How Does Financial Restructuring Work in the UAE and Can It Prevent Liquidation?

What Financial Restructuring Is and How It Differs From Liquidation

Financial restructuring is a court-supervised process that gives an insolvent or financially distressed business a structured opportunity to restructure its debts, restore solvency, and continue operating, rather than being liquidated. The debtor retains the business while working through a creditor-approved plan to repay obligations over a defined period.

Restructuring is the alternative to liquidation, not a step before it. A business that successfully completes a restructuring plan avoids dissolution entirely. The key distinction is viability: restructuring is available to a business whose underlying operations can generate sufficient income to service its debts, given time and a restructured payment schedule. A business with no viable path to recovery is more likely to proceed directly to liquidation.

In the UAE, financial restructuring is governed by Federal Decree-Law No. 51 of 2023 on Financial Restructuring and Bankruptcy, which took effect on 1 May 2024, replacing Federal Law No. 9 of 2016. The 2023 law significantly updated the framework, establishing clearer restructuring pathways, introducing the Financial Restructuring and Bankruptcy Unit under the Ministry of Economy as the competent administrative authority, and refining the roles and powers of all parties in the process.

When Can a Business Apply for Restructuring in the UAE

A debtor may apply for restructuring where it is unable to pay its debts as they fall due, or where it is likely to become unable to do so within the near term. The application is submitted to the competent court, which reviews whether the business’s financial position and operational prospects justify the restructuring pathway.

The court assesses whether the business has a realistic prospect of recovery within the restructuring period. Where it does, the court may approve the commencement of restructuring proceedings and appoint an Insolvency Practitioner to supervise the process. An Insolvency Practitioner must be licensed and registered under FDL No. 51 of 2023 to conduct restructuring and insolvency work in the UAE.

Protections That Apply Once Restructuring Is Approved

Once the court approves the commencement of restructuring proceedings, the debtor benefits from a moratorium on creditor action. During the restructuring period, creditors cannot initiate or continue enforcement proceedings, attach assets, or seek to wind up the company through the courts. This protection gives the business the breathing space it needs to develop and implement a restructuring plan without the threat of immediate enforcement disrupting operations.

The court may also suspend or modify certain ongoing contracts where this is necessary to preserve the business’s ability to continue trading during the restructuring period.

The Restructuring Plan: What It Must Contain

Once restructuring proceedings are approved, the debtor and the Insolvency Practitioner have a maximum of three months to prepare a draft restructuring plan. The plan must address how the business intends to achieve financial solvency and repay its creditors over the restructuring period. A complete restructuring plan covers:

• Financial projections demonstrating viability: realistic projections showing the business’s path to profitability and the cash flows from which creditor obligations will be met
• Operational restructuring measures: any steps the debtor will take to reduce costs and improve financial performance, including rationalising operations, terminating unprofitable contracts or departments, and reducing headcount where necessary
• Asset disposals: the sale or replacement of assets where proceeds will be applied to creditor repayment
• Creditor schedule: a full list of creditors and the proposed terms for settling each category of liability, including payment timelines and any agreed reductions or grace periods
• Execution timeline: a phased implementation schedule with defined milestones and performance obligations
• Debt restructuring mechanisms: grace periods, partial debt forgiveness, or the conversion of debt to equity in the company’s capital, where creditors agree
• Security for performance: the arrangements by which the debtor will secure its obligations under the plan
• Business sale option: where applicable, any offer by a third party to acquire part or all of the business as part of the restructuring solution

The restructuring plan is approved for a maximum period of five years. In exceptional circumstances, the court may extend this by a further three years on a case-by-case basis.

The Creditor Approval Process

The draft restructuring plan is submitted to the court, which then convenes a meeting of creditors to vote on the plan. Creditors have the opportunity to review the plan, raise objections, and negotiate modifications before voting. A creditor who did not attend the creditors’ meeting has a window of three working days following the meeting to submit an objection to the court.

A creditors’ committee is formed with a representative from among the creditors to oversee implementation of the plan’s commitments on behalf of the creditor body. The court retains oversight throughout the restructuring period and ensures that the plan is implemented in a manner that protects creditor interests.

Where creditors agree to reduce their claims as part of the plan, the court ensures that this reduction applies equally across the creditor class: no individual creditor is asked to accept worse terms than the collective reduction agreed by the creditors as a whole.

Supervision and Reporting During Restructuring

The restructuring plan is executed under the supervision of the Insolvency Practitioner. The Insolvency Practitioner reports the progress of plan implementation to the court at regular intervals, not less frequently than every three months, or more frequently where required by the court. Where the plan requires amendment during the restructuring period, the Insolvency Practitioner submits the proposed amendments to the court for approval or rejection within five business days.

The goal of the restructuring plan, once approved by the court, is published in two daily UAE newspapers in both Arabic and English within five business days of court approval, giving public notice of the proceedings and the debtor’s obligations.

When a Restructuring Plan Can Be Terminated

A restructuring plan can be nullified or terminated where the debtor commits fraud, falsification of financial data, theft of assets, or any other act that undermines the integrity of the process. Where the debtor fails to meet plan milestones without adequate justification, or where it becomes clear that the business cannot achieve the financial recovery projected, the court may terminate the restructuring proceedings and convert the matter to liquidation.

Restructuring vs Liquidation: The Financial Outcome for Creditors

The court ensures that creditors are not worse off through restructuring than they would be through liquidation. Where a creditor can demonstrate that the restructuring plan offers them a return lower than what they would receive in a liquidation scenario, the court will take this into account. The restructuring plan must satisfy a minimum recovery test relative to the liquidation alternative for each class of creditor whose interests are materially affected.

Frequently Asked Questions (FAQs)

How Farahat & Co. Can Help

Farahat & Co. provides financial restructuring advisory and liquidation services to businesses across the UAE, including restructuring plan preparation, financial projections, creditor negotiation support, Insolvency Practitioner engagements, and regulatory compliance under Federal Decree-Law No. 51 of 2023. Our team assists businesses in distress to assess whether restructuring or liquidation is the appropriate pathway for their specific circumstances.

Contact Farahat & Co. today to discuss your financial restructuring or insolvency requirements.