Liquidity problems in the construction industry have only been exacerbated by the COVID-19 pandemic. In the face of the high-profile collapse of the region’s top entrepreneurs, the UAE has taken steps to improve its bankruptcy law (Law 9 of 2016) to ensure they remain able to face the challenges very modern presented by the current climate. This includes the introduction of provisions that give debtors a limited stay in the event of an “emergency financial crisis” under Law 9 of 2019 amending the Bankruptcy Law.
The most recent amendment to the bankruptcy law took the form of Federal Law 35 of 2021 and entered into force on November 1, 2021. This amendment seeks to clarify when the directors and officers of a debtor may be liable personally liable for the debts of the business if they cannot be repaid.
In an amendment to section 144 of the Bankruptcy Act, the amendment states that when the assets of a bankrupt company are insufficient to settle at least 20% of its debts, the court can order any member of the board administration or management to pay the balance of the debts when “it is proved that one of them has committed one of the acts mentioned in paragraphs (a), (b) and (c) of article (147) hereof … “
Article 147 referred to in the amendment provides as follows:
“If the bankruptcy is declared, the court may order the administrators, managers or liquidation officials in liquidation proceedings outside the scope of this Decree-Law, to pay a sum to repay the debts of the debtor, the if applicable, one of them clearly commits one of the following acts, within two years of the date on which the proceedings were initiated, in accordance with this article:
A) Adopts business methods without considering its risks, such as disposing of goods at prices below market value to receive money in order to avoid or delay the opening of bankruptcy proceedings.
B) Engages in transactions with third parties to dispose of property without consideration or for an insufficient amount and without certain or disproportionate advantage to the debtor’s property.
C) Pay the debts of any creditor to harm other creditors, during the period of default or in a state of debt. “
It should be noted that the amendment specifies in particular that a decision to initiate personal liability is subject to appeal (which will not affect the bankruptcy) and, due to the reference to article 147, still seems impose deadlines.
The amendment to section 201 goes further by specifying prison sentences and potential fines for certain activities:
“The members of the board of directors, the managers and the liquidators of the company declared bankrupt by a final judgment will be punished with imprisonment of two (2) years at most and / or a fine of 100,000 AED at plus (one hundred thousand dirhams) if they commit any of the following acts:
1. Not having deliberately kept trade books sufficiently reflecting the real financial situation of the company or not having carried out the inventory required by law, with the intention of harming the company or its creditor .
2. Deliberately withholding the information required by the curator appointed in accordance with the provisions of chapter four of this decree-law or by the court, or deliberately providing him with false information.
3. Dispose of company assets after default, with the intention of concealing those assets from creditors.
4. Pay off a creditor’s debt after cessation of payments to cause damage to other creditors or to accept guarantees or special benefits for a creditor that are more favorable than for other creditors, even if it was for the purpose of enter into Composition or restructuring protection.
5. Dispose, in bad faith, of the assets of the company for less than their market value or use methods or means which would prejudice the interests of creditors with the intention of receiving funds in order to avoid or delay the Cessation of Payments or a declaration of bankruptcy or termination of the Protective Composition or Restructuring Procedure.
6. Spending gross amounts on gambling or speculative ventures that are outside the scope of business activities.
7. Making gross commitments in favor of a third party, without consideration, taking into account the financial situation of the company at the time of such commitments.
The penalty provided for in this article does not apply to a person whose participation in the acts prohibited by this article has not been established, or whose reservations about the company’s decision to perform said acts have been established.
Bankruptcy law (as last amended) remains a welcome and productive addition to the UAE legal landscape. The new amendment helps clarify the cases in which members and directors can be held personally liable for the debts of a bankrupt company, and also provides a number of potential defenses.
However, there is still a lot of work to be done by all players in the construction ecosystem to rebalance broader commercial and economic interests in construction projects. Many contracts will have their own terms of termination for technical insolvency, and anecdotal evidence suggests bond calls are on the rise. This means that the options for filing bankruptcy and restructuring under the law can be bypassed by employers who view the termination and liquidation of a demand bond as a quick way to receive money and pursue the claim. project. The scope of broader personal liability of directors and members may also be a concern for small and medium-sized entrepreneurs who may have already provided personal guarantees for the business and saw their income decline during the pandemic.