An overview of Insolvency and Restructuring in the UAE

The UAE has a robust legal framework that supports its businesses, investors, and entrepreneurs. Sometimes, businesses may face financial distress that ultimately leads to insolvency in the UAE. It is essential to have a structured approach towards insolvency. The UAE has an in-depth mechanism for businesses to handle their financial challenges. The legal framework and mechanisms safeguard the interests of investors, employees, and creditors. Legal framework understanding is very important. Trusted lawyers and legal consultants have been always the greatest source for this. For example, Dubai lawyers, at top Dubai law firms, are hired for quality legal support. From counselling to litigation, they provide legal help in all the aspects. 

Robust Insolvency Framework

The clear, fair, and efficient insolvency regime is essential for commercial activity and economic stability. Nonetheless, it also protects businesses struggling due to various reasons, which will get an opportunity to recover. It protects the rights of creditors but also encourages responsible borrowing. 

Further, it offers lucrative restructuring opportunities to recover bad debts. The legal framework is in line with international best practices. The UAE has introduced substantial legal reforms that have reshaped the insolvency in the UAE. Over the last decade, an insolvency law has boosted investors’ confidence.

Details about UAE Bankruptcy Law:

The Federal Law No. 9 of 2016 on UAE Bankruptcy Law is a milestone in the UAE. This law is also called the UAE bankruptcy law. It governs the business facing insolvency and financial difficulties in the UAE. It offers them a multitude of options to restructure their debts. 

It also protects their assets and suggests ways to prevent liquidation. The UAE bankruptcy law is applicable along with other laws. It mainly governs the companies incorporated under the UAE commercial company law. 

It is applicable to most of the businesses in free zones except for DIFC and ADGM. 

These two have separate insolvency regimes. It is also applied to sole proprietorships, partnerships, and civil companies that are engaged in commercial activities in the UAE.

Main Provisions of the UAE Bankruptcy Law:

The UAE Bankruptcy Law explicitly outlines the most important mechanisms to address insolvency matters. 

Preventive Composition

It is a debtor-led procedure that is aimed at avoiding bankruptcy. The aim is to negotiate with creditors to agree on restructuring debts. It permits financially distressed companies to continue to operate smoothly despite several challenges. It further provides viable options to businesses and works towards a settlement.

Financial Restructuring

A business that is facing financial difficulties can opt for court-supervised financial restructuring. This will allow them to develop more detailed debt restructuring plans. It provides a comprehensive plan under the jurisdiction.

Declaration of Liquidation

In case restructuring efforts do not succeed. It is deemed unfeasible to declare bankruptcy. A formal declaration of liquidation is allowed as per the law. It helps in settling the debts in an orderly way. The mechanism assists the creditors and debtors to protect their rights and interests. It fosters a transparent and balanced approach towards insolvency. 

New Reforms in Bankruptcy law:

In response to the global pandemic, the UAE introduced the Federal Decree-Law No. 21 of 2020. A lot of amendments were introduced in bankruptcy laws to offer more ease and flexibility to the debtors to repay their delinquent accounts. 

It improves the protection during extraordinary situations. It was mainly announced due to the COVID-19 Pandemic, which led to an economic crisis. Some of the eminent features of law are the granting of extended protection to the debtors. It is specifically given to them during preventive composition. It simplifies the procedure for small businesses that are currently facing insolvency.

It safeguards the directors and managers from personal liability in genuine cases of financial distress. Their new reforms are made to foster a more resilient and business-friendly environment in the UAE.

Insolvency in Free Zones like DIFC and ADGM:

The companies that are registered under the financial free zones, like Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) are subject to a separate set of laws. They have their own distinct insolvency legal frameworks, like:

• DIFC Insolvency Law No. 1 of 2019 governs the insolvency procedures within the free zones such as DIFC. It is a combination of international standards and modern restructuring mechanisms.

• Additionally, ADGM Insolvency Regulations 2015 provide a similar insolvency framework to businesses registered under free zones. They are an amalgamation of common law principles and best international practices. 

The businesses that are operating under the jurisdiction must consult legal experts or lawyers in Dubai. They are well aware of certain regulations that are applied to free zones in the UAE. They assist in ensuring compliance with the statutory requirements. Besides, they help in exploring available restructuring options as well. 

• FAQS are covering the most important questions. You can consult our expert lawyers and legal consultants as well if you need more specific and elaborative legal solutions. Ask The Law is one of the most trusted legal service providers in Dubai and UAE.  

FAQs

What is the difference between preventive composition and bankruptcy in the UAE?

Preventive composition refers to the restructuring process. A financially distressed business or company normally initiates it. It refers to negotiating with creditors in order to avoid bankruptcy. Conversely, Bankruptcy refers to the formal court proceedings that lead to the company’s liquidation. It is done to settle the debts. 

Do the UAE insolvency laws apply to free zone companies?

Most free zone companies are normally covered by the UAE Bankruptcy Law. It does not cover the business under DIFC and ADGM, as they have their insolvency regulations. Nevertheless, it is pivotal to consult the lawyers in Dubai who offer legal expertise on the laws. 

Can foreign Creditors participate in UAE insolvency proceedings?

Yes, foreign creditors can file claims. They can participate in UAE insolvency proceedings. The UAE Bankruptcy Law incorporates a range of provisions for cross-border insolvency. They facilitate the cooperation between UAE courts and foreign jurisdictions. It often requires legal assistance from experienced law firms in Dubai.