By: Barry Greenberg, an Of Counsel in the Restructuring & Bankruptcy, Corporate, and Insurance and Reinsurance practices in BSA’s DIFC office in Dubai.
The rise in the number of companies facing severe financial distress is an unavoidable fact in today’s market. In response, the UAE enacted a new Bankruptcy Law – Federal Law No. 9 of 2016 – which has provided new avenues whereby distressed companies can remediate an insolvency scenario. The new law seeks to enable a paradigm shift as to the treatment of indebted entities to a “rescue culture”, in line with the practices of other international commercially prominent jurisdictions such as the US and UK. Accordingly, the law provides for a process in which the injection of new capital can be arranged, while at the same time claims based on existing debt can be both managed and mitigated, using a set legal process.
The Bankruptcy Law was also amended in late 2020 in response to the COVID pandemic to provide for various forms of enhanced debtor protections, including suspension of the requirement to file in cases of insolvency, expedited claims relief and settlement procedures, and a suspension of any bankruptcy proceedings filed by a creditor.
A company considering filing for protection under the Bankruptcy Law should take steps prior to filing, so as to ensure that the process goes as smoothly as possible.
The first step is to make a robust risk assessment to determine whether the filing is necessary, in view of the fact that such is not without some significant risks.
Importantly, pursuant to Bankruptcy Law Article 144, if the debtor’s assets are insufficient to satisfy at least 20% of its debts, the Court may obligate members of the board or managers to pay these debts, in cases where their responsibility for the company’s loss is evident, pursuant to the provisions of the CCL. Evaluation of whether the company had been appropriately managed in accordance with the CCL must thus be made at this juncture.
Also, note that the directors or managers may face criminal prosecution in the event of a host of improper actions were taken prior to the filing or thereafter. These include circumstances where in some circumstances, liability may even extend to the shareholders themselves if they have been found to have been involved in improper actions related to the debtor company’s management.
These prohibited actions include such of the type that may be expected to attract criminal sanctions, including fraud, embezzlement, bad faith disposal of assets, and the making of false declarations. However, they also include making payments to one creditor to the detriment of others while the debtor is in an insolvent state, as well as other actions which if rising to the level of “gross negligence”, may lead to such scrutiny.
Thus, the risk assessment needs to include making both a clear-eyed estimate of the debtor’s net asset value in liquidation as well as an unbiased consideration of whether the debtor company’s management has engaged in any of the prohibited acts set forth in Title 6 of the Bankruptcy Law.
Once this is done, and assuming the debtor makes the decision to file, the appropriate documents and approvals must be obtained for submission to the court to institute the case. The court filing must include, among other items, the debtor’s incorporation documents and commercial books, the nomination of a trustee to take control of the company once the case is opened, identification in detail of all creditors and assets, as well as a report setting forth the debtor’s expected cash flows for the next 12 months, and a memorandum containing a brief description of the company’s economic and financial situation.
Marshalling all of these items and preparing the filing may take some time, so the debtor that is seriously considering filing a bankruptcy case needs to commence the diligence and the document gathering processes with all deliberate speed.