UNITED ARAB EMIRATES: An Introduction to Dispute Resolution: Domestic

The UAE’s New Bankruptcy Law: Financial Stability in Challenging Times

In 2024, the UAE introduced significant amendments to its bankruptcy framework through Federal Decree-Law No 51/2023 Promulgating the Financial Reorganisation and Bankruptcy Law (the “New Law” or the “Revised Bankruptcy Law”), marking an important step towards supporting businesses during financial distress. These changes come as companies worldwide face economic pressures, including inflation, market instability and changing consumer trends, especially after the pandemic. By refining its legal framework, the UAE aims to create a business-friendly environment, advancing financial stability and investor confidence in the UAE market. This article highlights the key changes under the New Law, and practical challenges clients may face when considering bankruptcy.

Why the Changes Matter in Today's Economy

After the pandemic, global economic uncertainty continues to impact businesses, with many struggling to manage financial challenges. In the UAE, a focus on attracting foreign investment has emphasised the need for a strong bankruptcy framework. The New Law offers businesses tools to address financial difficulties early, aligning with international best practices and strengthening the UAE’s position as a reliable and business friendly destination. For companies in industries such as retail, real estate and tourism, which are particularly vulnerable to market fluctuations, these legal updates provide much-needed relief.

Key Changes and Their Impact on Clients

Flexible options for debtors

The New Law introduces the following three key mechanisms for addressing financial distress.

1. Preventive settlement: helping businesses resolve financial issues before they escalate into insolvency.
2. Restructuring: allowing companies to reorganise their operations and finances for long-term survival.
3. Declaring bankruptcy: used when recovery is no longer possible.

These mechanisms offer businesses customised solutions to address their specific financial challenges. Clients benefit from earlier intervention and increase chances of maintaining operations. For instance, a medium-sized company experiencing a temporary cash flow issue can opt for restructuring instead of resorting to bankruptcy, thereby preserving its market reputation and workforce.

The New Law provides an update on the conditions for initiating each of these procedures to protect businesses from unnecessary actions. For example, financial instability and cessation of payment are now standard prerequisites for all three options. However, declaring bankruptcy requires additional consideration of whether the business can still operate or not. Particularly, cessation of payment is no longer presumed unless the debtor fails to act within ten days of receiving a creditor’s formal notice for a payment.

One of the major updates is the broader definition of financial instability which will help businesses in tackling short-term problems before they worsen. Businesses can now seek preventive settlement or restructuring even if they are not insolvent. For instance, a temporary cash flow issue, despite having sufficient assets, qualifies for relief.

Another key change introduced by the New Law is the abolition of the 30-day payment cessation period, which previously served to distinguish between the conditions for amicable settlement to avoid bankruptcy and restructuring. The Law replaced the concept of amicable settlement with a preventive settlement, aimed at enabling the debtor to resolve their distressed debts, and reduces delays and simplifies access to preventive settlement mechanisms, making it easier for businesses to act quickly. For companies operating in fast-paced industries like technology or logistics, this can be a game-changer.

Specialised Bankruptcy Court

One of the fundamental changes is the establishment of a dedicated Bankruptcy Court within the Ministry of Justice and a specialised Bankruptcy Administration unit which ensures efficient and professional handling of cases. The institutional change, as we have seen, reduces delays and enhances the consistency of judgments, giving businesses more predictability and confidence in the process.

Revised role of trustees

The role of trustees has been redefined under the New Law. Rather than managing all aspects of the process, trustees now focus on supervising and monitoring the implementation of procedures. Debtors are now responsible for key tasks, such as forming creditor committees, preparing and drafting the plan, submitting it to voting, establishing the voting mechanism and executing the plan. Such a shift is found to reduce delays significantly. Moreover, trustees are now appointed in the following stages to ensure accountability:

1. debtors nominate trustees;
2. the Bankruptcy Administration unit reviews nominations; and
3. the court makes the final appointment.

Trustee fees depend on the type of procedure, with debtors covering costs for preventive settlement and restructuring, while bankruptcy cases draw fees from the debtor’s estate.

Claim suspension (moratorium) and appeals

The New Law introduces certain timelines for claim suspension (moratorium):

• preventive settlement: claims are suspended for three months, extendable to six months; and
• restructuring: claims remain suspended until the plan is approved or the process is terminated, whichever is earlier.

The suspension is no longer limited to a period of ten to 14 months as it was under the previous law.

Another major change under the New Law is that the moratorium does not extend to stay labour cases, which, if there are any, will continue until they are determined. Another major change is the right to appeal, allowing all decisions and orders from the Bankruptcy Court to be challenged before the Court of Appeal. However, judgments issued by the Court of Appeal are final and are not subject to challenge before the Court of Cassation.

Directors’ and board liability

Under the New Law, the liability of the board of directors remains clearly defined by Article 246, which lists specific actions for which directors can be held accountable. However, their responsibility does not extend to the settlement of company debts, but rather to rectifying any damage caused by their actions, which can include negligent or wrongful conduct affecting the company’s financial position or operations.

A director or board member may avoid personal liability by formally expressing their dissent in writing during a board meeting, noting any actions they consider to be prohibited under the law or actions that may harm the company’s interests or diminish the value of its assets. This written objection serves as a protection, allowing directors to protect themselves from potential liability arising from decisions they believe are unlawful or harmful to the company.

The statute of limitations for initiating claims related to the liability of the board of directors is set at two years, beginning from the date of the issuance of the bankruptcy declaration judgment. This period defines the timeframe within which creditors, shareholders or other interested parties can bring legal action against the board for failure to meet their fiduciary duties or for actions leading to the company’s insolvency or bankruptcy.

Challenges

While the Revised Bankruptcy Law addresses many issues, businesses may still face challenges, such as unclear implementation procedures for preventive settlement and restructuring, which could cause confusion, hence, companies should work closely with legal advisors to navigate these processes and avoid delays. Moreover, trustee fees may also be burdensome for small businesses, but cost-effective solutions and managing trustee involvement can help mitigate expenses.

To avoid personal liability, directors must maintain proper documentation and ensure compliance with legal obligations, and investing in board training on their responsibilities under the New Law is crucial.

Also, declaring bankruptcy or seeking restructuring can harm a company's reputation; therefore, transparent communication with stakeholders is important to maintaining trust.

Conclusion

The UAE’s Revised Bankruptcy Law marks a substantial improvement in its legal framework, offering businesses more options to manage financial difficulties and aligning with global standards. By providing tools for early intervention and creating a more efficient process, the New Law enhances the UAE as a business hub. For clients, engaging legal professionals early and planning proactively will be key to overcoming challenges. These improvements reflect the UAE’s commitment to promoting financial stability and long-term growth in an evolving global economy.