they have undertaken certain actions in the management of the company within two years following the commencement of the bankruptcy proceedings. These actions include:

• sales of assets at an undervalue;
• entering into new commitments at less than market value or that are unaffordable in the context of the company’s resources; and
• creating preferences in favor of certain creditors.

However, if the directors are able to prove that the acts were taken with a view to minimizing the loss incurred by the debtor and its creditors, they may not be held liable. Furthermore, any director who objected to the acts, or was not involved in any of the relevant actions, will also not be held liable for them.

Directors’ liability – other sources of liability

18. Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganization actions? Can they be subject to sanctions for other reasons?

The UAE Bankruptcy Law provides that directors and general managers can be sentenced to prison for a period not exceeding two years or a fine of 100,000 dirhams, or both, if the following circumstances arise:

• failing to keep adequate commercial books to reflect the real financial position of the company;
• not providing information as requested by the trustee or deliberately providing the trustee with false information;
• illegally disposing of assets to hide them from the debtor’s estate;
• repaying the debt of a creditor to harm the remaining creditors;
• granting security to a creditor in preference over the remaining creditors;
• disposing of assets at an undervalue or other means that are detrimental to the interest of the creditors to procure funding or delay a payment default or the declaration of bankruptcy or rescission of preventive composition or bankruptcy restructuring procedures;
• expending considerable funds in non-core speculative business not required by the business of the company; or
• entering into undertakings for the benefit of a third party that are beyond the financial means of the debtor when made.

The UAE Bankruptcy Law also provides that if a court declares a company bankrupt and the company’s assets are insufficient to settle at least 20 percent of its debts, the court may order all or any of the members of the board of directors or the managers of a company to pay the balance of the company’s debts or part thereof if certain criteria are met.

Directors’ liability – defenses

19. What defenses are available to directors and officers in the context of an insolvency or reorganization?

If the directors are able to prove that the acts were taken with a view to minimizing the loss incurred by the debtor and its creditors, they may not be held liable. Furthermore, any director who objected to the acts, or was not involved in any of the relevant actions, or protested against them, will also not be held liable for them.

Shift in directors’ duties

20. Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganization proceeding is likely? When?

Under the Companies Law, a director must preserve the rights of the company and extend such care as a prudent person would do in a similar position and the director must not do any acts that are incompatible with the objects of the company and the powers granted to them to this effect.

A director of a company in financial difficulties may find that their acts and decisions in the period leading up to a preventive composition or bankruptcy restructuring are scrutinized closely against this standard; however, there are no provisions of the Companies Law or the UAE Bankruptcy Law that state that the duty of the directors owed to the company shifts to the creditors in these circumstances.

Officers and directors are liable towards the shareholders and third parties for acts of fraud, abuse of power, violation of the Companies Law or the company’s constitution and mismanagement of the company. As such, even if there is no express shift in duties, directors of companies in financial difficulty will have to consider the interest of all the company’s counterparties and stakeholders, including creditors.

Directors’ powers after proceedings commence

21. What powers can directors and officers exercise after liquidation or reorganization proceedings are commenced by, or against, their corporation?

Once bankruptcy proceedings are commenced, the debtor will be placed under the control and supervision of one or more liquidation trustees and the directors will lose their power to manage the debtor’s business. The UAE Bankruptcy Law expressly provides that, as of the date of commencement of the bankruptcy procedures, the debtor is not allowed to perform, among others, the following acts:

• manage assets or pay any claims created before the commencement of the bankruptcy procedures, except for any set-off payments made in accordance with the UAE Bankruptcy Law;
• dispose of any assets or pay or borrow any amounts, unless such disposal or payment is permitted by the UAE Bankruptcy Law; and
• dispose of stock or shares of, or change the ownership or legal form of the company, if the debtor is a legal person.

MATTERS ARISING IN A LIQUIDATION OR REORGANIZATION

Stays of proceedings and moratoria

22. What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganizations? In what circumstances may creditors obtain relief from such prohibitions?

Once the court accepts the application for preventive composition or bankruptcy proceedings and until the approval of the preventive composition or bankruptcy restructuring scheme, a statutory moratorium comes into effect to prevent creditor action and enforcement proceedings against the assets of the debtor. The statutory moratorium does not apply to secured creditors who continue to have the right to enforce secured claims with permission of the court.

Doing business

23. When can the debtor carry on business during a liquidation or reorganization? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

During the preventive composition, the debtor continues to manage its business under the supervision of the court-appointed trustee. The trustee has wide powers in relation to the preservation of assets and the continuation of the debtor’s business. Following the commencement of the bankruptcy procedures, the trustee takes over the management and the debtor will no longer have control over its business.

