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Timely changes to UAE bankruptcy law introduced to cover emergency situations
On October 24, 2020, the UAE Cabinet announced its decision to amend Federal Law No. 9 of 2016 (the “Bankruptcy Law”) by adding certain provisions to allow for business continuity during emergency situations. , including pandemics and natural disasters. This is a timely amendment to bankruptcy law and was introduced in response to the global COVID-19 pandemic.
The bankruptcy law is amended by a federal decree-law (the “Amending Act”). The overarching objective of the amending law is to provide assistance to debtors, businesses and individuals facing financial difficulties to enable them to continue operating in emergency situations.
In this update, we take a look at the changes to bankruptcy law.1
The key change introduced by the amending law is the introduction of the concept of “emergency financial crisis”. This is defined as “a public event that affects trade or investment in the state such as the outbreak of an epidemic, natural or environmental disaster, war or others”. While the current COVID-19 pandemic is likely to fall under this definition, the amending law makes it clear that it is up to the UAE Cabinet to determine whether, and for how long, a given situation will be considered. an emergency. Financial crisis. The changes to the bankruptcy law, which apply during an emergency financial crisis, are described below.
1. Obligation for a company to initiate suspended bankruptcy proceedings and new negotiated settlement process
The existing obligation for a company to ask the court to initiate bankruptcy proceedings if it has not paid its debts due for more than 30 days is temporarily suspended for the duration of the emergency financial crisis, provided that the debtor’s default be caused by the emergency financial crisis.
Instead, the debtor can ask the court for a “grace period” of up to 40 days to try to negotiate a settlement with his creditors. The process is similar to the existing preventive dialing process. If the court approves the grace period, the debtor is required to publish the court’s decision in two national newspapers and invite creditors to negotiate a settlement within 20 working days of publication. The terms of settlement must include satisfaction of all debts within 12 months. If the settlement is accepted by the creditors, who hold at least two-thirds of the debt’s value, the settlement (once approved by the court) will be binding on all creditors, whether they participated in the negotiations or accepted the settlement. terms.
This process offers troubled debtors protection from formal bankruptcy proceedings and a respite to continue operating, while being under the protection of the bankruptcy law regime. However, not all troubled debtors will be able to take advantage of this new process – when the debtor is unable to: (i) repay all of its debts within 12 months; or (ii) obtain the agreement of its proposals from the required majority of creditors, the debtor will be obliged to file bankruptcy proceedings in the ordinary course. In such cases, the amending law gives the court the power to accept the claim and change the process as it sees fit, as long as the debtor’s default is caused by or results from the emergency financial crisis.
The following provisions apply to debtors subject to this new procedure:
(A) Relaxation of the prohibition on disposal of the debtor’s assets
During an emergency financial crisis, directors and managers are permitted to dispose of a debtor’s assets in order to pay unpaid wages and salaries to employees, which are necessary for business continuity. These payments do not include indemnities, bonuses or other occasional payments in kind.
While this is a useful tool to promote retention of essential employees to facilitate business continuity, it is a limited exemption from the existing prohibition on divesting assets under the law. on bankruptcy (whether in the context of a preventive composition or bankruptcy proceedings). The amending law recalls that the debtor’s board and administrators must act prudently and in good faith, in the debtor’s interest to protect its financial objects and assets. In addition, the board is required to ensure that the debtor’s accounts are updated to include details of losses suffered due to the emergency financial crisis.
(B) Request for bankruptcy of the debtor by the creditor during the emergency financial crisis
While creditors with debt greater than AED 100,000 can still apply to the court to initiate bankruptcy proceedings against a debtor who has not settled a claim for payment within 30 days, the creditor’s claim will not be successful. examined by the court only at the end of the emergency financial crisis. Significantly, this suspension of creditors’ rights applies whether or not the debtor’s default is caused by the emergency financial crisis.
(C) Restriction of provisional measures and enforcement proceedings
In addition, no protective measure may be ordered by the Court against the assets of the debtor which are necessary for the continuity of its activities during the Emergency Financial Crisis. This includes the affixing of seals to a debtor’s business premises or its properties (unless the court finds that these properties are irrelevant to the management of the debtor’s business). However, secured creditors retain the right to apply to the court for an order allowing them to realize on security against the debtor.
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1 In preparing this document, we have relied on a Westlaw translation of the Amending Act and Bankruptcy Act.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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