What Is the Preventive Settlement Scheme Under UAE Bankruptcy Law?
Preventive settlement is a court-supervised procedure that lets a financially distressed but still viable UAE company reach a formal repayment agreement with its creditors, without being pushed into full bankruptcy and without losing control of its own business along the way. It was introduced under Federal Decree-Law No. 51 of 2023 on Financial Restructuring and Bankruptcy, which took effect on 1 May 2024, and it replaced an older mechanism known as preventive composition that existed under the previous bankruptcy law, Federal Law No. 9 of 2016.
The earlier preventive composition procedure was rarely used in practice. Its eligibility conditions were strict enough that many genuinely distressed companies could not qualify for it, which meant businesses in financial difficulty often had no realistic formal alternative to bankruptcy itself. Preventive settlement was designed specifically to fix that gap, giving companies a more accessible, debtor-led route to restructure their debts while there is still a viable business worth saving.
Who Can Apply for Preventive Settlement in the UAE?
Only the debtor company itself can apply for preventive settlement. Creditors cannot force a company into this procedure or apply on its behalf. This is a deliberate design feature: preventive settlement is meant to be a proactive tool a company’s own management reaches for while there is still time to act, not a remedy creditors use to pursue repayment.
To be eligible, the applicant company must be facing financial difficulty without yet being actually insolvent. UAE practice describes this as being “on the verge of insolvency,” meaning the business is showing real signs of financial distress, such as cash flow strain or difficulty meeting upcoming obligations, but has not yet reached the point of an actual cessation of payment. This eligibility line matters because it positions preventive settlement as an early-intervention tool. A company that waits until it has already stopped paying its debts has moved past the window where preventive settlement is the appropriate mechanism, and may instead need to consider the separate restructuring or bankruptcy procedures under the same law.
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How the Preventive Settlement Process Works
The process begins when the debtor company files an application with the Bankruptcy Court, the specialised court established under Federal Decree-Law No. 51 of 2023 to handle restructuring and insolvency matters. Once the court accepts the petition to open proceedings, the case moves through several stages.
| Stage | What Happens |
|---|---|
| Application | The debtor company files a petition with the Bankruptcy Court, setting out its financial position and its request to open preventive settlement proceedings |
| Court acceptance | The Bankruptcy Court reviews the application and, where the eligibility conditions are met, formally accepts the petition, opening the procedure and triggering the moratorium |
| Debtor remains in control | Unlike full bankruptcy proceedings, no trustee is automatically appointed to take over the business. The debtor’s existing management continues to run day-to-day operations while the settlement process is underway |
| Settlement proposal | The debtor prepares and submits a proposed settlement or repayment plan to its creditors, setting out how and over what timeframe it intends to meet its obligations |
| Creditor and court review | Creditors review and vote on the proposal, and the Bankruptcy Court supervises the process, ultimately approving a plan that meets the law’s requirements |
Because the debtor stays in operational control throughout, preventive settlement is far less disruptive to the day-to-day running of the business than a formal bankruptcy process, where a trustee typically takes over management of the company’s affairs. This is one of the main reasons the procedure exists in its current form: it allows a company’s own management, who usually understand the business best, to keep running operations while a formal settlement with creditors is worked out under the court’s supervision.
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The Moratorium and How Long Companies Have to Submit a Proposal
Once the Bankruptcy Court accepts a preventive settlement petition, a moratorium applies. This suspends legal proceedings against the debtor, meaning creditors generally cannot pursue individual claims, enforcement actions, or lawsuits against the company while the preventive settlement process is underway. The moratorium exists to give the debtor genuine breathing room to negotiate a settlement, rather than having to fight off creditor claims on multiple fronts at the same time it is trying to reach a collective agreement.
Companies are typically given a period of around three to six months from the date the court accepts the petition to prepare and submit their settlement proposal, with the exact duration and any extension sitting within the Bankruptcy Court’s discretion based on the circumstances of the case. This window is meant to be workable rather than indefinite: long enough for a genuinely distressed but viable business to put together a credible plan, but not so open-ended that the procedure becomes a way to simply delay dealing with creditors.
Why the Preventive Settlement Mechanism Exists
The purpose behind preventive settlement is straightforward. UAE policymakers wanted distressed but fundamentally viable businesses to have a formal, less disruptive path back to financial stability, rather than facing bankruptcy as the only structured option once financial difficulty sets in. Full bankruptcy proceedings can mean the appointment of a trustee, a loss of management control, and, in many cases, the eventual winding down of the business. For a company that is struggling but still has a viable underlying operation, that outcome can destroy value that a negotiated settlement could have preserved.
By allowing the debtor to remain in control, imposing a moratorium to stop creditor actions from overwhelming the process, and giving the company a defined window to reach agreement with its creditors, preventive settlement is built to protect jobs, preserve ongoing business relationships, and keep economically useful companies operating wherever a genuine path back to solvency exists. It reflects a broader shift in the 2023 law toward early intervention and rescue, rather than treating financial distress as something to be resolved only once a company has already failed.
Preventive Settlement vs Restructuring: A Short Comparison
Federal Decree-Law No. 51 of 2023 introduces both preventive settlement and a separate restructuring procedure, and the two are sometimes confused because they share a similar underlying goal of helping a distressed company avoid liquidation. The key distinction sits at the eligibility stage: preventive settlement is available to a company that is facing financial difficulty but is not yet actually insolvent, while the restructuring procedure is generally used by companies whose financial position has progressed further, including businesses that have already reached a cessation of payment. The two procedures also differ in how much operational control the debtor retains and in the level of court and creditor involvement required to approve a plan. This article focuses specifically on preventive settlement; a fuller side-by-side comparison of how the two procedures differ in practice, including when a business should consider one over the other, is covered in a dedicated comparison article.
How Farahat & Co. Can Help
Farahat & Co.’s liquidation and insolvency advisory team helps UAE businesses assess whether preventive settlement is the right path, review eligibility against the “on the verge of insolvency” threshold, and prepare a credible settlement proposal for the Bankruptcy Court and creditors.
Contact Farahat & Co. today to discuss your preventive settlement and insolvency advisory requirements.
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