No special treatment is given to creditors who supply goods or services. Counterparties must perform their obligations under any contracts unless they had obtained a judgment of stay of execution because of the failure of the debtor to perform its obligations under the contract before the start of the preventive composition or bankruptcy proceedings.

Other than the appointment of a supervisory creditor committee, Federal Decree Law No. 23 of 2019 and subsequent amendments (the UAE Bankruptcy Law) does not give the creditors much scope to supervise the debtor’s business. The power to supervise the debtor’s business (in a preventive composition scenario) and manage the debtor’s business (in a bankruptcy scenario) is vested in the trustee under the control of the court.

Post-filing credit

24. May a debtor in a liquidation or reorganization obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

The court may, at the request of the debtor or the trustee, in a preventive composition or bankruptcy restructuring procedure, allow the debtor to obtain new finance that will have priority over any existing ordinary debts of the debtor. The new credit may be secured either on unsecured assets of the debtor or on assets that are already subject to security (ranking behind existing security unless the relevant secured creditor agrees otherwise).

Sale of assets

25. In reorganizations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

Once the preventive composition or bankruptcy proceedings have been commenced, the trustee is entitled to sell the debtor’s assets. The debtor is not allowed to dispose of any assets except in the ordinary course of business without the prior consent of the trustee and the court.

Assets of the debtor that are considered critical to the debtor’s business may not be disposed of for a period not exceeding the period of the preventive composition or restructuring scheme without the permission of the court.

In a liquidation, at the request and under supervision of the trustee, the court may permit the debtor to sell all or part of their business at ‘the best possible price’, which is taken to be market value. The court permission for the sale is time barred and must not exceed six months from the date of granting the permission by the court and may be extended for not more than two months if the extension is in the interest of the creditors or the public.

All assets of the debtor must be sold by the trustee in public auction, with the consent and under the supervision of the court. Any alternative means of sale must be expressly approved and on conditions set by the court.

Negotiating sale of assets

26. Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

Given the requirement for judicial involvement in asset and business sales in bankruptcy liquidations, there is limited scope for a system of ‘stalking horse’ bids. The UAE system does not specifically provide for credit bidding in sales; however, one cannot discount using such a mechanism where to do so would be in the best interests of creditors, but this is subject to permission from the court.

Rejection and disclaimer of contracts

27. Can a debtor undergoing a liquidation or reorganization reject or disclaim an unfavorable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

The UAE Bankruptcy Law provides that the commencement of preventive composition or bankruptcy procedures does not entail the rescission or termination of contracts. The counterparty must perform its obligations under the contract unless it obtains a judgment of stay of execution because of the failure of the debtor to perform its obligations under the contract before the start of the preventive composition or bankruptcy proceedings. The trustee may request the court to order the termination of an unfavorable contract if this is in the interest of the debtor or the creditors and such termination does not substantially prejudice the interest of the counterparty.

If the trustee fails to perform or continue to perform contractual obligations in a bankruptcy restructuring or bankruptcy liquidation procedure, the counterparty may apply to the court to terminate the contract. The counterparty may submit a claim as an unsecured creditor for any amounts owed to it pursuant to the termination of the contract.

Intellectual property assets

28. May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganization is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

The UAE Bankruptcy Law does not specifically address this issue, although the general provisions of the UAE Bankruptcy Law on termination of contracts would apply.

Personal data

29. Where personal information or customer data collected by a company in liquidation or reorganization is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

The UAE Bankruptcy Law does not contain any specific provisions on collection of customer data in a liquidation or reorganization scenario. The United Arab Emirates generally does not have any specific data protection laws comparable to those applicable in Europe outside of certain free-zone areas such as the Dubai International Financial Centre and the Abu Dhabi Global Market.

However, certain provisions in a number of different UAE laws may provide some protections in respect of privacy and the transfer of data. For example, article 378 of Federal Law No. 3 of 1987 (the Penal Code) provides that the publication of any personal data that relates to an individual’s private or family life is an offence.

Also, certain sector-based laws and policies, such as the Cybercrime Law and Privacy of Consumer Information Policy, require service providers to take measures to prevent the unauthorized use or disclosure of personal data. Furthermore, there are no specific provisions under UAE federal law that impose any obligations on data controllers to ensure data is processed properly.

Notification or registration is not required before processing data provided that consent has been obtained from the data subject in relation to the collection and processing of any personal data relating to the individual’s private or family life.

There are no specific provisions under UAE law regulating the transfer of data. However, under article 378 of the Penal Code, data subjects should provide consent to the transfer of personal data to third parties inside or outside the United Arab Emirates if that data relates to an individual’s private or family life.

Arbitration processes

30. How frequently is arbitration used in liquidation or reorganization proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganization case is opened be arbitrated with the consent of the parties?

