There has been much comment and speculation in recent weeks as to what provisions may be included in the UAE's proposed new federal bankruptcy law.
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The law, which would repeal the existing federal bankruptcy law, is intended to create a more modern, debtor-friendly regime, with particular emphasis on the rescue of a distressed debtor's existing business or the restructuring of the debtor's liabilities, rather than formal liquidation or bankruptcy.
Hadef & Partners has teamed up with the international law firm Clifford Chance to draft the new law and to formulate key policy proposals for it, drawing on a comparative study of insolvency laws in other jurisdictions, including England and Wales, France and Germany.
The draft law is going through a consultation process after which it will be presented to the UAE Cabinet as the first formal step towards its promulgation as a federal law.
A wide-ranging review of the existing law was carried out to identify certain "problem" areas and to understand why existing insolvency provisions have historically been so little used. Many of the provisions under the new law aim to move away from the negative impact or "social stigma" attached to insolvency generally, to "decriminalise" the effects of insolvency and to make the requirements for entry into insolvency proceedings more cost-effective and simpler to implement.
The new law will apply to any entity established under the UAE Commercial Companies Law and any person engaging in business activity for profit. It will not apply to government entities or entities incorporated and licensed to operate in a financial free zone such as the Dubai International Financial Centre, which has its own insolvency laws. The scope of the law is therefore wider than the provisions contained in the current law, which is limited to the activities of a "trader" and no one else.
For the first time, provisions will apply to individual debtors not engaged in any business activities under a separate and distinct personal insolvency regime.
The conditions that must exist before any insolvency procedure may be commenced against a debtor are extended, including a state of affairs in which the debtor is in - or has not yet reached - a state of "over-indebtedness".
The insolvency regime for traders and others conducting business for profit will include streamlined rescue procedures. These will comprise a "financial reorganisation" procedure available to debtors who are in financial difficulties but who are not yet insolvent and a debtor-led but court-driven "protective composition" procedure that provides protection to a debtor who is in financial difficulties, enabling the debtor to reach a compromise with his creditors and avoid formal insolvency proceedings.
The financial reorganisation procedure is designed to encourage a private, out-of-court settlement and restructuring of a debtor's liabilities and will be administered by a separate centralised commission to be established by the Council of Ministers. This commission will have access to a panel with appropriate mediators with sufficient expertise to help debtors and their creditors reach a negotiated settlement for the rescheduling of their debts.
It is also empowered to create and maintain a centralised register for disqualified people and a centralised register of bankruptcy restrictions and orders.
Formal insolvency procedures are retained but with modification, allowing for a two-stage process once a debtor is declared insolvent, including a "rescue" procedure (if the debtor's business is considered to be viable) and a formal liquidation process. A streamlined bankruptcy process is available for small bankruptcies.
For individuals who are not carrying out business activity, the insolvency regime is extended to include a rescue procedure that enables individuals to compromise their debts over a defined period under a court-led procedure and a formal insolvency procedure involving the appointment of an office holder and liquidation of the debtor's assets.
The law contains "priority funding" provisions that permit new financing for debtors following the commencement of a protective composition procedure or bankruptcy proceedings, modifies certain technical areas of existing bankruptcy law, including the application of set-off of debts on insolvency, preferential creditors and the order of preferential payments.
The law also modifies the civil and criminal sanctions that may be applied against individual debtors and directors and managers of corporate debtors on insolvency. However, those that deal with bounced cheques and other bankruptcy-related acts set out in the UAE Penal Code are retained.
Although it is uncertain whether the new law will include all of these key provisions, it is hoped that they will be retained without material amendment. As the emphasis of the draft law is to promote a rescue culture as an alternative to formal insolvency procedures, it will be interesting to see how these are received generally and how they will be applied within the wider UAE business community if and when the draft completes its formal passage through the legislative process.
(James Farn is a partner at Hadef & Partners)
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