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Bankruptcy: settlement with creditors

The UAE Bankruptcy Law – Federal Law No. 9 of 2016 (the ‘Law’) – provides a set of rules for the settlement of creditor claims

If a majority of the holders of two-thirds of the debt do not approve of the reorganization plan, that plan is rejected Ordinary creditors seeking their due amounts pursuant to a restructuring plan likely will not recover the full amount Should the debtor be liquidated, the Law sets out the order in which debts are to be paid

By; Barry Greenberg | Of Counsel – BSA Ahmad Bin Hezeem & Associates LLC

The UAE Bankruptcy Law – Federal Law No. 9 of 2016 (the ‘Law’) – provides a set of rules for the settlement of creditor claims.

Where the debtor is restructured pursuant to a Preventive Composition scheme under Title 3 of the Law, or a more formal reorganization under Title 4, the settlement of claims will be subject to the approval of a specified majority of the creditors, via ratification of the debtor’s reorganization plan. If a majority of the holders of two-thirds of the ordinary debt do not approve of the reorganization plan, that plan will be rejected. Secured creditors do not participate in the vote to approve the plan; however, their rights cannot be prejudiced by a plan and they, in general, retain the right to commence action to recover their security during the course of a bankruptcy proceeding.

Ordinary creditors seeking their due amounts pursuant to a restructuring plan likely will not recover the full amount owed, with the extent of the reduction being set forth in the plan specifics. The plan will be formulated by the Court-appointed trustee with the debtor’s assistance, after a careful review of the debtor’s liabilities, assets, and the possibility of the debtor’s return to fiscal viability. The trustee will seek to permit the creditors to receive as close to the full value of their claims as possible while balancing the need to keep the debtor in business, if such is practicable.

Those creditors voting on the proposed restructuring plan need to consider that reality as they cast their votes. While creditors may be dissatisfied by the proposed reduction in their collectible amounts, that recovery amount will almost certainly be significantly larger than what they would recover should the debtor be liquidated, which is what will most likely occur if the creditors reject the plan.

From the time at which the Court opens the procedures, the debtor’s management is overseen by the trustee, who may affirm or reject the debtor’s continuing contracts and leases as circumstances warrant but may require leave of Court to do so.

Should the debtor be liquidated, the Law sets out the order in which debts are to be paid. Debts secured by moveable or immoveable property shall be given priority over all other debts, except for the trustee’s fees and costs incurred in the sale of such secured assets. Following this, the order of privileged debts is: 

1) judicial fees or expenses, including trustee and experts’ fees, 2) end of service gratuities, wages, and salaries for no greater than 3 months, 3) alimony, 4) amounts due to government agencies, 5) debtor’s advisor’s fees, including legal consultants, and 6) fees costs and expenses incurred after the opening of the procedures for the purpose of maintaining the debtor’s continuity of business during that period.

All of the debts in each privileged category must be settled prior to the payment of the next category of debts. Once all secured and privileged debts are satisfied, then ordinary debts are paid. Should the sale of the secured property be insufficient to satisfy the secured debt amount, the remainder of the secured debt shall be treated as ordinary debt. In each case of similar classes of debt, payment will be made on a pro-rata basis if insufficient funds are available to pay the full amount owing in that class.

Debtors must exercise extreme care in self-administering which debts they intend to pay if they are in a state of insolvency but have not filed for protection under the Law. The debtors’ managers and directors can be personally held both civilly and criminally liable for making payments to creditors to the detriment of other creditors while the debtor is insolvent.