How Debtors and Creditors Can Resolve Claims Amicably

The law encourages amicable settlements and expands the scope for debtors seeking protective composition, focusing on resolving financial difficulties through negotiation.

a new UAE Bankruptcy Law has been issued, which contains several new provisions to maintain the vitality of the national economy, preserve the rights of creditors and help debtors settle their debts to avoid, if possible, declaring bankruptcy.

The law is a game changer for both debtors and creditors as it equally balances the interest of creditors in the debt owed to them and the debtor having substantial control over the operation of the business with court approval .

Here’s what we know based on excerpts shared by regional law firm BSA: Navandeep Matta, Senior Associate at Kochhar & Co, Dubaiand Areen Jayousi, Partner at Horizons & Co., about the new law:

When will the law come into force?

The UAE Bankruptcy Law was published in the UAE Gazette on October 31, 2023 and will come into force on May 1, 2024.

What is the purpose of this new law?

The new law reviews the legal framework for restructuring and insolvency and streamlines the process to further improve investor confidence. The law recognizes the need to balance the interests of various stakeholders, including creditors, employees, and spouses, for a smooth and effective restructuring.

Does the law encourage friendly agreements?

Yes. The law encourages amicable settlements and expands the scope for debtors seeking protective composition, focusing on resolving financial difficulties through negotiation.

Will there be new bankruptcy courts?

Yes. The United Arab Emirates will have special courts that will deal with bankruptcy cases. Currently, a specific section of the Court is headed by a Court of Appeals judge, who is responsible for overseeing bankruptcy and restructuring matters. A unit will be established with the name “Financial Reorganization and Bankruptcy Unit”, which will have an administrative work team that will assist it in the performance of its tasks related to preventive liquidation, restructuring or bankruptcy procedures.

What’s new for creditors and debtors?

The new law protects and streamlines the process and avoids separate enforcement procedures for creditors. The court may impose a moratorium on creditor actions from the start of judicial and enforcement measures against the debtors until the restructuring plan is ratified without a specific time limit. The law also places emphasis on avoiding potential damage to the bankruptcy estate during restructuring, a notable feature of the law.

How long can the moratorium last?

The issuance of the resolution to open preventive liquidation procedures will give rise to a moratorium on claims for the three months following the date of issuance of the resolution. The Bankruptcy Court may, at the request of the debtor, extend the moratorium period for claims for one or more times, provided that it does not exceed one month each time, and in any case, the moratorium period for claims will not exceed six months.

The Bankruptcy Administration must, at the request of the debtor, provide a certificate of moratorium on claims and its duration. During the claims moratorium period, the debtor must exercise the necessary care to ensure that its creditors vote to approve the proposed preventive agreement. Likewise, it will provide the creditors with all the documents, information and data that allow them to decide on the proposed preventive agreement and will respond to the queries raised by the creditors.

Will the moratorium remain open until the restructuring is ratified?

The moratorium after the adoption of the decision to open a restructuring procedure will not be limited, as it was in the previous law, and will remain open until the ratification of the restructuring plan. However, employment claims and personal status issues (except those relating to inheritance) are exempt from the moratorium, which will help preserve the rights of employees, spouses and children.

Can the debtor request new financing?

If the debtor’s request to initiate preventive liquidation and restructuring proceedings is accepted in accordance with Article (252) of the new law, the bankruptcy court may grant permission to the debtor to obtain new financing, with or without collateral, under certain conditions. .

They are:

a) Priority will be given to the new financing over any ordinary debt existing by the debtor on the date of the decision to initiate the procedure;

(b) The possibility of guaranteeing the new financing with a lien on any of the debtor’s free funds;

c) The possibility of guaranteeing the new financing through a lien on the debtor’s encumbered funds, evaluated for a value greater than the debt guaranteed in the previous lien. In this case, the new lien will have a lower priority than the existing lien on the same funds, unless the secured creditors agree in cash on the position of the lien that the new lien must have a ranking equal to or higher than that of the existing lien. on the same funds. .

(d) If the secured creditor is a licensed financial institution, the same funds are permitted to be pledged even if they are assessed at a value equal to the debt secured in the previous lien, with a value not exceeding (30%) of the value of that background.

The bankruptcy court may issue a decision approving that the new lien ranks equal to or greater than the existing lien on the same funds, especially if the purpose of the new financing is to obtain materials or services necessary for the debtor’s continuing operations to generate returns. to help pay off your overdue debts.

Can a court determine the date the debtor(s) will stop paying?

Unlike the previous law, when a final ruling is issued on the opening of a preventive agreement, restructuring or bankruptcy plan, the court must set in the ruling a date of cessation of payments by the debtor(s), which will have important consequences on certain acts. executed by the debtor(s) in the past.

Will bankruptcy court verdicts be considered written and executed?

Yes. All decisions and judgments of the bankruptcy court will be considered an executory order and will be enforceable under the new law.

Can bankruptcy courts stay claims against debtors before final judgment?

Bankruptcy courts will have the power to issue interim decisions to suspend ongoing claims against the debtor(s) before issuing a final judgment opening a preventive composition plan or restructuring plan, which was not the case under the previous law.

Can the bankruptcy court ratify the restructuring plan after considering the trustee’s opinion and the creditor’s objection?

In the event that the creditor refuses to proceed with the proposed restructuring plan, the debtor will have the right to petition the bankruptcy court to request ratification of the restructuring plan.

The bankruptcy court may ratify the plan after considering the opinion of the trustee, and opposing creditors may ratify the restructuring plan on the condition that the creditors’ rights under the plan are not less than their rights in case bankruptcy. Under the previous law, if the creditor rejected the restructuring plan, the debtor would automatically be declared bankrupt.

Will directors and officers be held personally liable if they commit certain actions, such as using business methods that involve ill-considered risks?

As for the directors (including people who actually participate in the management), the members of the board of directors and the liquidator, they will be considered personally liable if they commit particular actions, such as using commercial methods of ill-considered risks, fulfilling any of the commitments of the creditors. debts with the intention of causing harm to other creditors, etc. Said responsibility is similar to what was provided in the previous law; However, the new law clearly mentions that it applies to actions committed two years before the date of cessation of payment.

In addition, the lawsuit against managers, directors and liquidators must be filed within two years following the ruling declaring the company bankrupt. Needless to say, such persons will also be criminally liable if they commit the crimes specified in the new law.

What is the preventive liquidation procedure?

The debtor may submit a request to open preventive liquidation procedures if his business is viable, in the following cases:

(a) If you have suspended payment or there are reasons that make you expect or fear the impossibility of paying all or some of your debts when due;

b) If his creditors had previously rejected a proposed preventive agreement or restructuring plan, or the Bankruptcy Court had refused to ratify any of them, even if they involved other debts of the debtor for which the application was not submitted, after 3 months have elapsed from the date of the meeting of creditors or the decision of the Bankruptcy Court;

c) If a resolution or ruling by the Bankruptcy Court had previously been issued to put an end to the preventive liquidation or restructuring procedures, even if it involved other debts of the debtor for which the application was not submitted, once the period has elapsed. three months from the date of issuance of the decision or judgment of the Bankruptcy Court;

d) If a final judgment has previously been issued declaring the bankruptcy of the debtor, after his rehabilitation under the provisions of this Law.

Are bankruptcy decisions subject to appeal?

All decisions and rulings issued by the bankruptcy court will be subject to appeal within 30 days from the date of issuance of the corresponding decision or ruling, which was not the case under the previous law, since only rulings on the acceptance and rejection of the claim. appeal in addition to other rulings on the acceptance or rejection of a certain debt.

News Source: Khaleej Times