Although the local authorities in the United Arab Emirates (UAE) have announced the distribution of economic stimulus packages in order to minimize the disruption that's caused by the COVID-19 pandemic, there are still businesses that are negatively affected by the disruption in one way or another.
Understanding the practical options for bankruptcy and insolvency, as well as the application of careful thought with respect to the approach, is very important. In this article, we'll provide you with information on how bankruptcy works in the country. Read on.
Local Legislation on Bankruptcy in UAE
Federal Law of 2016 No 9 came into force last December 29th of 2016. It is referred to as the Bankruptcy Law. It applies to business entities that are incorporated in the country pursuant to UAE Commercial Companies Law. The legislation also applies to individuals and corporate entities that are trading for profit e.g. accountants and lawyers.
Government agencies that are partially or wholly owned by the UAE federal government are not included in the scope of UAE Bankruptcy Law.
Read More: Bad Debts Accounting: How Bad Debts Can Affect Your Business
Process of UAE Bankruptcy
There are different procedures for insolvency and restructuring that are applicable to business entities: liquidation or winding up of a company, protective composition, and bankruptcy and restructuring.
Protective Composition
If a business is currently in financial distress; however, it’s still capable of meeting its legal and payment obligations for more than thirty business days, then it will be eligible in sending an application to the court for a protective composition.
Take note: the business should not yet be overindebted.
A protective composition that is approved by the court will suspend the obligations of the business in declaring bankruptcy, including proceedings that are against the business, to allow it in finding a solution for its financial issues. If the protective composition was approved by proper UAE courts, then the business will have a trustee that will propose a rescheduling of the debts of the business under contract. The contractual rescheduling for a business’s debts applies to company creditors.
The plan has to be implemented in three years from the date of approval by a UAE court. The term may be extended for three years with the approval of creditors.
Bankruptcy and Restructuring
Either the business itself, its creditors or public prosecutor can petition a business’ bankruptcy. A business will be considered as bankrupt if it’s ceased payments for more than thirty business days and it’s overindebted or when the value of assets of the company is less compared to its liabilities.
If bankrupt, the business can petition to the court. Company creditors are to petition as well for bankruptcy of a certain business if the creditors have already service notices for debt payments to the business; however, the business is still unable to provide payment within thirty business days from the date of giving notices. The debt of the business should be at least Dhs 100,000.
Restructuring is available when the court deems it can be rescued. Courts will appoint a business or person as a trustee which will be responsible for setting up a plan for rescheduling debts.
The plan has to be implemented five years from the date of approval of the court. The term may be extended to an additional three years with the approval of creditors and unsecured creditors. A trustee has to public restructuring decision of the court within seven days from issuance in two local daily newspapers that are widely distributed in the country.
Bankruptcy and Liquidation
If a restructuring plan or protective composition is rejected by the required majority, is terminated, fails, or applicant was found to have been operating in bad faith, local courts can declare a debtor as bankrupt. The court will then order for the assets to be liquidated by an approved liquidator in UAE.
In its judgment, local courts will be appointing a person or entity as a trustee. The trustee will publish the court’s judgment in local daily newspapers that are distributed widely within 3 business days from the appointment of the trustee.
Read More: Process of Liquidating a Company in JAFZA
Approved Liquidators in UAE
From the information that we've given, we here at Farahat & Co recommend that businesses in UAE evaluate the financial position of their companies, devise debt recovery strategies, and formulate credit repayment strategies together with approved UAE liquidators. This may be negotiating short term deferments and increasing length of repayment of debts plans.
When a business is still unable in settling its debts, it is always a good idea to seek legal advice and financial advice from experts on the company liquidation process in Dubai UAE. A seasoned liquidator in Dubai will be able to present you with options in dealing with your specific issues and address your business’ needs and requirements. We are also able to tailor solutions based on your personal preferences.
Call us today to book an Initial Consultation with our team on Company Liquidation in Dubai UAE.