The statutory procedures set out in the UAE Bankruptcy Law can be applied for at the competent court in accordance with the applicable jurisdiction rules of the Civil Procedures Code and are not subject to arbitration proceedings. Federal Law No. 18 of 1993 provided that trustees in insolvency procedures could accept arbitration in any proceedings connected with the bankruptcy, subject to obtaining the consent of the judge where the arbitration relates to an indefinite amount or an amount above 10,000 dirhams.

A similar provision is not included in the UAE Bankruptcy Law. It remains to be seen how the courts will implement the new regulation in this regard, particularly in view of the statutory moratoria that now apply to debtors who are in preventive composition or bankruptcy restructuring procedures and in relation to whom legal proceedings cannot be initiated or continued (other than enforcement of security with permission of the court).

CREDITOR REMEDIES

Creditors’ enforcement

31. Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

We are not aware of any such processes that would permit creditors to seize assets outside of court proceedings.

Unsecured credit

32. What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

In general, remedies are not available to creditors (secured or unsecured) outside of the formal bankruptcy proceedings. Pre-judgment attachments are not generally available, although creditors may have limited rights in situations where the creditor retains some right over a specific asset (eg, where a creditor has actually retained physical possession of the ‘thing’ contracted for).

The creditor is limited as to the actions it may take; it may not sell the asset in question unless it is of a type that would suffer loss or deterioration and the creditor must obtain court permission before proceeding to sell the asset. Retention does, however, provide the person retaining the goods a priority right over competing creditors.

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

33. During the liquidation or reorganization, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

The predominant way of communication with creditors is through publications by the trustee in two widely circulated daily newspapers (one in English and one in Arabic) subject to statutory timelines. This is the case for the notification of the creditors regarding the start of the preventive composition or bankruptcy proceedings, the publication of the list of debt breakdown and the convening of creditors’ meetings (including the place and time of the meeting) to discuss and vote on the draft preventive composition scheme or the bankruptcy restructuring scheme.

Ahead of the meeting, the trustee must provide the creditors with a copy of the draft preventive composition scheme or the draft restructuring scheme, as relevant.

The preventive composition scheme or restructuring scheme will include the following information that will become available to the creditors or creditors’ committees:

• information around the possibility of the debtor’s business to regenerate profit;
• activities or business of the debtor that must be suspended or terminated;
• the terms and conditions of settlement of any liabilities;
• any performance bonds (contingent liabilities) that may be requested from the debtor;
• any proposals to purchase all or part of the business of the debtor;
• applicable grace periods and discounts in relation to any due payments;
• the possibility of debt-to-equity conversion;
• the possibility to consolidate, create, release or replace any credit support, if necessary, to implement the draft scheme;
• any proposals around the extension of the maturity dates for repayment of principal (specifically included for bankruptcy restructuring); and
• the scheme implementation period (specifically included for preventive composition).

The reporting obligations of the trustee in preventive composition, bankruptcy restructuring and bankruptcy liquidation proceedings are owed to and under the supervision of the court.

Creditor representation

34. What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

The court, after consulting with the trustee, may issue a decision to form one or more creditor committees (eg, a committee of unsecured creditors, a committee of secured creditors or a committee of bondholders) for the purpose of discussing and proposing amendments to the preventive composition scheme. Every committee may choose a representative from the creditors or the legal or financial advisers. All correspondence relating to the creditors’ meeting must be communicated to the representative of each committee and they will be responsible for notifying the creditors to which their committee relates.

At the request of the trustee, the court may limit the powers of the representative or relieve them of their task if the court is of the opinion that the powers conferred upon such representatives are too broad and detrimental to the interest of the creditors. The court may ‘reform’ any of the committees at its discretion. Although it seems that secured creditors are allowed to discuss the scheme and propose amendments, only the unsecured creditors have a right to vote on the protective composition or bankruptcy restructuring scheme.

Federal Decree Law No. 23 of 2019 and subsequent amendments (the UAE Bankruptcy Law) assumes that the creditors will retain legal and financial advisers, and provides that the committee may choose an adviser as a representative. The UAE Bankruptcy Law does not provide any detail on how the creditor committees are funded.

In relation to preventive composition procedures, the UAE Bankruptcy Law allows the creditors to nominate a supervisory committee to supervise the execution of the preventive composition procedures. If there are several nominations, the court will decide on the appointment. If there are secured and unsecured creditors, the supervisory committee must include a representative of each group.

The supervisory committee will assist the trustee and the court and serve the general interest of the creditors. The supervisory committee must notify any breaches of the scheme conditions to the court. No fees must be charged by the supervisory committee. Although this is not entirely clear, it is likely that a supervisory committee can also be nominated in the context of bankruptcy restructuring procedures.

