UAE Bankruptcy Law: A New Era in Financial and Legal Governance

UAE Bankruptcy Law

The Financial Reorganisation and Bankruptcy Law by Federal Decree Law No. 51 of 2023 (the "Bankruptcy Law"), that comes into effect from May 1, 2024, brings about a whole new dimension to the legal and financial governance in the UAE. The Executive Regulation that the UAE Cabinet Resolution No. 94 of 2024 represents has finally provided businesses and stakeholders with the kind of procedural and substantive clarity regarding the Bankruptcy Law. This article therefore explores the salient updates and their implications occasioned by the Executive Regulation, considering the backdrop of recent developments.

Supervisory Entities

One of the biggest reforms given through the Bankruptcy Law is formalizing the central UAE Bank and Securities and Commodities Authority, as Supervisory Entities. These institutions already exercise supervisory power but the Executive Regulation solidifies them in bankruptcy cases involving their jurisdictions.

Effects on the Financial Markets

This is anticipated to enhance trust in the overall financial environment in the UAE. Supervisory Bodies will conduct processes of bankruptcy or restructuring. Their transparency and stability will, most notably be realized in the fields of insurance, finance, and securities. Now entities regulated by the bodies enjoy an oversight process whose definition removes doubts during distress within the financial environments.

Bankruptcy Register

The Bankruptcy Law requires the existence of a central bankruptcy register, to be administered by the Financial Reorganisation and Bankruptcy Unit. The Executive Regulation details the types of data that are to be entered, for example, applications filed and measures taken under the law. The regulation also defines the criteria for accessing the register.

Access Criteria

Interested parties must apply in writing for access to the register stating their purpose and the information being sought. Approval from the Minister of Justice or his or her representative is required. This method balances openness with privacy so that stakeholders, including creditors, may obtain relevant information without compromising sensitive information.

Thresholds for Filing Procedures

The Executive Regulation sets new minimum debt thresholds for opening insolvency procedure while gearing the system towards prioritizing major cases. Here is how it is set:

Debtor-Led Process

1. Natural Persons

A minimum amount of AED 300,000 unpaid.

2. Legal Persons

 Minimum debt amount of AED 500,000.

Creditor-Led Process

Creditors can now apply for starting a procedure against:

1. General Debtors - AED 1,000,000.
2. AED 10,000,000 for entities regulated by the UAE Central Bank or the SCA.

Secured Creditors

1. Individual applications require securities valued below AED 1,000,000.
2. Group applications require a minimum of AED 5,000,000.

Regulatory Process

Supervisory Entities can initiate proceedings if the debtor's debt exceeds AED 500,000.

Implications

The higher thresholds mean that the courts will conserve their resources for significant and complicated cases. Small-value debts are less likely to cause insolvency, and businesses can handle minor financial setbacks on their own.

Initial Payment to Start Procedures

Debtors or creditors must pay 5% of the debtor's debt or assets as a guarantee to the Bankruptcy Court to start the insolvency process. This fund pays for court costs at the beginning.

Flexibility Provisions

The President of the Bankruptcy Administration may waive or reduce this deposit in cases of financial hardship or if initial procedures are cost-free. This flexibility ensures that financial distress does not become an impediment to accessing the judicial process.

Procedures for Small Debtors

Recognising the unique challenges faced by small debtors, the Bankruptcy Law introduces streamlined procedures. The Executive Regulation defines small debtors as follows:

1. Individuals

Assets less than AED 1,000,000.

2. Legal Entities

Assets less than AED 2,000,000.

Simplified Procedures

The Bankruptcy Court may apply simplified procedures for small debtors, allowing for quicker preventive settlements, restructuring, or bankruptcy. This simplification relieves the procedural burden on small businesses and creates a friendly environment for entrepreneurs.

Key Changes for 2025

1. Improved Digital Infrastructure

In line with the digital transformation goals of the UAE, the bankruptcy register will be integrated with a secure online platform by mid-2025. The platform will enable stakeholders to file applications, receive case updates, and communicate with the court electronically, thereby reducing administrative delays.

2. Focus on ESG Considerations

The Executive Regulation emphasizes the importance of taking into account ESG factors in restructuring plans. The debtors will now be required to include ESG assessments in their proposals, in line with global trends toward sustainable business practices.

3. Training for Insolvency Practitioners

The UAE is conducting training sessions for insolvency practitioners to enable them to meet the demands of the new law. All licensed practitioners will have to undergo the courses by the end of 2025.

4. Cross-Border Insolvency

The UAE is negotiating bilateral agreements with the country's trading partners to reduce the complexity in cross-border insolvency cases. It seeks to settle jurisdictional issues and increase collaboration in international bankruptcy cases.

5. Balancing Stakeholder Interests

The Executive Regulation represents a balanced approach, addressing the concerns of debtors, creditors, and the judiciary. By increasing debt thresholds, the law ensures that only significant cases reach the courts. Simultaneously, small debtors benefit from simplified procedures, reflecting a commitment to equitable treatment.

6. Creditor Protections

The revised framework provides creditors with greater access to information through the bankruptcy register and ensures their interests are safeguarded during insolvency proceedings.

7. Support for Debtors

 Debtors gain clarity on their rights and obligations with streamlined processes, thereby reducing the financial and administrative burden during bankruptcy.

Conclusion

The Federal Decree Law No. 51 of 2023 and its Executive Regulation of the UAE are a landmark in the country's insolvency regime. The law aims to balance the goals of promoting economic resilience with ensuring fairness by improving supervisory oversight, increasing debt thresholds, and implementing streamlined procedures for small debtors. The UAE cements its position as an investment and business hub for all of the globe as businesses transform to the new framework. On-going updates within 2025, such as digital enhancements and cooperation across borders, will position this bankruptcy framework for a benchmark legal and financial government.