Scope and Application of Bankruptcy Law


Watson Farley & Williams developed the Global Aviation Restructuring Index (“GARI“), an online tool providing a comparative index of 50 restructuring processes in more than 25 key aviation jurisdictions. GARI also assigns” debtor and creditor friendliness “ratings to each restructuring proceeding, which allows for a easy comparison between different procedures in the same or several jurisdictions Please access GARI.

The United Arab Emirates (“UAE”) is not yet included in GARI, as its bankruptcy law is relatively recent. Its applicability to the aviation industry has yet to be tested (UAE-based airlines have historically not been subject to any restructuring proceedings) and local airlines may not even fall under the umbrella of the law. It is therefore unclear how an airline could be restructured in the UAE, making it difficult to assign the GARI rating system to jurisdiction.

In accordance with GARI’s objectives, the following article provides:

  1. an overview of the UAE’s current bankruptcy / restructuring regime;
  2. a summary of the main plan processes described;
  3. our perspective on its potential applicability to the aviation industry; and
  4. considerations relating to the question of sovereign immunity.

Background to bankruptcy law

This article is based on our review of the English and Arabic texts of the Federal Bankruptcy Law of the United Arab Emirates No. 9 of 2016 (as amended) (the “Bankruptcy Law”) and the Federal Law of the Arab Emirates. united n ° 21 of 2020 on bankruptcy modification. law (the “amending law”), among others. The Arabic text is particularly important because it is the versions of the decrees / laws in this language which are final and binding, taking precedence over those in English. Unless otherwise specified, any reference to an “article” refers to bankruptcy law or the amending law (as applicable).

The Bankruptcy Law entered into force on December 29, 2016, replacing the insolvency regime previously contained in the United Arab Emirates Commercial Code (Federal Law No. 18 of 1993), with the aim of streamlining and modernizing insolvency processes in the United Arab Emirates. “

The Bankruptcy Law entered into force on December 29, 2016, replacing the insolvency regime previously contained in the United Arab Emirates Commercial Code (Federal Law No. 18 of 1993), with the aim of streamlining and modernizing insolvency proceedings in the United Arab Emirates. Generally speaking, this has been partially achieved.

Scope and Application of Bankruptcy Law

Section 2 of the Bankruptcy Law states:

“Article 2

The provisions of this decree-law apply:

1- Companies subject to the provisions of the Law on commercial companies.

2- Companies which are not constituted in accordance with the law on commercial companies and which are wholly or partly owned by the federal or local government, and whose laws of their establishment, their statutes or their statutes stipulate that they must be subject to the provisions of this decree-law.

3- Companies and establishments in free zones that are not subject to specific provisions governing preventive composition, restructuring or bankruptcy procedures, taking into account the provisions of Federal Law no. (8) of 2004 on financial free zones.

4- Any person having the quality of trader according to the provisions of the Law.

5- Approved civil societies of a professional nature.

Applicability of Article 2 to Airlines of the United Arab Emirates

UAE airlines may be subject to bankruptcy law if any aspect of section 2 applies to them; in practice this will probably mean either Article 2 (2) or Article 2 (4):

(i) whether they have made the relevant provision to “adhere” to bankruptcy law in their memoranda and articles of association of any other related law (under section 2 (2)); Where

(ii) whether they could or would be considered “merchants” (under Article 2 (4)), based on the fact that airlines operate as commercial entities. However, the Arabic text of the bankruptcy law calls into question the application of Article 2 (4) to legal persons and to natural persons or simply to the latter.

Bankruptcy Law Process and Testing

The process

If bankruptcy law applies, it provides for three processes:

(i) Preventive Composition Procedure (“PCP”) (under Chapter 3 of the Bankruptcy Act): a debtor-led process that aims to save troubled businesses by helping them reach a settlement supervised by a tribunal with their creditors. While the debtor retains the right to manage the business during this process, oversight is provided by a court appointed trustee.