Enforcement of estate’s rights

35. If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

The bankruptcy laws do not provide for creditors to pursue the estate’s remedies while the bankruptcy proceedings are continuing. However, if the bankruptcy and liquidation is closed because of insufficiency of assets in the estate, the UAE Bankruptcy Law provides that ‘every creditor whose debt is admitted and not fully paid, may enforce on the properties of the debtor to receive the remainder of his debt’. Given that the UAE Bankruptcy Law has not been tested and the limited experience in the United Arab Emirates of insolvent liquidations, it is not clear how the courts will approach this provision and how it will be applied in practice.

Claims

36. How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognized? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

All creditors, including secured creditors, must submit their claims and supporting documents within 20 business days of the date of publication of the initiation of preventive composition or bankruptcy proceedings (the Claims Deadline). The trustee may request further clarification from any creditor who submits their claim, including from the auditor or the accountant of the creditor.

After expiry of the Claims Deadline, the trustee must put together a list of names of creditors who submitted their claims including a statement regarding each debt, supporting documents, credit support and whether in the opinion of the trustee the debt should be accepted, amended or rejected and a proposition as to repayment of the debt (if possible).

The trustee must lodge the list of creditors with the court within 10 business days of the Claims Deadline. If necessary, the court may extend this period once by 10 business days at its own discretion. The trustee must, within three consecutive business days of submitting the list to the court, publish a list with a breakdown of the debt in two widely circulated local daily newspapers (one in Arabic and one in English).

The debtor and every creditor (whether included in the debt breakdown or not), may object to the list within seven business days of the date of its publication. The court will decide on the objection within 10 business days of the day of lodging such objection. Any debt may be admitted on a temporary basis by the court. The court’s decision may be appealed before the competent Court of Appeal within five business days of the day of the court’s decision on the objection. The decision of the Court of Appeal will be final. The courts will approve the list of creditors whose claims will be admitted on a final or temporary basis.

Unless expressly consented to by the trustee and approved by the court, a creditor who fails to submit proof of claim before the Claims Deadline will be excluded from the preventive composition or bankruptcy procedure. If the trustee rejects or fails to respond within three business days, the creditor may apply to the court to accept its claim. The court may, after consulting with the trustee, consider the application and issue a decision within seven business days of the date of application.

Claims for contingent or unliquidated amounts can be submitted to the trustee. The court may, before making a final ruling regarding a debt, provisionally accept a debt in an amount specified by the court. However, the trustee, debtor and court may challenge a debt.

The law does not provide any further guidance on how claims for contingent or unliquidated claims would be valued or on the nature of the proof required to be submitted by a creditor. The law does not provide further guidance on the enforcement of a claim acquired at a discount nor claims relating to interest accrued after the opening of an insolvency case and the area relating to claims remains largely untested.

Set-off and netting

37. To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganization? Can creditors be deprived of the right of set-off either temporarily or permanently?

The UAE Bankruptcy Law permits set-off between a debtor and a creditor if it had been contractually agreed before insolvency, but not in relation to debts that arise after the commencement of a preventive composition or bankruptcy restructuring procedure. The set-off provision also allows for a creditor to claim for any debt that remains after the set-off, and, conversely, if following the set-off the creditor owes an amount, then this must be paid to the debtor’s estate.

In the absence of clarity on the sums that can be used as part of the insolvency set-off, it is the expectation that the provisions of Federal Law No. 5 of 1985 relating to mandatory set-off will still apply to any analysis of insolvency set-off; in particular that the creditor and debtor will owe each other an obligation of the same type and description and it must be ‘equally due’ and of ‘equal strength and weakness’.

Although a set-off provision has been included, the UAE Bankruptcy Law does not provide specific provisions for post-insolvency close-out netting. However, the court will have discretion to incorporate any agreement on set-off or netting arrangements into a preventive composition scheme or restructuring plan approved in accordance with the procedures outlined earlier.

Modifying creditors’ rights

38. May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

The UAE Bankruptcy Law provides that a secured creditor who wishes to vote on a preventive composition scheme or bankruptcy restructuring may only do so after having ‘assigned’ their security interest (the law is not clear on what this assignment entails, in whose favor it should be made and the terms of this assignment), as voting on such schemes is only available to unsecured creditors.

This, however, is at the discretion of the secured creditor and not the courts. The law is untested, and it is therefore unclear how the courts would approach this matter. Other than the obligation to ‘assign’ security for voting purposes and the inclusion of a list of statutory priorities, the UAE Bankruptcy Law does not provide grounds for changing the ranking of a creditor’s claim.

Priority claims

39. Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganizations? Which have priority over secured creditors?

