The word, ‘bankruptcy’ is known to have derived from two Latin terms ‘banco rotta’ or ‘bancus ruptus’, where the word ‘bancus’ means ‘bench’ and ‘ruptus’ means ‘broken’. So, you must be wondering what does a broken bench has to do with the word bankruptcy, it can be understood by tracing back to the age of Italian renaissance, where the Italian merchants used to do their businesses from benches in the town marketplaces and when they failed to pay their debts, the creditors would literally break their benches. The broken bench would indicate that such merchants have lost their ability to carry out or negotiate any further business. In the ancient days, the insolvent debtors were deprived of any opportunity to restart their businesses until the debts they owed were paid fully and were even made subject to ‘debt salvery’. However, at present, the times have changed from letting the creditors being harsh on the businessmen who have gone bankrupt to resolve the dispute between the creditor and insolvent debtor in a way to rehabilitate the debtor to start afresh and at the same time fairly repay the creditor. The United Arab Emirates (UAE) legislation, took into consideration the inadequacy of the insolvency regime to effectively meet the needs of the distressed businesses, pursuant to the Global Financial Crisis in 2008 and has introduced the Federal Law Number 9 of 2016 on the Bankruptcy Law (the Bankruptcy Law). The Bankruptcy Law overhauled the previous insolvency regime in line with the modern and international practices and has incorporated key features from the insolvency laws of different countries, especially the modern French insolvency law mechanics and the bankruptcy regime of the United States. The Bankruptcy Law has been amended by Federal Law Number 23 of 2019 to improvise certain provisions. Unlike the previous insolvency law which was limited to govern only the traders, the Bankruptcy Law has a wider scope of application.
1. The companies governed by the Commercial Companies Law.
2. The companies owned wholly or partly by the Federal or local government.
3. The companies and establishments in the free-zones which are not subject to their own laws. 4. Any person with a capacity to be a merchant as per the provisions of this law.
5. Licensed civil companies of professional nature.
The entities established in free-zones which have their own standalone bankruptcy laws shall not fall under the purview of the Bankruptcy Law, for instance, the financial free-zones of the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM).
The Bankruptcy Law provides for the formation of a permanent committee named ‘Financial Reorganization Committee (The Committee)’. The Committee is assigned with certain roles, such as:
1. To supervise the management of the financial reorganization in a manner to facilitate a mutual agreement between the debtor and his creditors, by appointing one or more experts to assist in carrying out this purpose.
2. To finalize the team of experts as well as approve the terms and procedures of registration of the experts, with regards to the matters of financial reorganization and bankruptcy, so as to carry out their assigned duties as per the provisions of this law.
3. Decide the fee structure of the appointed experts. The appointed experts within the limits of this act for the purpose of implementing the task assigned to them shall be considered as public servants.
4. Maintain a record of the persons against whom judicial decisions were made. It shall also issue the form of the record and the data to be included therein, along with conditions under which persons have the right to view such records.
5. To submit records time-to-time on its work, achievements and suggestions to the ministers and to carry out any other such competencies as assigned by the Council of Ministries.
The Bankruptcy Law provides the tests to assess the insolvency of the company and the options of processes feasible for them. The kind of process to be adopted will be evaluated based on financial status of the debtor based on the two tests:
• Cash Flow test: If the debts are due to be paid for more than thirty (30) successive days, then the debtor shall be considered as ‘insolvent’.
• Balance-sheet test: Where the debtor’s assets fail to cover the debtor’s liabilities, shall be considered to be in the state of over-indebtedness.
The debtor shall be obligated under the provisions of the Bankruptcy Law to file for bankruptcy within thirty (30) days of it being aware of its insolvency on conducting the above test, along with it, the debtor can apply for protection within that period.
The Bankruptcy Law provides for two court procedures.
This procedure intends to assist the debtor and his creditors to reach a court-directed mutual settlement, as per the preventive composition plan with the help of the appointed trustee. The following procedure has been adopted from the French insolvency law, which provides for ‘voluntary safeguard proceedings’ (procédure de sauvegarde), whereby, it facilitates the debtor facing severe financial crisis but not yet insolvent to come to an agreement with his creditors as to the whole or partial repayment of the debts, under the supervision of the court, in order to escape liquidation.
