Firstly: Definitions : _
Bankruptcy is defined as: A term referring to the debtor who has been unable to settle his debt, and he deserves to be given an extension or granted an additional period for payment, in accordance with the saying of the Almighty, “And if someone is in hardship, then [let there be] postponement until [a time of] ease.” (Surah Al-Baqarah, 280).
Bankruptcy applies to individuals and civilians who are not classified as merchants, unlike those classified as merchants.
Bankruptcy is defined as the declaration by a commercial company or individual merchant that they are unable to meet their obligations to creditors. In such cases, they liquidate all their assets to pay off as much of these obligations as possible and then exit the market permanently.
Bankruptcy also occurs when there is a disturbance in the financial circumstances of the merchant, making them unable to meet their financial obligations, and they cease to settle their debts..
{ Bankruptcy is a condition that an individual trader may experience, as may commercial companies }
Therefore, it is evident that bankruptcy applies to ordinary individuals who are not classified as merchants, while insolvency applies to commercial activities and merchants.
According to the definitions provided in the UAE Commercial Transactions Law, a merchant is anyone who engages in commercial activities with full legal capacity. The term “merchant” also applies to a company established for this purpose, whether civil or otherwise, as long as it is established for commercial purposes.
Secondly: the laws governing both bankruptcy and insolvency :
The UAE legislator enacted the Bankruptcy Law for the first time in January 2020, which is the first law of its kind adopted by the UAE Cabinet to regulate cases of insolvency for non-traders. This was aimed at facilitating individuals’ needs and understanding their situations. Subsequently, it was amended in 2021 by virtue of Cabinet Resolution No. 47 of 2021 to specify the amount of debt that obliges the debtor to file for bankruptcy proceedings and liquidate their assets.
The UAE legislator also regulated various cases of bankruptcy through Federal Law No. 9 of 2016, aiming to protect the rights of traders and their creditors. This law was a step taken by the UAE to safeguard capital and encourage more flow and assurance by monitoring the necessary and appropriate mechanisms, ultimately leading to restructuring the debtor’s business or declaring it bankrupt.
Recently, Federal Decree-Law No. 51 of 2023 was issued to enact the Financial Restructuring Law, which came into effect in May 2024, concerning bankruptcy regulation.
Thirdly: the objective of insolvency and bankruptcy proceedings : _
The UAE legislator aims, through insolvency and bankruptcy laws and procedures, to enhance financial stability, which benefits society, including the following main objectives:
- Supporting individuals and companies facing current or anticipated financial difficulties by providing them with the opportunity to reorganize their debts, enabling them to reestablish their financial standing and contribute to supporting and developing the economy.
- Granting individuals and companies the opportunity to work and be productive again, and protecting them from legal actions through halting execution proceedings against debtors.
- Ensuring the rights of creditors and guaranteeing fair treatment for them, maximizing the value of debtors’ assets, selling them in an organized manner at an appropriate price, and ensuring fair distribution of proceeds to creditors upon liquidation.
- Settling financial obligations through one or more experts appointed by the court to prepare a settlement plan, coordinated between the debtor and creditors, within a period of three years.
Fourthly: Those entitled to Initiate Proceedings:
” Who has the right to file for bankruptcy insolvency “
The UAE legislator has granted every debtor who has ceased to pay any of their debts by more than 65 consecutive business days, excluding traders, and all those covered by Decree No. 47 of 2021 regarding insolvency, to apply for the commencement of insolvency proceedings, provided that the application is accompanied by all the documents specified in the aforementioned decree. The legislator also empowered creditors of an insolvent debtor to file a request with the court to claim the insolvency of their debtor.
However, the legislator has specified necessary conditions for creditors to file for their debtor’s insolvency:
- The creditor or group of creditors must have a debt value of not less than AED 1,000,000 ( one million dirhams ) before filing for the debtor’s insolvency.
- The creditor or group of creditors shall have previously issued a notice to the debtor to fulfill the debt within 65 consecutive working days, and the debtor failed to comply with the debt.