In addition to certain employee claims, the UAE Bankruptcy Law provides for the following priority claims in liquidations:

• judicial fees and charges incurred in respect of the liquidation process, such as court fees and the fees of the trustee and experts;
• judgment debts;
• amounts due to government bodies; and
• fees, costs and expenses that arise in connection with the provision of goods and services to continue the business of the debtor after proceedings have been initiated.

The UAE Bankruptcy Law mentions that secured creditors are ‘ranked higher than other ordinary creditors’. The law is not clear on whether the courts would grant priority to the secured creditors or the priority claimants listed above, or whether the priority claimants will only be paid from funds available to unsecured creditors.

Employment-related liabilities

40. What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

Federal Law No. 18 of 1993 (the Commercial Code) permitted the bankruptcy trustee to terminate contracts, provided this was done in accordance with the provisions of Federal Law No. 8 of 1980 (the Labour Law). This has changed in the UAE Bankruptcy Law as it provides that:

“without prejudice to the rights legally established to the worker, the court may terminate the effective employment contracts between the debtor whose properties are subject to restructuring or whose bankruptcy is declared and any of his employees, if required, irrespective of the provisions contained in such contracts.”

The UAE Bankruptcy Law further provides that unpaid end of service gratuity, wages and salaries of employees of the debtor (not including allowances, bonuses and do on), in total not exceeding a maximum of three months’ salary, are preferential debts on liquidation of the debtor. The court may also permit the payment of salaries for a period of not more than 30 days.

Further guidance is needed, but we would assume that the court would terminate any employment contract in accordance with the provisions of the Labor Law. The Labor Law provides for two principal types of employment contract:

• definite or limited term; and
• indefinite or unlimited term.

The termination provisions differ between the two types of employment contracts and consequently the claims that may arise differ. Where a limited term contract is terminated for reasons other than fault on the part of the employee, the employee is entitled to an amount equal to three months’ salary or payment of the remainder of the term of the contract, whichever period is shorter.

In the case of unlimited-term contracts, such contracts can be terminated for a valid reason (which would include restructuring or insolvency) at any time, by giving the employee at least 30 days’ notice in writing. If such a notice is not given, and the employee is terminated, the employee is entitled to compensation in lieu of notice.

Pension claims

41. What remedies exist for pension-related claims against employers in insolvency or reorganization proceedings and what priorities attach to such claims?

The majority of employees in the United Arab Emirates do not benefit from pension plans but are entitled to an end-of-service benefit, the amount of which depends on the employee’s base salary and length of service. The UAE Bankruptcy Law provides that unpaid end-of-service benefit is a preferential debt and ranks in the list of priorities after judicial fees and charges incurred in respect of the liquidation process, such as court fees and the fees of the trustee and experts.

Environmental problems and liabilities

42. Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

The UAE Bankruptcy Law does not address environmental liabilities in an insolvency scenario. Federal Law No. 2 of 2015 provides that corporate officers and directors are liable towards the company shareholders and third parties for acts of fraud, abuse of power, violation of the company’s constitution and mismanagement of the company. Corporate officers may be liable to pay amounts owed by their corporations where the liabilities arise from any of the above acts.

This provision applies regardless of whether the company is in an insolvency situation. The Commercial Code does not specifically address environmental issues and liabilities. The United Arab Emirates has specific environmental legislation both at a federal level and in each emirate. The main federal law is Federal Law No. 24 of 1999 concerning the protection and development of the environment; however, this is of general application and does not cover liability on insolvency.

Liabilities that survive insolvency or reorganization proceedings

43. Do any liabilities of a debtor survive an insolvency or a reorganization?

There are no provisions in the UAE Bankruptcy Law that seem to suggest that liabilities will survive the liquidation of the debtor. In relation to reorganizations, in the normal course of events, liabilities may survive only if the preventive composition or bankruptcy restructuring is unsuccessful.

Distributions

44. How and when are distributions made to creditors in liquidations and reorganizations?

The UAE Bankruptcy Law provides that the trustee must apply the proceeds of liquidation of the debtor’s assets towards any claims owed by the debtor under supervision of the court in line with the applicable waterfall of priority of claims and the treatment of preferential creditors. In respect of a reorganization, if a preventive composition or bankruptcy restructuring has been finalized, distributions will be made pursuant to the terms of the preventive composition or the restructuring.

SECURITY

Secured lending and credit (immovables)

45. What principal types of security are taken on immovable (real) property?

Security over real property is usually taken in the form of a mortgage. Mortgages over real property may consist of:

• mortgages over freehold land and buildings constructed on such land;
• mortgages over leasehold interests in real property; and
• mortgages over buildings constructed on leased land.

The mortgage gives the mortgagee a security interest over the real property in question for the mortgagor’s debt. As a result of the mortgage, the mortgagee obtains a priority right over unsecured creditors in general, although it is unclear whether certain preferred unsecured claims, including employee wage and tax claims, would be preferred over secured creditor claims.

