Dubai Court of Appeal’s Landmark Decision: Bankruptcy Reversed Amidst Asset Concealment by Debtor

Al Tamimi & Company successfully won a landmark judgment from the Dubai Court of Appeal in a case concerning bankruptcy proceedings.  Al Tamimi & Company represented the creditors in an appeal against a Court of First Instance judgment which accepted a debtor’s request to initiate bankruptcy proceedings.  This judgment is significant because it highlights the conditions and requirements for commencing bankruptcy proceedings and the court’s duty to ensure that the bankruptcy law is not used to evade the payment of debts.

On 12 June 2024, the Court of Appeal overturned the bankruptcy commencement judgment (Court of First Instance judgment) which initiated the bankruptcy of a real estate broker (the “Debtor”). The Court of Appeal rejected the Debtor’s bankruptcy application, after accepting the creditors’ challenges (submitted by Al Tamimi & Company). The creditors argued that the Debtor had concealed and transferred his assets to evade making payments to the creditors and failed to submit the documents required under the UAE Bankruptcy Law.  They further argued that the Debtor was using the bankruptcy law in bad faith which prevented the creditors from undertaking execution measures against him. The Court of Appeal ruled that no debtor should be allowed to benefit from the bankruptcy regime to evade liabilities and hinder creditors’ rights.

On 13 July 2023, the Debtor filed an application before the Dubai Court of First Instance to commence bankruptcy proceedings, alleging inability to pay his debts due to the deterioration of his financial position. The Court of First Instance appointed an expert to evaluate the Debtor’s financial situation and report on the feasibility of restructuring or settling his debts. The expert’s report stated that the documents submitted by the Debtor were very brief and did not reveal his assets, liabilities, projects, or sources of income. The Court of First Instance relied on the expert’s report, which was based on incomplete and insufficient documents and information.  Nevertheless, the Court of First Instance issued a judgment that accepted the Debtor’s application and appointed a trustee in view of the Debtor’s apparent inability to repay his debts.

On 7 February 2024, Al Tamimi and Company appealed the judgment before the Court of Appeal on behalf of the creditors and requested the court to reject the Debtor’s application.  Al Tamimi & Company argued that the judgment violated Articles 73, 74, and 79 of the UAE Bankruptcy Law No. 9 of 2016, as amended (that was applicable at the time and has since been replaced by Federal Decree Law No. 51 of 2023 as of 1 May 2024).  Article 73 of the bankruptcy law stipulates the documents and information that the debtor must submit along with his request for initiating bankruptcy proceedings, and a nomination of a trustee to oversee the proceedings, and any other documents that support his request. Article 73 also allows the court to grant the debtor a deadline to provide any additional documents or information that the court deems necessary to decide on the request. We argued the Debtor did not submit the required documents and adequate information to describe his financial position nor did the Court of First Instance grant a deadline to provide the additional information.  Al Tamimi also argued that the bankruptcy commencement judgment lacked reasoning, was not supported by evidence and violated the creditors’ right of defence as the creditors were able to prove that the Debtor acted in bad faith, concealed and dissipated his assets, including those abroad, to avoid paying his debts.

The Court of Appeal issued its judgment and overturned the Court of First Instance judgment. The Court accepted all our arguments and found that the Debtor did not comply with the provisions of Article 73 of the Bankruptcy Law. The Court of Appeal held that the debtor had concealed his assets and transferred them to his wife and daughter to avoid the claims of the creditors. The Court also held that the Debtor’s financial and economic situation was sound, and his assets were sufficient to pay his debts and the debtor’s request to initiate bankruptcy proceedings was motivated by his intention to stop the judicial and execution proceedings against him, which contradicts the general purpose of the bankruptcy law.

This judgment is a significant win as it highlights the criteria and reasons for rejecting a request to initiate bankruptcy proceedings and established the lack of transparency, the concealment of assets, the bad faith, and the violation of the rights of defence of the creditors. The judgment also demonstrates the court’s duty to protect creditors’ rights and prevent any abuse of the bankruptcy process to hinder such rights.  The judgment confirms that a debtor must submit sufficient documents and information on all his assets to enable the court to assess the debtor’s economic and financial position and the feasibility of restructuring or settling his debts.  As this case demonstrates, the Court has the discretion to reject a bankruptcy application if the debtor does not comply with the legal requirements or acts in bad faith to abuse the protection afforded by the Bankruptcy Law.

How can we help?

Should you have any questions or require further clarification on these matters, please do not hesitate to contact Naief Yahia, Mohamed El Dessouky and Stephany Malhame.