Article 6 of the Bankruptcy Law provides the provisions for the eligibility to apply and who can be parties to this procedure; except the debtor, no other party is allowed to apply to the court for a preventive composition and also the debtor applying should not have been able to make the payments of the debts for a period of thirty (30) successive days due to the existing financial conditions.
Article 15 provides reasons when the application can be rejected:
1. The following procedure cannot be availed by any debtor who has already gone through this procedure in the past one year or have already entered into bankruptcy procedure.
2. Any debtor who is proven to act in bad faith or the application consists of anything which can abuse the litigation procedures,
3. If the debtor on the final judgment can be held liable of any crime, theft, dishonesty or misappropriation of public assets,
4. If the debtor couldn’t pay the expenses or submit such an amount which is required to initiate the proceedings for preventive composition to the court’s treasury within the stipulated time,
5. If the court decides to open the bankruptcy procedure or if the debtor’s application failed to meet the necessary requirements.
6. If it is established that initiating preventive composition would be inappropriate.
The debtor shall first submit an application stating the reasons for initiating the preventive composition to the court, along with other relevant documents such as;
• Briefly describing the economic and financial situation of the debtor and details of his assets and the employees.
• A copy of certified business license and a professional register sanctioned by the competent licensing authority at the Emirate.
• A copy of the financial statements with regards to the debtor’s business of the financial year prior to the submission of such application.
• A report containing the details of the debtor’s estimated cash flow and profits and losses of the debtor’s projects for the period of twelve months subsequent to the submission of the application, detailed statement of debtors movable and immovable properties and their approximate value on the date of submission of the application, proposal of preventive composition, details of the debtor’s nominated trustee, particulars of the known name and addresses of the creditors, their amount of rights, debts or the guarantee offered in return and any such relevant document to support the application.
The debtor is required to deposit an amount of money or a bank guarantee into the court’s treasury to meet the expenses of the procedure, which includes even the fees for the experts and the trustees. The court also appoints an expert to review if the financial condition of the debtor has sufficient funds to initiate the procedure for preventive composition and also deposit a report on the same, along with an approval as to that, the debtor’s application has met all the necessary requirements, within a period of twenty (20) days from the date of appointment of such experts.
After the submission of the application for preventive composition, the court may take precautionary measures either on the request of any party or on its own accord, in order to secure or manage any of the debtor’s assets, which may even include sealing of the headquarters, until the application has been settled and approved by the court. During this time, where the court is in the process of verifying the application, the court may provide the debtor with a specific time to submit any other additional documents to support the application.
Article 14 of the Bankruptcy Law, provides that the court may decide on the application for preventive composition within five (5) working days from the date of the submission of the application, provided such application was successful in meeting all the requirements.
Where it was referred to an expert, then the court may decide on the application for preventive composition from the date when the expert’s report has been submitted to the court.
On court’s acceptance of the application, the procedure for preventive measure shall open.
After the verification of the application, if the court has approved the application for preventive composition, then, it shall appoint a trustee. The composition of the trustee shall not exceed more than three trustees, which may include the trustee nominated by the debtor. Any person who is one of the creditors, or the debtor’s spouse or relatives up to the forth degree, or any person who has been sentenced by a final judgment for a felony or theft or any other such crimes, or any person who was known to be debtor’s partner, employee or agents two years prior to opening of the preventive composition procedures cannot be eligible to be elected as one of the trustees.
In this stage, the creditors are allowed to appeal the decision of the court with regards to the appointment of the trustees, within the period of five (5) working days from the date of the publication of the trustees. The court shall take all the necessary requirements with regards to the trustee as to ensure a proceeding without any prejudice to the interests of the parties. The appointed trustee will then prepare a record on the procedures to be followed and also make a list of the debtor’s assets, either in his presence or in the presence of his representative, which shall be signed by both the trustee and the debtor. Thereafter, the copy of the same shall be submitted to the court. The list of the assets shall not include the rights of the beneficiaries of the debtor’s pension, irrespective of when it has been acquired.