Other than in certain designated areas, restrictions on foreign ownership of real property exist throughout the United Arab Emirates. In brief, each emirate is free to enact its own legislation in relation to foreign ownership of real property.

In Dubai, the local population and nationals from Gulf Cooperation Council (GCC) countries can hold the title to freehold property without distinction, although foreign owners may only hold the freehold title within specifically designated areas. There are also restrictions on the length of leaseholds. For certain practical reasons, and, indeed, for registrable security (eg, mortgages over immovable property), it is a requirement for a local bank registered with the Central Bank to hold the security.

Secured lending and credit (movables)

46. What principal types of security are taken on movable (personal) property?

The principal types of security taken on movable property are pledges, business mortgages and assignments.

Pursuant to Federal Decree Law No. 4 of 2020 (the Movables Law) in relation to securing rights in movable property, the types of assets capable of being pledged include:

• receivables;
• accounts in credit with banks (including current accounts and deposits);
• bonds and documents transferable through delivery or endorsement;
• equipment and work tools;
• tangible and intangible elements of a business;
• raw material used in a manufacturing process; and
• agricultural products, animals and their products.

The Movables Law has removed the requirement to take physical possession of most types of movable assets. Registration of security over movable assets in the Security Register is generally required to ensure the validity and enforceability of the security. The Security Register allows for:

• free public searches of registered security;
• certified searches of registered security;
• registration of notices of security interests; and
• registration of notices of termination of security interest.

A business mortgage (a pledge over a commercial business) can be taken over a commercial business (usually interpreted to cover all the tangible and intangible property of a commercial trader); however, it may only be granted to banks and financial institutions, although this is becoming less common since the introduction of the Movables Law. The items that are secured pursuant to a business mortgage should be in existence and identifiable and cannot be changed after perfection without additional formalities, as the concept of a floating charge is not recognized. Business mortgages automatically expire after five years unless renewed.

Because of the uncertainty of the UAE insolvency regime, it is unclear whether a company’s inventory or tradable assets would fall within the definition of a business mortgage. While there may be some similarities between the business mortgage and an English law floating charge, the concept of a floating charge is not recognized under UAE law.

Pledges can be created over shares issued by some UAE incorporated companies, although difficulties may arise for foreign creditors taking or enforcing such pledges because of laws restricting foreign ownership in UAE companies. In general, UAE companies must be 51 percent owned by UAE or GCC nationals, so the exercise of a pledge that results in non-UAE or non-GCC nationals owning more than 49 percent of a company would be invalid.

Account pledges can also be created. The Movables Law has removed the uncertainty that previously existed around fluctuating balances and it is clear that they can now be secured.

Assignment agreements are usually taken as a form of security over contracts, contractual rights, account receivables and insurances. Federal Law No. 5 of 1985 is silent as to whether it applies solely to the assignment of obligations or the assignment of both rights and obligations. There is also uncertainty as to whether the consent of the obligor is required or an acknowledgement of the assignment in addition to a notice of the assignment.

Under UAE law, an assignment of future assets that are not identifiable at the time the assignment is granted is not permitted. The perfection requirements for each type of security vary depending on the circumstances, such as the location of the secured assets and the asset that is the subject of the relevant security interest. Separate perfection requirements are also applicable with respect to mortgages over certain property such as vessels and aircraft.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

47. What transactions can be annulled or set aside in liquidations and reorganizations and what are the grounds? Who can attack such transactions?

The following transactions may be annulled or set aside by the court, and are not binding on the general body of creditors, if they take place during the two years before the initiation of the bankruptcy proceedings and it is found that the relevant transaction occurred at a time when the creditor knew, or ought to have known, that the debtor was insolvent and where it can be shown that the transaction has a detrimental effect on the general body of creditors:

• donations, gifts or transactions without consideration with the exception of small gifts that are customary;
• any transaction in which the liabilities of the debtor remarkably exceed the liabilities of the counterparty;
• payment of debts before the maturity date;
• payment of debts with something other than that agreed; and
• providing security or guarantees for a pre-existing debt.

To the extent that the court finds that the transaction was entered into in good faith and for the purpose of the continuation of the debtor’s business and that there were grounds for the debtor to believe that the transaction would be of the benefit of the business, the court may not reverse such transaction.

In relation to debtors that have been declared bankrupt, personal, financial and criminal liability may accrue to directors and managers for, among others, preferential treatment of creditors and transactions at an undervalue.

In this context, Federal Decree Law No. 23 of 2019 and subsequent amendments (the UAE Bankruptcy Law) provides that certain transactions (eg, preferences, security for pre-existing debts and disposals at an undervalue) that take place during the two years before the commencement of the bankruptcy proceedings may be declared invalid and unwound by the court and directors could be sentenced for up to two years in prison in such circumstances.

