Bankruptcy in the UAE: 15 Essential FAQs on the New Bankruptcy Legal Framework

1. What is the UAE Bankruptcy Law?

The UAE Bankruptcy Law, governed by Federal Decree-Law No. 51 of 2023, provides a structured legal framework for financially distressed companies and traders. It offers mechanisms such as preventive settlement, financial restructuring, and liquidation to help manage financial difficulties while balancing creditor and debtor interests.

2. Who is subject to the UAE Bankruptcy Law?

The law applies to:

·?????? Companies established in mainland UAE under the Commercial Companies Law.

·?????? Natural persons acting as traders.

·?????? Licensed civil companies conducting professional activities.

The law does not apply to:

·?????? Entities in Free Zones with independent bankruptcy laws, such as DIFC and ADGM.

·?????? Government-owned entities with special bankruptcy provisions.

·?????? Banks, financial institutions, and insurance companies regulated by the UAE Central Bank.

·?????? Individuals with personal debts, which fall under the UAE Insolvency Law for individuals (Federal Law No. 19 of 2019).

3. What are the key updates introduced by the 2023 Bankruptcy Law?

·?????? Specialized Bankruptcy Court with jurisdiction over bankruptcy matters.

·?????? Specialized government departments assisting the Bankruptcy Court in streamlining Bankruptcy applications and proceedings.

·?????? Preventive settlement procedure to enable businesses to operate while repaying debts.

·?????? Increased accountability for directors and management, imposing personal liability in cases of misconduct.

·?????? Enhanced debt enforcement procedures, allowing secured creditors to initiate enforcement under court supervision.

4. What is the preventive settlement procedure?

The preventive settlement is a court-supervised process enabling debtors to restructure debts while continuing business operations. It replaces the previous preventive composition procedure and provides an efficient framework for resolving financial distress.

5. What are the thresholds for initiating bankruptcy?

A bankruptcy application may be filed if debts exceed:

·?????? AED 300,000 for individuals.

·?????? AED 500,000 for legal entities.

·?????? AED 5 million for regulated entities (e.g., financial institutions). Creditors can also file bankruptcy applications if a debtor’s unpaid, undisputed debt meets the legal threshold.

Note that under the new law, multiple creditors can apply jointly to ensure they meet the relevant threshold for a successful application.

6.?What role does the Bankruptcy Court play?

The Bankruptcy Court is responsible for:

·?????? Adjudicating bankruptcy cases.

·?????? Appointing trustees and experts.

·?????? Approving restructuring plans or liquidation proceedings.

·?????? Overseeing enforcement actions against secured assets.

7. What are the responsibilities and liabilities of company directors?

·?????? Company directors must ensure accurate financial reporting and prudent management. They can be held personally liable if found guilty of:

·?????? Wrongful trading (continuing operations while knowing insolvency is unavoidable).

·?????? Fraudulent behaviour, such as hiding assets or falsifying records.

·?????? Negligence that worsens financial distress. The court may impose financial penalties and restrictions on future business activities.

8. What happens to secured assets during bankruptcy?

·?????? Secured creditors have priority over secured assets, which may be liquidated under court supervision.

·?????? If the secured debt is not fully covered, the remaining amount is treated as an unsecured debt.

·?????? Creditors may request enforcement if the asset is not sold within 30 days.

9. Can a bankrupt company secure new financing?

Yes, a bankrupt company may apply for new financing with court approval. The court may:

·?????? Authorize secured or unsecured loans.

·?????? Allow the use of unencumbered assets as collateral.

·?????? Permit new funding as part of a restructuring plan.

10. How does the law impact employee rights?

·?????? Employee wages and end-of-service benefits are considered priority debts and must be settled before unsecured creditors.

·?????? Employees may face redundancy in liquidation cases, but restructuring may allow continued employment.

11. What role do creditors play in the bankruptcy process?

Creditors can:

·?????? File for bankruptcy if a debtor’s unpaid debt meets the threshold.

·?????? Challenge claims and dispute asset valuations.

·?????? Vote on restructuring or settlement plans.

·?????? Enforce claims against secured assets with court approval.

12. What penalties exist for fraudulent bankruptcy?

·?????? Fraudulent bankruptcy involves deliberately concealing assets, falsifying records, or misusing insolvency proceedings. Offenders may face:

·?????? Fines and imprisonment, depending on the severity of the misconduct.

·?????? Personal liability for directors and senior management.

·?????? Restrictions on holding managerial positions in the future.

13. What are the restructuring options under the Bankruptcy Law?

The law promotes restructuring over liquidation through:

·?????? Operational restructuring (e.g., cost-cutting, renegotiating supplier contracts).

·?????? Financial restructuring (e.g., debt rescheduling, debt-for-equity swaps).

·?????? Asset restructuring (e.g., selling non-core assets to improve liquidity).

The process is overseen by the court-appointed trustee and subject to creditor approval.

14. How does UAE law address cross-border insolvency?

While the UAE is not a signatory to the UNCITRAL Model Law on Cross-Border Insolvency, it follows international best practices. Courts may recognize and enforce foreign bankruptcy rulings under the New York Convention (1958) if they do not contradict UAE public policy.

15. How does the law prioritize debt repayment?

·?????? Debt repayment follows a strict hierarchy:

·?????? Secured creditors (debts backed by assets).

·?????? Privileged creditors (e.g., employee wages, court-ordered pensions, legal fees, government dues).

·?????? Unsecured creditors (ordinary debts without collateral).

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For expert legal guidance on the UAE Bankruptcy Law, contact Yungo Law today. With over 20 years of experience in UAE Corporate & Commercial Law, our dedicated legal team is equipped to assist you with company management, risk assessment, and liability protection. Whether you need tailored advice or strategic solutions, we are here to provide you with peace of mind.