The trustee shall within five (5) working days from date of his appointment shall publish an abstract of the decision to open the preventive composition procedure, along with an invitation to the creditors to deposit their claims and the supportive documents for the same within a period of twenty (20) working days from the date of such publication, in two most prevalent local newspapers, where one of them is issued in Arabic and while the other one is issued in English. The trustee, at the same time, may notify the creditors with known addresses to also submit their claims and the supporting documents within the twenty (20) working days of the publication of the decision for preventive composition.
After the expiry of twenty (20) working days, the trustee will then prepare a list of all the creditors who has submitted their claims of the debts, along with all the supportive documents and shall deposit the same to the court within ten (10) working days from the date of the expiry of the twenty (20) days. Thereafter, the trustee shall within a period of three (3) working days shall publish in two most widely known local newspapers, one in Arabic and the other in English languages, the list of debts and the statement of amounts considered to be accepted of each debt. The debtor and the creditors, even whose name has not been stated in such list may raise an objection to the list within seven (7) working days from the date of publication of such list in the newspapers. The raised objection shall be decided by the court within ten (10) working days from the date of filing of such objections, however, this decision shall be appealable before the competent Court of Appeal, within five (5) working days from the date of issuance of the decision and this decision shall be final. Article 39 of the Bankruptcy Law provides a provision which enables the creditor who failed to submit his debt documents within the stipulated period of twenty (20) days due to acceptable reasons to submit the documents.
The trustee along with the help of the debtor shall prepare the draft for the preventive composition plan and shall submit it to the court within a period of forty-five (45) working days from the date when the decision as to the opening of the preventive composition procedure was published. The court, at the request of the debtor or the trustee may extend the time period of submitting the draft for preventive composition plan for a period of twenty (20) working days, provided the court receives a periodic report of the preparation plan every ten (10) working days. The draft for preventive composition plan shall include the following:
1. A possibility of the debtor’s business running in profits again.
2. The debtor’s activities which ought to be suspended or terminated.
3. The terms and conditions of the settlement of any obligations
4. Any performance guarantees which are necessary to be submitted by the debtor
5. Any offers as to the purchase of all or part of the debtor’s assets
6. Grace periods and any discounts on the payments
7. Possibility of conversion of debt to capital shares in any project
8. The time period for the implementation of the plan and any other information to aid the implementation of the plan
9. Any offer with regards to the unification, establishment, sale or replacement of any guarantee The draft shall be reviewed by the court within a period of ten (10) working days from the date of the submission of preventive composition plan.
During this period, the court may also request the trustee to enter any other necessary amendments to the plan and return it to the court within a time period not exceeding ten (10) working days from the date of court’s request to the same. If the court approves of the draft plan, it may direct the trustees to send an invitation to the creditors for a meeting to assess and discuss the draft of the preventive composition plan and cast their votes on the same, within five (5) working days of such approval. The invitation of the meeting and all the relevant details as to the place and time of this meeting shall also be published in the two most prevalent daily newspapers. The court shall ensure that the creditors are notified about the meeting by all possible means of communication, even the electronic means. Thereafter, the meeting shall be conducted within a period of fifteen (15) working days from the date of the publication of the invitation and at the discretion of the court, the procedure for preventive composition may begin. There upon, the trustee shall, within the period of three (3) working days from the date of when the preventive composition plan was approved by the required majority of votes by the creditors, shall submit the draft for the preventive composition plan for the court’s decision of approval or rejection. Any creditor whose debt was accepted but was not convinced of the draft plan, may file an objection to the draft submitted to the court within three (3) working days of submission of the draft. The court shall decide upon the submitted objection within a period of five (5) working days from the date of filed objection. This decision shall be final.
The court may issue its decision as to the ratification of the implementation of the preventive composition plan on verifying all the conditions. Any failure to observe the terms and conditions of the composition may lead to the nullification of the procedure and also an order by the court to convert the proceedings to bankruptcy and liquidate the debtor’s assets.
