Common Warning Signs of an Impending Company Insolvency in UAE

The recent COVID-19 pandemic triggered a major economic downturn, with bankruptcies rising while healthy companies are finding themselves faced with potential insolvency.  

Warning Signs for an Impending Company Bankruptcy in UAE

While it is difficult to exactly predict the path of UAE economy when the pandemic fully subsides, more recent historic trends can demonstrate bankruptcies strongly correlate to the growth of the UAE’s GDP. When the GDP growth is in decline, the number of filings for bankruptcy increases.  

It is important for businesses and executives to watch out for the early warning signs of financial trouble. Recognizing the signs listed below as they emerge can make the difference between becoming eligible for a Chapter 11 (restructuring) or losing your business through Chapter 7 (company liquidation). 

Warning signs that you’re to watch out for include: 

• Consistent calls for payment of outstanding debts from creditors
• Company executives are considering of injecting personal funds into the business in order to make payroll or satisfy debts
• Increased interest rate on credit card debt due to several missed or late payments
• Inability of the business to meet its debt obligations, including lease payments and loans
• Difficulty meeting payroll
• Key debt covenants have already been or will be breached
• Departure of key employees or management
• Low capital or cash balance
• Continued decrease in cash flow of the business

If after you have noticed some or all of the aforementioned warning signs the situation becomes unstable or too dire from a financial standpoint, your business in UAE has various options for company bankruptcy in UAE. Your options will help your company weather the storm and preserve for the long-term. 

How to Determine If It’s Time to Undergo Company Liquidation in Dubai

There are three crucial tests that you have to be aware of for checking company insolvency in UAE. They are as follows:

• Legal action test – The creditors of the business have already taken action through the courts, passing a petition for the company to wind up in Dubai/UAE or a statutory demand
• Balance sheet test – Your company debts, including contingent liabilities like pending claims against your business, have become greater than the company assets
• Cash flow test – The business can no longer pay the bills when they fall due

It is advisable that you establish formally whether or not your business has become solvent or insolvent. If you seek advice from a company insolvency practitioner in Dubai, you can avoid accusations for misconduct down the line, including failure to cease trading when insolvent. 

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What are the conditions to meet before Liquidation of a company in the UAE

Kinds of Company Bankruptcy in UAE

There are several different forms of company bankruptcy in UAE with Chapter 11 and Chapter 7 the most common or well-known. Each kind of company bankruptcy in Dubai/UAE offers a different method which can treat debt differently.  

• Chapter 7 (Company Liquidation) – An orderly procedure supervised by the local court during which a court-appointed company liquidator in UAE takes over assets of a debtor, reducing them to cash then making distributions to company creditors
• Chapter 11 (Company Restructuring) – This is commonly used by companies or enterprises hoping to maintain business operations and repay company creditors through a plan of company restructuring with the approval of the court
• Adjustment of Debts – Enables the debtor in keeping valuable property while proposing a plan for repaying creditors over time. A debtor receives protection from legal consequences and other actions that may be taken by creditors while a plan for debt adjustment and repayment is in effect

Federal Law (no 9) of 2016 or UAE Bankruptcy Law is intended to allow insolvent businesses a way out from particularly heavy debts. This gives businesses the opportunity to have a fresh start when the other options fail. It is often through bankruptcy discharge with a court order allowing the debtor to be released from personal liability (only for certain debts). Company bankruptcy in UAE will prohibit collections agencies and creditors from communicating with businesses with outstanding debt.  

To help you navigate insolvency, here are important focus areas of your business as you seek the help of a company liquidator in Dubai: 

• Technical accounting – as your business tries to emerge from bankruptcy, a fresh-start technical accounting will be required.

• Business valuation – it is absolutely important for your business to have a grasp on the more quantitative aspects of the bankruptcy proceedings through conducting proper solvency tests, establishing going concerns,s and restructuring of the fair values.

• Disaster planning – it is important to determine the risk factors and the critical business functions in order to develop and successfully implement a plan in ensuring the business achieves continuity of operation before, after, and during a disaster.

Consult with a company liquidator in Dubai to know more about the options of your business. Call us here in Farahat & Co now!