- The insolvency application shall be accompanied by all the documents specified in Decree No. 47 of 2021 regarding insolvency, as outlined in the “Creditor’s Right to File for Insolvency” section.
“Who has the right to file for Insolvency proceedings?”
The UAE legislator granted the right to file for Insolvency to those covered by Federal Law No. ( 51 ) of 2023 on insolvency, including anyone classified as a merchant according to the law, whether a natural person or a company. The law allows a merchant who has ceased to pay their debts for 60 days to file for bankruptcy. Additionally, creditors of a debtor trader have been granted the same right as the merchant, allowing them to file for their debtor’s insolvency if the debtor has failed to pay their outstanding debts for more than 30 working days. However, the legislator has set some specific conditions that creditors must fulfill to file for Insolvency of their debtor.
Firstly : the creditor or creditors shall have a debt value of not less than AED 100,000 ( one hundred thousand dirhams ) before filing for bankruptcy.
Secondly : the creditor shalll have formally notified the debtor in writing to settle the outstanding debt at least 30 working days before applying to initiate insolvency proceedings.
Therefore, when the conditions are met by the creditor or creditors, they can apply for bankruptcy declaration against their debtor, the merchant, following the legal process outlined for selling and distributing the debtor’s assets to settle their debts, including restructuring, financial organization, and until a bankruptcy declaration judgment is issued declaring the debtor’s insolvency.
Fifthly: The consequences of commencing insolvency or bankruptcy proceedings are as follows :
” The consequences of commencing Bankruptcy proceedings “
“The issuance of a judgement to commence Bankruptcy proceedings entails several consequences, including the following : _
- Bankruptcy allows companies to restructure their debts more efficiently. This means that companies can negotiate with creditors to reduce their debt burden and reach a more manageable repayment plan, thereby avoiding bankruptcy.
- The law provides companies with additional protection from creditors, as creditors are not allowed to take any action against them until the court approves the restructuring plan. This gives companies more time to negotiate with creditors and reach a repayment plan that suits both parties.
- The law also provides companies with more flexibility in restructuring their debts, allowing them to choose from a variety of restructuring options such as debt consolidation and debt restructuring …… etc.
- • Bankruptcy grants individuals the necessary time to arrange their financial affairs for up to three years, enabling them to settle their financial issues with creditors.
“The consequences of Insolvency “
The issuance of an Insolvency declaration results in several effects, including depriving other creditors from filing criminal suits against the onsolvent, and halting other lawsuits and proceedings brought against them, unless otherwise is stated by law, to achieve equality. In the case of individuals, the insolvent is prohibited from exercising all political rights, from membership in the Federal National Council, from holding a public office or position, and from being a member of the board of directors of federations and clubs …… etc.
Sixthly: Reasons for the Court’s dismissal of Bankruptcy or Insolvency Petitions :
The court maydecide to dismiss a case to initiate insolvency or bankruptcy proceedings if the debtor or the company fails to meet the aforementioned legal requirements, However, committing any of the following acts by the debtor may result in the dismissal of the petition and the rejection of initiating proceedings:
• The request to terminate the implementation procedures of the plan before completing the financial settlement with creditors.
• The debtor’s failure to implement a restructuring plan or settlement.
• The debtor’s evasion or attempt to evade fulfilling their obligations or hiding any part of their assets.
• If the debtor provides false information about their debts, rights, or assets.
” In Conclusion “
Due to the importance of insolvency and bankruptcy and their effects on both debtors and creditors, as well as the secondary creditors, and the significant benefits they offer to both the applicants and the state.
Therefore, Abdullatif Aljassmi Advocates and Legal Consultants offers its clients the following services :
- Represent parties involved in preventive settlements, restructuring in insolvency, and bankruptcy based on clients’ positions as creditors or debtors.
- Providing consultations regarding all insolvency and bankruptcy procedures.
- Offering negotiation and settlement services preceding bankruptcy procedures.
- Vigorous legal follow-up on asset liquidation processes.
- Defending the rights of clients in all stages of legal proceedings.