The bankruptcy procedure provides for two methods:
1. Process of restructuring of the debtor’s business
2. Process of liquidation of the debtor’s assets to meet the required obligations.
The debtor who has failed to make the payment of his debts for a period exceeding thirty (30) consecutive days because of his critical financial conditions or his state of insolvency, may be eligible to apply to the court for the initiation of the procedure under bankruptcy. At the same time, even the creditor or the group of creditors whose debt amounts to not less than UAE Dirhams one hundred thousand (AED 100,00O), may also be eligible to apply to the court to open the procedures as per the bankruptcy provisions.
The debtor shall submit to the court the application, specifying, if the application is for restructuring or adjudication of bankruptcy and liquidation, along with all the reasons justifying the submission of such application. The application shall include all the relevant documents like economic and financial statements, information of all his assets, value of movable and immovable properties, copy of commercial or professional licenses, details of cash flow, profits and losses, name of the creditors and their addresses and the details of the debts, and details of the nominated trustee and any other such documents supporting the initiation of the bankruptcy procedures. Similarly, the creditor who wishes to initiate proceedings under bankruptcy, may also submit all the relevant documents in support of the application. The court may decide on the approval of the application of bankruptcy procedure, within a period not exceeding five (5) working days from the date when the application has been submitted. The court will specify its approval of the possibility to restructure the debtor’s business and may start preparing the plan for restructuring based on the application submitted by the debtor or the creditor.
On accepting the application for the procedures of restructuring, the court shall also appoint a trustee. The responsibilities and the criteria to qualify as a trustee shall be as same as mentioned above in the preventive composition procedure.
The trustee, shall within five (5) working days from the date of his notification of appointment decision, shall publish the brief of the decision as to open the procedures for restructuring, along with the invitation to the creditors to submit their claims and the documents supporting such claims within a period not exceeding twenty (20) days from the date of such publication, in two popular daily newspaper, where one is in Arabic and the other is in English languages. The trustee shall also ensure that all the known creditors are notified of the same and may direct them to provide with all their claims and supportive documents within a period of twenty (20) working days. Thereafter, the trustee may submit a list containing all the details of the creditors and the amount of debt claimed by them, with all the supporting documents within a period of ten (10) working days from the date of the expiry of the twenty (20) days to submit the claims by the creditors. The trustee shall then publish within three (3) working days following the deposit by the creditors, the list of the debts and the accepted debts, in two widespread daily local newspapers in both the Arabic and English languages. Any grieved debtor or creditor, even if their name is not mentioned in the list may appeal before the court against such claims, within a period of seven (7) working days from the date of publication of such list in the newspapers. The decision of the court can be further appealed in the competent Court of Appeal.
The trustee shall submit a report as to his assessments on the possibility of restructuring the debtor’s business and his assessments on the possibility of selling the debtor’s business wholly or partly on the basis of a current and running business, if it’s the case of adjudication of the debtor’s bankruptcy and liquidation of his assets. The court shall review the reports submitted by the trustee within a period of ten (10) working days from the date when the report has been submitted.
The court may also request the trustee with regards to any amendments to be made with a period not exceeding than ten (10) days from the date when the request has been notified by the court. Then, the trustee shall provide the creditors whose debts have been accepted, with a copy of the report within three (3) working days from the date of the expiry of the report submitted to court. There upon, the court may direct the trustee to invite the debtor and creditors for a meeting to assess and examine the report within a period of ten (10) working days from the date of issuing such copy of the report to the creditors. The invitation of the meeting shall be published in the local newspaper as well and also the trustee shall notify of this meeting to the parties by all the possible means of communication. The court may then decide either the commencement of the restructuring procedures and assign the trustee to prepare the restructuring plan of the debtor’s business or disapprove the application submitted and may direct for the procedure of adjudication of the debtor’s bankruptcy and liquidation of his assets. The court should be convinced of the debtor’s ability to continue the running of his business in order to initiate a proceeding for restructuring of his business.
The trustee shall publish the decision of the court to initiate the proceedings within five (5) working days from the date of its issuance in two widely known local newspapers, where one is in Arabic and the other is English. Once the court approves of the commencement of the restructuring procedures, then the appointed trustee shall begin his task and also start the preparation and development of the restructuring plan with the help of the debtor, within a period not exceeding three (3) months from the date of court’s decision, the court may extend the same for a period of additional three (3) months. The trustee is required to inform the court every twenty-one (21) working days on the progress of the draft for restructuring plan.