Equitable subordination

48. Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganization proceedings?

There are no provisions in the UAE Bankruptcy Law that specifically deal with limitations on claims by insiders and non-arm’s length creditors in the manner that this is dealt with in other jurisdictions. Under UAE law, however, courts have general discretion to invalidate and reverse transactions that are entered into on a non-arm’s length basis or those that are entered into with third parties, if that third party knew at the time it entered into the relevant transaction that the company had ceased paying its debts.

Lender liability

49. Are there any circumstances where lenders could be held liable for the insolvency of a debtor?

There is nothing in the UAE Bankruptcy Law that imposes such liability.

GROUPS OF COMPANIES

Groups of companies

50. In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

As a general principle under UAE law, each legal entity has a separate legal personality. Shareholders of limited liability companies and public joint-stock companies are not liable for the debts of the insolvent company. Notwithstanding this, it is possible under UAE law to pierce the corporate veil in certain limited circumstances, but this area of law is not very well developed and there are few published cases.

In particular, decisions of the UAE courts suggest that a shareholder can be directly liable to the company’s creditors in situations involving fraud, deceit and negligence or serious error in its dealings with the company’s creditors; these judgments have not been directly related to insolvency or restructuring cases and there is no binding system of precedent in the United Arab Emirates.

Although the drafting of the provision is unclear, Federal Decree Law No. 23 of 2019 and subsequent amendments (the UAE Bankruptcy Law) provides in the penalties section that:

“Every person who works at the juristic person (ie, legal entity) subject to the provisions of this Decree Law and plays an effective role in decision making therein shall be considered a manager, in this Section. This shall include the person under whose directives and instructions the manager acts.”

This seems to introduce a concept of ‘shadow directorship’ that seems to suggest, if a purposive interpretation is applied, that where a person (including a shareholder) directs the management of a company, that person may be liable under the UAE Bankruptcy Law if any of the specified offenses are committed.

The legislation does not provide any guidance on how and when distributions of group company assets (including assets owned by a group entity) will be made, but the judge has considerable discretion when considering such distributions.

Combining parent and subsidiary proceedings

51. In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

The UAE Bankruptcy Law provides that where the assets of another company are integrated with the assets of a company subject to an insolvency process in a manner that makes them difficult to separate or if the court considers that it would not be practical or feasible from a cost standpoint to open separate proceedings, the court may decide to join such other company or companies in the same process.

INTERNATIONAL CASES

Recognition of foreign judgments

52. Are foreign judgments or orders recognized, and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

The provisions relating to liquidation apply to foreign companies that conduct their principal activity in the United Arab Emirates or have their center of management in the United Arab Emirates. There has yet to be a major corporate insolvency in the United Arab Emirates and the general insolvency regime is largely untested. Also, there is no specific legislation that deals with foreign insolvencies that may have a link to the United Arab Emirates.

As a result, it is likely that any such proceedings would be dealt with under normal UAE private international law and would therefore have to be enforced in accordance with the rules on enforcement of foreign judgments. Foreign judgments are not automatically enforceable in the United Arab Emirates and, in particular, the Civil Procedures Code requires reciprocity of enforcement between the United Arab Emirates and the country issuing the judgment. Under the Civil Procedures Code, a judgment of a foreign court may be enforced in a UAE court if:

• no UAE court has jurisdiction in the dispute and the foreign court did have jurisdiction;
• the parties in relation to which the judgment was issued have been given due notice of the proceedings and were represented;
• the foreign judgment is final; and
• the judgment does not contradict any judgment issued in the United Arab Emirates and contains nothing that would be in breach of public policy, order or morals.

The UAE courts have a broad jurisdiction to hear any proceeding with a UAE element. In summary, the UAE courts may assume jurisdiction if:

• a party is domiciled in the United Arab Emirates;
• the claim concerns an asset that is located in the United Arab Emirates;
• the claim concerns a contract under which the contractual obligation should have been or was performed, concluded, executed, completed or relevant payments were made in the United Arab Emirates;
• the claim is in respect of insolvency that has been declared in the United Arab Emirates;
• the claim is against a UAE national or expatriate who is domiciled in the United Arab Emirates; or
• the claim concerns a party who is employed in the United Arab Emirates.

We are not aware of any international treaties on insolvency having been signed by the United Arab Emirates. The United Arab Emirates is a signatory to the New York Convention on the Recognition and Enforcement of Arbitral Awards and has signed a limited number of treaties on the recognition of foreign judgments, including the Riyadh Arab Agreement for Judicial Cooperation and the Gulf Cooperation Council (GCC) Convention for the Execution of Judgments, Delegations and Judicial Notifications (the GCC Convention), which was ratified by the United Arab Emirates in June 1996.

