Understanding the practical options for bankruptcy and insolvency in the UAE, and applying careful thought to which approach genuinely fits a business’s circumstances, matters considerably for any company facing financial distress. This guide covers the current legal framework governing UAE bankruptcy, the available procedures, and what’s changed from the previous regime.
Current Legislation on Bankruptcy in the UAE
UAE bankruptcy and financial restructuring is currently governed by Federal Decree-Law No. 51 of 2023 on Financial Restructuring and Bankruptcy, published 31 October 2023 and effective from 1 May 2024. This law replaced the earlier Federal Law No. 9 of 2016 (as amended), which many older references still describe.
The law applies to business entities incorporated in the UAE under the Commercial Companies Law, along with individuals and corporate entities trading for profit, such as accountants and lawyers. Government agencies partially or wholly owned by the UAE federal government fall outside its scope, as do entities within the DIFC and ADGM free zones, which maintain their own separate insolvency regimes.
Also check: Company Liquidation / Bankruptcy / Insolvency
What’s Changed Under the Current Law
Federal Decree-Law No. 51 of 2023 introduced several significant changes to the UAE’s bankruptcy framework:
- A dedicated Bankruptcy Court, supported by a Financial Reorganisation and Bankruptcy Unit, established specifically to oversee and streamline bankruptcy proceedings.
- Preventive Settlement, a new, more accessible mechanism replacing the previous “Preventive Composition” procedure, operating under court supervision.
- Increased management liability, with directors and management facing greater personal accountability under the current framework than under the previous law.
- Court-appointed experts and auditors, with courts now empowered to engage experts within the Bankruptcy Court itself, funded through the judiciary’s budget.
Given how substantially the framework has changed, and that certain implementing details (such as specific monetary thresholds) have continued to be refined since the law’s introduction, businesses should confirm current procedural specifics with a qualified advisor rather than relying on the previous 2016 law’s figures, which no longer apply.
Must check: Personal / Individual Insolvency Services
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
Procedures Available Under the Current Framework
The current law provides several pathways for a financially distressed business, generally following the same broad structure the previous law introduced, though with updated mechanisms and terminology:
Preventive Settlement
Where a business is in financial distress but still capable of meeting its obligations, it may apply to the Bankruptcy Court for a preventive settlement. If approved, this suspends bankruptcy-related obligations and related proceedings against the business, giving it space to resolve its financial position under court supervision. A trustee is typically appointed to help develop a proposal for rescheduling the business’s debts with its creditors.
Restructuring
Where the court determines a distressed business can genuinely be rescued, restructuring proceedings allow the court to appoint a trustee responsible for developing a debt rescheduling plan. Restructuring decisions are generally required to be publicized, helping ensure transparency for creditors and other stakeholders.
Bankruptcy and Liquidation
Where a preventive settlement or restructuring plan is rejected by the required majority, terminated, fails, or the applicant is found to have acted in bad faith, the Bankruptcy Court can declare a debtor bankrupt and order its assets liquidated by an approved liquidator. The court appoints a trustee, whose appointment and the court’s judgment are generally required to be published to ensure creditors and other parties are properly informed.
Who Can Petition for Bankruptcy?
A business itself, its creditors, or the public prosecutor can petition for bankruptcy proceedings. Creditors seeking to petition generally need to have already served formal notice demanding payment, with the business remaining unable to pay within the relevant notice period. Specific procedural thresholds and timeframes are set out in the current law and its implementing regulations, businesses and creditors should confirm the applicable current requirements directly rather than relying on the thresholds that applied under the previous 2016 law.
Approved and Trusted Liquidators in the UAE
We recommend that businesses facing financial distress evaluate their financial position, devise a debt recovery strategy, and formulate a repayment plan together with an approved UAE liquidator or insolvency advisor. This can include negotiating short-term deferments or extending debt repayment timelines.
Where a business genuinely can’t settle its debts, seeking legal and financial advice on the current bankruptcy and liquidation process early gives considerably more options than waiting until creditors have already taken independent action. An experienced advisor can present options tailored to the business’s specific circumstances and needs.
Frequently Asked Questions (FAQs)
What law currently governs bankruptcy in the UAE?
Does the current bankruptcy law apply to DIFC and ADGM entities?
What replaced 'Preventive Composition' under the new law?
Is there now a dedicated court for UAE bankruptcy matters?
Are directors more personally liable under the current bankruptcy law?
Should businesses rely on the old 2016 law's specific thresholds and timelines?
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
How Farahat & Co. Can Help
Farahat & Co., established in 1985 with a team of regulated liquidators, provides bankruptcy, restructuring, and liquidation advisory services aligned with the current UAE Financial Restructuring and Bankruptcy Law.
Contact Farahat & Co. today to discuss your bankruptcy or restructuring requirements.