The draft plan shall include all the relevant details as to the possibility of the debtor’s business to run in profits again, any performance of bonds, terms and conditions of the settlements and time period of implementation of such plan and shall include all the other relevant information for the successful implementation of the plan. The time period for implementation of the restructuring plan shall not exceed more than five (5) years from the date of approval of the plan by the court. However, it can be extended for a period not exceeding more than three (3) years with the consent of the majority of the creditors who are entitled to two thirds of the unsettled debts. The court shall further review the draft for restructuring plan to ensure if the interests of all the parties have been met within a period of ten (10) working days from the date of the submission of such draft. It may also direct the trustee to add any other necessary amendments to the draft within a period of five (5) working days from the date of being notified of the same. The court may request the trustee to send a notification inviting the creditors for a meeting to assess, discuss and vote on the draft of the restructuring plan within five (5) working days from the date of re-submittal of the draft. The invitation shall be published in two local newspapers. The meeting shall be conducted within a period of not less than three (3) working days and not more than fifteen (15) working days from the date of publication of such invitation and thereafter, at the discretion of the court may proceed with the restructuring process.
The trustee is required to submit the draft plan for the court’s approval or rejection, within a period of three (3) working days from the date of the meeting where the majority of the votes were acquired. The trustee shall register the courts’ decision approving of the plan in the debtor’s commercial register or professional register or as appropriate and also publish the same in two widely known newspapers, one in Arabic and the other in English, where it shall also include the abstract of the essential conditions of the restructuring plan, the debtor’s name, place of residence and number of registration in the commercial register, within seven (7) working days from the date of court’s ratification of the restructuring plan. The trustee shall supervise the implementation of the restructuring plan.
The restructuring procedures will be subject to nullification, if any judgment convicting the debtor of one of the crimes as specified in the Bankruptcy Law, after the ratification of the plan. If the debtor fails to comply with terms of the plan may annul the plan on the request of the interested party.
Article 124 of the Bankruptcy Law provides for the conditions when the court can declare the bankruptcy of the debtor and order liquidation of his assets as:
1. Where the court has terminated the preventive composition procedures
2. Where the debtor acted in bad faith or the application was intended to escape the financial obligations.
3. Where restructuring procedures were inappropriate based on the statements and documents submitted or based on the expert’s report or the report of the trustee on the impossibility of restructuring.
4. If the required majority has not been achieved.
5. If the court disapproved of the restructuring plan
6. Where the restructuring plan has been terminated or the procedures have been declared to be invalid. Where the court has approved of the commencement procedures for adjudication of bankruptcy of the debtor and the liquidation of his assets, then a trustee shall be appointed to carry out the procedures of the bankruptcy and liquidation of the debtor’s assets.
Thereafter, the trustee shall publish the order of the adjudication of bankruptcy and liquidation of the debtor’s assets in two local newspapers, one in Arabic and the other in English, within three (3) working days from the date when such order was issued. The trustee shall direct the creditor to submit any other claims which have not been submitted earlier, within ten (10) working days from the publication of such order.
A final audit on the creditor’s claim shall be conducted by the trustee, provided that the sale of the debtor’s assets will be fully used to only meet the legal fees or to settle the debts secured by mortgage. The trustee shall liquidate all the debtor’s assets, except for those he is allowed to keep as per the provisions of the Bankruptcy Law. The debtor is responsible to disclose any assets inherited or received during the bankruptcy procedure. The trustee shall carry forth the sale of the debtor’s assets by public auction with the approval and supervision of the court. The proceeds made out of selling the debtor’s assets shall be used by the trustee to meet any of the claims due on the debtor and if any surplus, it shall be returned to the debtor. Thereafter, on taking into account any claims before the court, the trustee may distribute the liquidation proceeds as per the priority between the creditors.
On completion of the final distribution of the debtor’s assets to the creditors, the court may issue an order to close all the procedures. The trustee shall return all the documents in his possession to the debtor after the completion of all procedures. The Bankruptcy Law has been enforced in order to fill the voids in the previous existing insolvency regime, mainly with regards to providing for a broader and modern approach aiming to rescue and turnaround the distressed businesses.