UAE sets up bankruptcy court to rule on disputes

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• Law takes effect next May
• Closer to global best practices
• Emphasis on amicable deals

The UAE is overhauling its bankruptcy and restructuring law, introducing a specialist court to oversee disputes.

The legislation – formally Federal Law Decree No 51 of 2023 – comes into force on May 1, 2024, and replaces the 2016 bankruptcy framework.

It will emphasise the importance of amicable resolutions, broadening the scope for debtors to seek agreement with creditors.

However, it will also allow secured creditors to enforce claims against assets directly through the bankruptcy court, which should streamline enforcement.

The move is expected to have a significant impact on how insolvency cases are handled in the UAE, aligning the country more closely with global best practices.

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“The UAE has always issued laws that adapt and mirror its positive trajectory in the economic and financial sectors,” Ghalib Mahmoud, a senior associate at Hadef & Partners in Dubai, told AGBI.

“The new bankruptcy law appears to provide further avenues for businesses and traders to seek legal assistance and recover from financial difficulties.” 

The law also introduces an extended moratorium period. The bankruptcy court will have the authority to halt creditor actions from the start of proceedings until the approval of the restructuring plan, with no set time limit. 

Raza Mithani, managing partner at Conselis Law, told AGBI that the aim was to “strike a balance between the rights of creditors and the interests of debtors” in rescuing viable businesses. 

“For example, whilst there is provision for an extended moratorium in respect of creditor actions, there is an exception in respect of employment and family law matters, to ensure some measure of protection for what may be classed as vulnerable creditors,” he said.

Mahmoud added that the law would also allow proceedings to be initiated by either a debtor or creditor, with proper notice, regardless of the debtor’s ability to cover the underlying debt.

The federal decree was published in the UAE Official Gazette on October 31, but the full text and detailed regulations have yet to be released, including the minimum debt value required for a creditor to initiate proceedings.

While the text available so far does not mention startups, legal experts believe it will help the founders of these enterprises.

Creditors – particularly banks – typically have minimal interest in dedicating resources to restructure small enterprises, even if they are viable.

The new law would give founders “an opportunity or security blanket” to address financial struggles amicably while working to achieve long-term goals, Mahmoud said.

The UAE’s 2016 bankruptcy law was designed to streamline company dissolutions and halt prosecutions during court-approved insolvency proceedings. 

It emerged in response to the 2008 global financial crisis, which highlighted deficiencies in the UAE insolvency regime that meant unpaid debts or bounced cheques landed business owners in prison.

A study published last week in the US journal The National Law Review pointed out that Gulf countries, including the UAE, had increased their interest rates in line with US policy to combat rising inflation.

This hike in borrowing costs, coupled with the end of Covid-19 support schemes, has led to a global upsurge in insolvencies.

Insolvencies in England and Wales in the year ending June 30, 2023, had “more than doubled” compared to the same period in 2020, it said. While the UAE does not have a formal insolvency register, “a similar picture is perhaps emerging in the Middle East”.