The New Bankruptcy Law in the UAE and the Establishment of the Bankruptcy Court: Financial Restructuring and Creditor Protection

Overview of the New Bankruptcy Law

The new bankruptcy law represents a proactive step towards modernising the framework governing corporate distress. At its core lies the concept of "preventive settlement" and restructuring, which allows entities facing financial difficulties to propose sustainable plans to restructure their debts under judicial supervision, thereby preventing immediate liquidation, preserving jobs and economic value, and reinforcing investor confidence. The new law has repealed Federal Decree-Law No. 9 of 2016, while its regulations and decisions remain in force until they are replaced.

Preventive Settlement and Restructuring

The preventive settlement mechanism allows a distressed entity to begin organised negotiations with its creditors to reorganise its financial and operational affairs under the court's supervision, with the debtor potentially retaining management of its business during the procedure unless the creditors' interests are harmed. This approach balances the interests of the debtor and the creditors, enhances transparency and cooperation in resolving financial difficulties, and paves the way for the resumption of business activity and sustainable growth. "Preventive settlement" has replaced the "preventive composition" tool of the prior law.

Mediation and Out-of-Court Settlements

The law encourages dialogue and negotiation between the debtor and the creditors to reach amicable out-of-court solutions before resorting to formal proceedings. The effect of this approach is not limited to speeding up the resolution of disputes; it also fosters cooperative, less adversarial agreements of mutual benefit to both parties, reducing the need for judicial intervention and preserving the commercial relationship.

Debt Settlement and Orderly Liquidation

Where restructuring cannot be sustained, the law provides clear principles for debt settlement and orderly liquidation, allowing the debtor to liquidate assets responsibly or to restructure debts, while ensuring a fair distribution of proceeds among the creditors. The introduction of organised, predictable procedures reflects the country's commitment to international best practices, thereby reducing disruption to economic activity.

Protection of Creditors' Rights

The law gives the protection of creditors central importance through strong procedural safeguards and strict principles for the distribution of assets during bankruptcy proceedings, aiming to prevent preferential treatment and to ensure fair outcomes for all parties. It also expands the scope of management liability to include any person who undertakes the actual management of the company for harmful acts, and in certain cases allows secured creditors to enforce against the secured assets through the bankruptcy court.

Establishment of the Specialised Bankruptcy Court

The Bankruptcy Court

The law establishes a specialised judicial division (the "Bankruptcy Court") that oversees preventive settlement, restructuring and bankruptcy proceedings and resolves complex financial disputes. Its decisions are writs of execution that are immediately enforceable, and claims pending under the prior law are transferred to it without fees.

Alongside the court, the law has established the "Financial Restructuring and Bankruptcy Unit" within the Ministry of Justice, which handles administrative aspects and gives opinions on applications, and maintains a bankruptcy register in which applications and judgments are recorded — reinforcing the centralisation of expertise and procedural efficiency.

Infographic: The Treatment Path and the Law's Pillars

The path for treating distress under the new bankruptcy law

1Financial distress and filing the applicationThe entity ceases to pay its debts and submits a settlement or bankruptcy application to the Bankruptcy Department within the prescribed period.

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2Mediation and negotiationOpening channels of dialogue and negotiation with the creditors to seek an amicable out-of-court settlement.

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3Preventive settlement and a restructuring planProposing a plan to restructure the debts under the supervision of the Bankruptcy Court, balancing the interests of the parties.

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4Resuming activity (on success)Implementing the approved plan and resuming business activity while preserving economic value and jobs.

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5Orderly liquidation (where not feasible)Where sustainability is not feasible, liquidating the assets in an orderly manner and fairly distributing the proceeds among the creditors.

Pillars of the New Bankruptcy Law

Bankruptcy CourtA specialised division with immediately enforceable decisions.

Preventive SettlementRescuing the entity before immediate liquidation.

MediationFaster, less adversarial amicable settlements.

Creditor ProtectionFair distribution and prevention of preferential treatment.

Unit and Bankruptcy RegisterCentral administration and a register of applications and judgments.

International StandardsAlignment with global best practices.

Key Differences Between the New Law (51/2023) and the Prior Law (9/2016)

Implications for Economic Stability and Growth

The law enhances confidence among local and international investors through a comprehensive framework for managing corporate distress, thereby facilitating access to capital and encouraging entrepreneurship. By focusing on restructuring and debt-resolution mechanisms, it supports the resilience of entities and stimulates a dynamic business environment capable of withstanding economic fluctuations, cementing the country's standing as a trustworthy destination for business and investment.

The Lawyer's Role in Bankruptcy and Restructuring Cases

The lawyer plays a pivotal role at every stage of treating distress, beginning with assessing the entity's financial and legal position and determining the most appropriate procedure (preventive settlement, restructuring or bankruptcy), through preparing and submitting the applications and documents to the Bankruptcy Department within the prescribed deadlines, negotiating with creditors and drafting restructuring plans, and representing the debtor or creditor before the Bankruptcy Court, up to protecting the client's rights and following up the enforcement of decisions. The lawyer also provides preventive advice to limit the risks of management liability and to preserve the entity's economic value.

Key Legal Periods and Deadlines

Practical Legal Tips

Legal References

Frequently Asked Questions

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