(ii) Bankruptcy (under Chapter 4 of the Bankruptcy Law) itself is divided into two distinct processes:

(A) a rescue and reorganization (restructuring) process: a court-approved restructuring plan in which a debtor is insolvent, but the court determines that his company is capable of rescue (for example, where the management of the company has shown its willingness to try to recover the activity, a return to profitability could be possible within a reasonable time and its assets are sufficient to cover the restructuring); and

(B) a formal liquidation and distribution procedure: if the answer to one of the two bankruptcy tests is “yes” and the debtor concerned has ceased to pay its debts for more than 30 consecutive days “due to unstable financial situation or debtor financial information(Section 68 (1)), then they will be considered insolvent and bankruptcy law requires them to file for bankruptcy within 30 days under either of the bankruptcy tests (in accordance with Section 68). An application to initiate bankruptcy proceedings under the Bankruptcy Law can be made by (in addition to the debtor himself), one or more creditors who have a debt of at least AED 100,000 to them ( under certain conditions), any competent regulatory body and public prosecution of the claim would be in the public interest.

Bankruptcy tests

To determine which process applies, bankruptcy law provides for the following two tests (together, the “bankruptcy tests”):

(i) Has the business stopped paying overdue debts for more than 30 consecutive days?

(ii) Don’t the company’s assets cover its liabilities?

The aim of the Bankruptcy Tests is to encourage companies in difficulty to restructure at an early stage.

Recent Bankruptcy Law Amendments to Address the “Emergency Financial Crisis”

It should be noted that the amending law adds a new chapter to the bankruptcy law entitled “Chapter 15 bis – Bankruptcy proceedings during the emergency financial crisisThis chapter covers times of severe financial hardship such as the Covid-19 pandemic.

“Emergency financial crisis” is defined as “A general situation that affects trade or investment in the country, such as a pandemic, natural or environmental disaster, war, etc.“Although a definition is included in the amending law, it then provides that the Cabinet of the UAE will determine when such a situation exists, as well as the duration of it, which seems to indicate that a decision of the Cabinet of the United Arab Emirates is required before a party can invoke and avail itself of the provisions of chapter 15 of the amending law.

A detailed analysis of Chapter 15 bis is beyond the scope of this note.

Sovereign immunity

We would also like to note that although there is no concept of sovereign immunity in UAE law, Article 247 of the UAE Civil Procedure Code sets out a general prohibition of execution against “public property owned by the state or one of the EmiratesLikewise, Article 106 of the Cabinet Resolution prohibits the seizure of any public or private property owned by the United Arab Emirates or any of its Emirates. any other legal proceedings may not be valid and binding under UAE law and it is possible that such waivers may be legally revoked.However, a counterparty and its assets (when they are or become the direct property or government or an official of an emirate in an official capacity) are likely to be considered assets held by an emirate for the purposes of UAE law.

Our experience shows that government entities are inclined to take a business perspective on this issue and therefore are unlikely to claim immunity given the potentially damaging economic impact. In fact, it is standard practice for government entities to settle disputes rather than initiate proceedings that risk damaging their reputation.

The practical implications

From a strictly practical point of view, given the level of public funding available to airlines in the UAE, we believe it is highly unlikely that any of them will fail, let alone be forced. to bankruptcy proceedings.

As mentioned above, it is possible that some of these airlines will argue that due to the way the bankruptcy law is worded it does not apply to them.

In any event, many of them are financially supported by the government and would likely be bailed out anyway, as more recently evidenced by the US $ 4.8 billion in government assistance received by industry across the board. the Middle East in 2020, most (a report of US $ 4.1 billion) of which was distributed through direct cash injections, to help airlines cope with the heightened financial risks they face. are facing due to the wider effect of the Covid-19 pandemic on the aviation industry.

Even if they were not bailed out, the government could, in theory, seek to amend bankruptcy law to deal favorably with claims against them. For example, in 2009, the Emirate of Dubai established a tribunal to settle claims against Dubai World and its subsidiaries. Dubai World was able to secure an agreement with its creditors to restructure their debt, the funds coming from a bailout from the government of Dubai. There is, however, no formal obligation for the government of the United Arab Emirates (nor the government of Dubai) to do so, although it should be noted that the Crown Prince of Dubai announced in March 2020 that the government of Dubai is fully committed to supporting its airlines. through the Covid-19 pandemic crisis.


While the introduction of the bankruptcy law is a long overdue change in the UAE legal landscape, its applicability to airlines in the jurisdiction is still somewhat unclear and, to date, untested.

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