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UAE Bankruptcy Law Update – Emergency Financial Crisis

  • Développement en droit 8 mars 2021 8 mars 2021
  • Moyen-Orient

  • Litiges commerciaux

On 22 October 2020, the UAE government made various changes to the UAE Bankruptcy Law*, including the concept of Emergency Financial Crisis (EFC). Subsequently, on 10 January 2021, the UAE Cabinet declared the existence of an EFC in the UAE. In this article, Partners Michael Morris and Keith Hutchison explore how this declaration may impact on debtors and creditors.

Emergency Financial Crisis

One of the key changes implemented was a power given to the UAE Cabinet to declare an EFC.  An EFC is defined as:

"A general situation that affects trade or investment in the country, such as a pandemic, natural or environmental disaster, war, etc."

At the time of announcing the changes to the Bankruptcy Law, an EFC was not declared. However, we expected that such an announcement was imminent and that it would likely have retrospective effect to run in parallel to the pandemic. As predicted, on 10 January 2021, the UAE Cabinet: announced the existence of an EFC; and declared the EFC as having started on 1 April 2020 and continuing until at least 31 July 2021.

What does this mean for Debtors and Creditors?

In summary, during an EFC:

  • DEBTORS are not required to file for bankruptcy if they have failed to pay their debts within 30 days due to the EFC (it is unclear whether the Debtor will have to satisfy the Court that the failure to pay was due to the EFC and whether disputes will arise on this issue).
  • DEBTORS can still file for bankruptcy and the Court may elect not to appoint a trustee in the proceedings if the Debtor proves the disruption to his business was caused by the EFC. Moreover, the Court shall not take any precautionary measures against the debtor's assets which are essential for the operation of the Debtor's business during the EFC.
  • CREDITORS cannot file and the Court will not accept bankruptcy applications against any Debtors during the EFC.
  • SETTLEMENT WITH CREDITORS (only applies to Debtor filings):
    • If the bankruptcy is accepted by Court, the Debtor may request 40 business days to negotiate settlement with his Creditors.  If approved by the Court, this shall be published and include an invitation to Creditors to negotiate settlement within 20 business days.
    • The Settlement period offered to Creditors shall not exceed 12 months.
    • If settlement is reached with Creditors with 2/3rds of the debt, this settlement shall be binding on all Creditors (even those who did not participate).
    • Settlement negotiations must be in writing and approved by the Court.
  • EXISTING BANKRUPTCY PROCEEDINGS filed prior to the declaration of the EFC (i.e. before 1 April 2020) will continue, although the Court can double the time periods set under the Bankruptcy Law for these proceedings. What is, however, slightly unclear at this stage is how the Courts will interpret the effect of the EFC declaration on claims filed after 1 April 2020 and before the issuance of the law on 10 January 2021, i.e. those filed prior to the actual declaration of an EFC, but after the 1 April 2020 date from which the EFC has been declared to have existed. It would seem perhaps procedurally unfair for Creditors in that position to have their bankruptcy actions stayed or dismissed retrospectively – especially where various steps may have been taken (and costs incurred) in such proceedings already that affect parties' status and rights – so the better interpretation may be that such actions are unaffected and the impact on bankruptcy actions will operate only to those filed after 10 January 2021. This is something we will observe in practice on active cases for the interpretation that is applied in the coming weeks.
  • DIRECTORS' LIABILITY will not arise where those directors pay unpaid salaries of employees (excluding allowances pay rises and other contingent payments) out of company funds.
  • NEW MONEY will be available to Debtors during an EFC. Debtors may obtain new financing (secured and unsecured) with Court approval, which will have priority over existing debts.

Creditors can still take legal action to pursue their debts

While ultimately the threat of commencing bankruptcy proceedings may not be available to Creditors during the EFC, it is important to appreciate that Creditors can still pursue recovery of their debts through civil remedies in the UAE Courts, regardless of the existence of an EFC.  For example, Creditors remain entitled to apply for payment orders, precautionary attachments, and they may also pursue standard civil claims for debt recovery as a money judgment.



*UAE Federal Law No 9 of 2016


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