Debtor-Led Preventive Compositions

The inability to meet one’s financial obligations as they become due is a challenging, but unfortunately, not uncommon occurrence. In December 2016, the UAE put in place a legal framework under Federal Law Decree No. 9 of 2016 on Bankruptcy (the “Bankruptcy Law”), which provides for several avenues to address severe financial challenges and hopefully avoid bankruptcy and liquidation. One such noteworthy avenue is a Preventive Composition. Through this route, depending on the extent of indebtedness, timely intervention may enable the debtor to regain or salvage its financial footing by applying

By Maheen Qasim Ahmad

The inability to meet one’s financial obligations as they become due is a challenging, but unfortunately, not uncommon occurrence.

In December 2016, the UAE put in place a legal framework under Federal Law Decree No. 9 of 2016 on Bankruptcy (the “Bankruptcy Law”), which provides for several avenues to address severe financial challenges and hopefully avoid bankruptcy and liquidation.

One such noteworthy avenue is a Preventive Composition. Through this route, depending on the extent of indebtedness, timely intervention may enable the debtor to regain or salvage its financial footing by applying to court for Preventive Composition.

This note outlines the types of entities and persons who may utilize the Bankruptcy Law in general and particularly the option of Preventive Composition.  

Who May Take Advantage of the Bankruptcy Law?

The Bankruptcy Law captures private sector companies formed onshore and governed by the UAE Commercial Companies Law, as well as under certain free zones. The Bankruptcy Law also captures civil companies (carrying out professional activities) and partnerships (not covered by the previous bankruptcy regime), as well as individual traders (as defined under the UAE Commercial Transactions Law) and sole proprietorships.

One important caveat, however, is that companies wholly or partially owned by the UAE Federal or Emirate-level governments are only included where the founding statute of that governmental or quasi-governmental entity or the companies’ founding/constitutive documents provide that they shall be subject to the Bankruptcy Law.

Companies formed under the laws of the DIFC and the ADGM are subject to their respective bankruptcy regimes.

Also of note that a Personal Bankruptcy Law (Federal Law Decree No. 19 of 2019) addressing bankruptcies of individuals came into force November 29, 2019.

Pre-Bankruptcy Preventive Composition

Where a debtor is experiencing financial strain but not yet insolvent or has been insolvent for less than 30 consecutive business days (using either the cash flow or balance sheet tests, as these are defined in the Bankruptcy Law), it may apply to the court for Preventive Composition. The procedure would not be available where the debtor has already taken advantage of such a procedure within the previous year, or where the debtor has already become the subject of bankruptcy proceedings.

Upon application, the court would appoint a trustee and a financial expert who would assess the suitability of the applicant for the procedure and manage the process, respectively. If approved, the trustee would under supervision of the Court, assist the debtor in reaching a settlement plan with its creditors to discharge the debts, including imposition of a temporary moratorium on claims.  A minimum of a 2/3 majority of the creditors must approve the plan. Once approved, the debtor may continue to run its business under the supervision of the trustee.

Another important caveat is that secured creditors may still pursue their collateral despite the moratorium, but this may only be done with permission from the court.

The consequences of a failure to comply with the plan may result in a declaration of bankruptcy order by the court and even liquidation. Once the debtor has discharged its obligations, the procedure is concluded, having effectively prevented the entity from financial demise.

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