UAE Bankruptcy Law – Executive Regulations: Key Developments and Procedures

The UAE has recently introduced significant changes to its bankruptcy and financial reorganization framework with the issuance of the executive regulation. Following the entry into force of Federal Decree Law No. 51 of 2023 issuing the Financial Restructuring and Bankruptcy Law (the “Bankruptcy Law“) on 1 May 2024, the much-anticipated executive regulation has now been issued via Cabinet Resolution No. 94 of 2024 (the “Executive Regulation”). Published on 16 September 2024 in the UAE Official Gazette No. 783, the Executive Regulation is retroactively effective from the day following the entry into force of the Bankruptcy Law.

This client alert sheds light on the key developments introduced by the Executive Regulation.

Definition of Regulatory Authority

The Regulatory Authority has been defined under the Bankruptcy Law as the federal or local regulatory government authority to be designated by the Executive Regulation. The Regulatory Authority was granted various roles and duties in relation to the different proceedings concerning regulated entities as prescribed under the Bankruptcy Law.

Article 2 of the Executive Regulation has now limited the definition of Regulatory Authority to the UAE Central Bank and the Securities and Commodities Authority (SCA). While the Executive Regulation officially establishes an additional role for the two regulators in overseeing the implementation of the Bankruptcy Law on regulated entities within their regulatory ambit, it remains to be seen how extensive the role of the UAE Central Bank will be in bankruptcy and financial reorganization proceedings. This is particularly relevant given that the Bankruptcy Law has excluded banks, financial institutions, and insurance companies from its scope of application, in the event such regulated entities have specific legislation regulating their insolvency. Hence, the UAE Central Bank’s role may be eliminated or minimized upon the issuance of such legislation in the future.

Establishment of the Bankruptcy Register

Pursuant to the Bankruptcy Law, the Financial Reorganization and Bankruptcy Unit (“Unit”) within the Ministry of Justice is entrusted with the duty of establishing and maintaining the bankruptcy register.  The form, contents and particulars of such register have now been outlined in the Executive Regulation (Article 3).  In summary, the register records applications and actions taken under the Bankruptcy Law, including extensive data on judicial cases, details of the trustee and supervisor (if appointed), debtor information (whether an individual or corporation), and bankruptcy court judgments and orders. The bankruptcy register is supervised by the Unit head and is regularly updated.

Access to the Bankruptcy Register

As per Article 4 of the Executive Regulation, the bankruptcy register is accessible under clearly defined conditions. Parties with a legitimate interest can review the register by submitting a formal application, detailing the information sought and purpose of the request. Approval from the Minister of Justice or the Minister’s representative is required for access. This structured approach to managing the bankruptcy register aims at enhancing transparency and providing stakeholders, including creditors, with crucial information about bankruptcy and financial reorganization cases, thereby improving the overall effectiveness of the bankruptcy system compared to previous practices.

Debt thresholds

One of the key advancements in the Executive Regulation is the enhancement of debt thresholds for initiating proceedings as follows:

Debtor application:

• AED 300,000 for a natural person.
• AED 500,000 for a corporate person.
• AED 5,000,000 for a debtor subject to a regulatory authority.

Creditor(s) application:

• AED 1,000,000 for debtors that are not subject to a regulatory authority.
• AED 10,000,000 for debtors that are subject to a regulatory authority.

A secured creditor whose debt is secured by a mortgage/privilege may submit an application under the Bankruptcy Law if the value of the security securing its rights is less than the outstanding debt, by not less than AED 1,000,000 per creditor, and AED 5,000,000 per group of creditors. For debtors that are supervised by a regulatory authority, the shortfall in such event must not be less than AED 10,000,000.

Regulatory authority’s application: the debtor’s debt should not be less than AED 500,000.

The revised thresholds included in the Executive Regulation are now higher than the threshold set under the old bankruptcy law. This adjustment aims to shield businesses from the complications of bankruptcy and financial reorganization proceedings over minor debts that could otherwise be settled via regular business operations. It channels the judicial system’s efforts and professional resources towards more significant, complex insolvency cases, ensuring that larger disputes receive the appropriate level of attention needed.

Deposit Requirements for Initiating Bankruptcy Proceedings

Except for bankruptcy proceedings initiated by regulatory authorities, both debtors and creditors are required to deposit either cash or a bank guarantee representing 5% of the debtor’s total debts or assets, or the creditor’s claimed debts, with the Bankruptcy Court’s treasury.

The head of the Bankruptcy Administration has the discretion to reduce this deposit or postpone it under certain circumstances, ensuring that financial constraints do not hinder the ability of debtors or creditors to seek legal remedies under the Bankruptcy Law. Nevertheless, such deposit may be problematic in practice, especially in relation to filings with large debts as the Executive Regulation does not specify a maximum cap for the deposit.

Voting Meeting on the Preventative Settlement Proposal

Article 9 of the Executive Regulation introduces additional essential terms and boundaries for conducting a meeting to vote on the preventative settlement proposal, complementing the provisions of the Bankruptcy Law, particularly Articles 69 and 73. These preventative settlement proceedings are unique as they are led by the debtor without the supervision of a trustee.

This Article is tailored to support the integrity of the bankruptcy process, ensuring that the interests of all stakeholders are protected during such debtor led proceedings. However, the effectiveness of such measures hinges significantly on their implementation and the proactive involvement of all parties.  Strict adherence to the outlined procedures is crucial for maintaining the transparency and fairness of the process.  By setting clear guidelines for the voting meeting, the Executive Regulation aims to foster a structured and equitable approach to preventative settlements, thereby enhancing the overall efficacy and reliability of the bankruptcy system.

Trustee’s approval of specific debtor activities during financial restructuring proceedings

The Executive Regulation has highlighted several debtor actions that necessitate prior approval from the trustee during Restructuring Proceedings. These actions include but are not limited to: (i) providing or renewing security to third parties, (ii) repaying debts, whether due or prematurely, (iii) establishing subsidiaries or investing in shares in other companies, (iv) transferring ownership of any part of the debtor’s assets, business, or funds beyond the debtor’s regular operational scope, and (v) relinquishing any legal claims or entering financial settlements.

This mechanism is designed to maintain transparency throughout the proceedings, safeguard all parties’ interests, and promote a structured approach to financial recovery. This level of control from the trustee may be deemed crucial for maintaining trust among creditors and supporting the debtor’s journey towards solvency.

Conclusion

The new UAE Bankruptcy Law, along with its recently published Executive Regulation, introduces significant improvements that streamline and clarify the bankruptcy and financial reorganization system. By establishing clear thresholds for initiating proceedings, outlining the duties of regulatory authorities, and providing access to essential information via the bankruptcy register, this regulatory framework not only protects the interests of all involved parties, but also facilitates the financial rescue of debtors.  These measures collectively contribute to fostering a more stable and transparent bankruptcy and financial reorganization landscape in the UAE.

How can we help?

If you have any queries related to the Bankruptcy Law and its Executive Regulation, please feel free to contact the key contacts below.