Under the GCC Convention, judgments issued in any of the six-member counties of the GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) are enforceable in any other GCC country.

UNCITRAL Model Laws

53. Have any of the UNCITRAL Model Laws on Cross-Border Insolvency been adopted or is adoption under consideration in your country?

We are not aware of any proposal to adopt the UNCITRAL Model Law on Cross-Border Insolvency into UAE law. The UNCITRAL Model Law on Cross-Border Insolvency has been adopted in the Dubai International Financial Centre, as part of the new Insolvency Law, and in the Abu Dhabi Global Market.

Foreign creditors

54. How are foreign creditors dealt with in liquidations and reorganizations?

Federal Decree Law No. 23 of 2019 and subsequent amendments (the UAE Bankruptcy Law) does not contain provisions that address foreign creditors specifically. Foreign creditors will have to prove their claims in a preventive composition or bankruptcy restructuring procedure as per the relevant provisions in the UAE Bankruptcy Law that apply to creditors of the debtor.

Cross-border transfers of assets under administration

55. May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

The UAE Bankruptcy Law does not contain provisions that address the cross-border transfer of assets under administration. The United Arab Emirates is not a party to any international insolvency or restructuring treaties, and Federal Law No. 18 of 1993 (the Commercial Code), Federal Law No. 2 of 2015 and Federal Law No. 5 of 1985 (the Civil Code) are also silent on whether assets could be transferred from a UAE administration to a foreign administration.

COMI

56. What test is used in your jurisdiction to determine the COMI (center of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

The Commercial Code does not set out a specific test, and the question of determining this has not to our knowledge been addressed. The legislation is largely untested as there has yet to be a major corporate insolvency in the United Arab Emirates using the UAE Bankruptcy Law.

In principle, the UAE courts have jurisdiction to hear bankruptcy cases relating to any entity that is governed by the UAE Bankruptcy Law, that conducts its principal activity in the United Arab Emirates, or that has its central management in the United Arab Emirates as defined in the Commercial Code.

Cross-border cooperation

57. Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognize foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?

Neither the Commercial Code, the Civil Code nor the UAE Bankruptcy Law provide guidance to courts in such circumstances. We are not aware of any formal cooperation processes between the United Arab Emirates and foreign courts and officials in the context of insolvencies and restructurings. The United Arab Emirates has not incorporated into national law the UNCITRAL Model Law on Cross-Border Insolvency and there are no provisions in the UAE law for the recognition of insolvency proceedings commenced in other jurisdictions or for cooperation with the courts of other jurisdictions.

The UAE courts may recognize a foreign judgment of insolvency on a reciprocal basis, but such recognition would be subject to a number of conditions, including compliance with public policy in the United Arab Emirates, both parties having obtained adequate representation and the judgment being obtained from a jurisdiction that enforces UAE judicial rulings. As a matter of practice, however, the UAE courts will generally seek to assert their jurisdiction over any matter involving UAE parties and they are unlikely to recognize the appointment of foreign insolvency officials or proceedings without consideration of the issues independently under UAE law.

Cross-border insolvency protocols and joint court hearings

58. In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

We are not aware of the UAE courts having entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries or having communicated or held joint hearings with courts in other countries in cross-border cases.

Winding-up of foreign companies

59. What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

In principle, the UAE courts have jurisdiction to hear bankruptcy cases relating to any entity that is governed by the UAE Bankruptcy Law, that conducts its principal activity in the United Arab Emirates, or that has its central management in the United Arab Emirates as defined in the Commercial Code, but as there has been no major cross-border insolvency, this is untested.

UPDATE AND TRENDS IN RESTRUCTURING AND INSOLVENCY IN UAE

Trends and reforms

60. Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

Federal Decree Law No. 23 of 2019 and subsequent amendments remained largely untested for several years after its enactment in the context of large, complex and high-value restructurings. In recent times, a number of cases have emerged where some processes have been utilized, including in high-profile cases such as those concerning JBF RAK, Drake & Scull, Arabtec and KBBO. The UAE Financial Reorganization Committee has also become actively involved in some of these cases.

These are very positive developments for the jurisdiction, as they demonstrate the practical application of the law, giving market participants increased confidence in the system.

Further updates to the law are expected in the near future, building on the experience of recent cases and showing the dynamic and responsive approach being taken by the United Arab Emirates.

* The information in this chapter was accurate as at July 2023.

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“The article’s content refers to the regulations that were applicable at the time of its creation and is intended solely for reference purposes. To obtain accurate information, it is advisable to seek the guidance of a consulting lawyer.”

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