By: Barry Greenberg, an Of Counsel in the Restructuring & Bankruptcy, Corporate, and Insurance and Reinsurance practices in BSA’s DIFC office in Dubai, a leading law firm
A debtor that files for relief, or that is subject to a creditor’s filing to place the debtor involuntarily into bankruptcy under the UAE Bankruptcy Law – Federal Law No. 9 of 2016 (the ‘Law’) – is provided with certain protections as to its ongoing obligations to satisfy its existing debts.
The Law was also amended in late 2020 in response to the COVID-19 pandemic to provide for various forms of enhanced debtor protections, Thus, the debtors’ protections will vary, depending on when the case was filed and whether the “Emergency Financial Crisis” (the ‘EFC’), which been declared to exist by the Council of Ministers, for the period effective from 1 April 2020 through 31 July 2021, remains in effect.
During the existing EFC, the additional debtor relief includes the 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.
More generally speaking, and without regard to the EFC considerations, in the event of a filing, the debtors’ financial obligations are not eliminated. However, should a restructuring plan be approved by the creditors, these obligations may be reduced to an amount that would enable the debtor a fiscally viable path to pay the reduced debts and to continue as an ongoing enterprise.
Should the debtor not be able to be restructured and instead is placed into bankruptcy and liquidated, the debtor’s obligations will be discharged upon the completion of liquidation, with some important exceptions, including in the case of an inability to satisfy at least 20% of the debt, or where the debtor had engaged in specified acts of misfeasance which caused the insolvency.
In these unfortunate circumstances, the debtors’ manager may be held personally liable for some or all of the debtors’ obligations.
When the case is accepted, the Court will appoint a trustee who shall be responsible for the running of the debtors’ business until the restructuring is approved or the debtor is liquidated; however, the trustee will delegate most managerial tasks to the debtor. Payment of claims is generally in the purview of the trustee, so the debtor is limited in paying its obligations and must defer to the trustee.
In fact, a debtor can be sanctioned should preferential payments be made to one creditor to the detriment of others while in an insolvent state, and thus needs to take great care in allocating its resources in the event of insolvency.
The debtors’ contracts and leases remain in force during the pendency of the case although the trustee may seek to repeal these in certain circumstances, including where the termination is necessary for the continuation of the debtors’ commercial activities.
The Law provides for a freeze of criminal prosecution for company cheques that bounced prior to the initiation of the proceedings, while the proceeding is ongoing – assuming no fraud is involved. This is a significant change from prior law and provides individuals who executed corporate cheques some protections that previously were unavailable.
Civil enforcement claims are also suspended for a period of no more than 10 months post the opening of the case or until a restructuring plan is approved, subject to an extension upon leave of Court. Secured parties, however, may apply to the Court during the proceedings to redeem their rights.
The Law also allows the debtor to obtain new loans with priority over all pre-existing non-secured debt. This is very helpful, insofar as it may give the debtor a previously unavailable lifeline while providing the incoming lender with greater comfort.