Importantly, the New Law provides for the introduction of a Financial Restructuring Committee (FRC) which shall be established by the Cabinet of Ministers to oversee the management of restructuring process by financial institutions licensed to facilitate an out-of-court mutual and consensual restructuring arrangement between the debtor and its creditor. Such FRC shall also maintain a list of experts in the matters of restructuring and bankruptcy, and also, maintain a register of persons against whom judgments are delivered under the New Law. While the New Law is silent on the manner of the workings of such FRC, it is anticipated that further regulations shall be released which shall regulate and detail out on the procedures, duties, and roles of the FRC.

It is pertinent to note that the New Law enumerates the following procedures for debtors in financial difficulty:

Obtaining New Finance

Article 181 of the New Law provides comfort to debtors dealing with financial hardship. Pursuant to this provision, Debtors can request Court, at the time of a preventive composition scheme or restructuring process, to obtain new finance upon the terms laid down under the New Law. Importantly, such new finance, if permitted by the Court, will have priority over any other unsecured debt owed by the debtor.

Suspension of Criminal Proceedings for Dishonored Cheques

Upon initiation of a preventive composition scheme or restructuring process, any criminal proceedings filed against the debtor for the issue of a dishonored cheque shall be suspended. As a result of such a suspension, the recipient creditor of the cheque shall be included in the list of creditors.

Interested Parties

If you are a debtor:

As set out herein, the New Law is a mechanism which awards opportunity to distressed businesses and debtors, who need certain breathing opportunity reach settlement with its creditors and continue with the operation of its business.

If you are a creditor:

While the New Law primarily provides a safety net and secured approach to debtors for their businesses, the success of a preventive scheme or a restructuring scheme shall be dependent on the approval of the creditors. Therefore, it is essential that the creditors review the preventive composition scheme or the restructuring scheme cautiously and prudently. Although, the right to vote on a scheme is with unsecured creditors, secured creditors have more far-reaching entitlements, in as much as, such secured creditors are entitled to enforce their security interest when the debts fall due even during the pendency of the preventive scheme or restructuring scheme. Further, the secured creditors are also entitled to take action first upon bankruptcy judgment passed by the Court.

Liability of the Directors

The legislators have purported to stress the importance of governance of companies and the manner in which the management undertakes its activities. This is evident from the duties and obligations imposed by the management under the terms of the Companies Law, and it is taken further under the terms of the New Law. Regarding article 144 of the New Law, directors/managers who are responsible for the losses to the Company shall be jointly liable for the debts of the company, in the event of bankruptcy, if such assets of the company are insufficient to cover 20% (twenty percent) of its debts. Therefore, it is essential that the management of the company familiarizes itself with its duties and responsibilities under the Commercial Companies Law and also have a thorough understanding of the financial position of the company and monitor any actions taken by shareholders and creditors of the company.

Effect and Impact

There has been a lot of speculation and conjecture on whether the Bankruptcy Law will assist in facilitating a conducive financial market for the investors. While the mechanism has been set in place, much will depend on how the courts implement it. The law is at an early stage, and on account of largely being a court-driven process, it will hinge on the expertise of the experts, trustees, and courts. Moreover, effective implementation of the law will also hinge on the infrastructure.

Having said that, the New Law has a more far-reaching impact than the erstwhile regime in terms of providing more flexibility and comfort to distressed businesses. In effect, the New Law gives them an option to rely on it and reach a settlement with its creditors, which in turn will have a more positive impact on the UAE as a conducive financial market for international investors.

[i] Articles 5-66 of Section 3 of the New Law