The UAE legislative framework provides for the use of protective compositions or arrangements made between the debtor and creditors which are modelled loosely on the French safeguard procedure. Such schemes allow the debtor to avoid the consequences of an adjudication of its bankruptcy.
Preventive Composition is a debtor-led, court-supervised procedure available to a debtor who is i) in financial difficulties but not yet insolvent or ii) has been insolvent (under either of the tests mentioned above) for a period of less than 30 consecutive business days. The procedure aims to facilitate the rescue of a business by helping a debtor reach a settlement with its creditors.
An application for Preventive Composition can be made only by the debtor or ordered by the court. The procedure will not be available where the debtor has already entered into such a procedure within the past year, or the debtor has already entered bankruptcy proceedings. The composition application must include detailed information on the debtor, including an overview of its financial situation, assets, employees, creditors and debtors, copies of financial books and statements, proposals for preventive composition and selection of a trustee to carry out the procedure. A shareholders' resolution approving the application for Preventive Composition must also be submitted.
A court-appointed expert will then prepare a report on the financial position of the debtor, determining whether the necessary conditions have been met, including whether the debtor has the funds to cover the costs of the procedure. If the court accepts the debtor’s application, the debtor will be placed under the supervision of a court-appointed expert – or trustee – and all bankruptcy proceedings, other claims and enforcement actions relating to the debtor are automatically stayed. Creditors with specific security are required to obtain court approval in order to make, or continue to make, claims against the trustee in relation to the specific assets over which they hold security. Once appointed, the trustee will publish the court’s decision and invite creditors to submit their claims within 20 working days.
The procedure allows the debtor an initial period of 45 working days from publication of the court’s decision to submit a draft preventive composition plan (this period may be extended by application to the court). The draft plan should outline the debtor’s proposals along with the likely chances of success and a timeline for implementation which must not exceed three years (although the period may be extended for another three years with majority creditor approval).
Once the plan has been reviewed by the court and permission has been granted to convene creditors' meetings, the plan is then voted on by creditors. All creditors whose debts have been accepted by the court may vote. For the composition to be approved, a majority of creditors must vote in favour of the arrangement, provided that such majority represents at least two-thirds of the total debt by value.
Where the relevant threshold is achieved, all unsecured creditors (secured creditors are not allowed to vote unless they have relinquished their security) will be bound by the composition whether or not they participated or took part in the vote for the adoption of the composition. Secured creditors will only be bound by the composition if they relinquished their security rights and expressly voted in favour of it.
During the composition period, the debtor retains the right to continue running the business under the supervision of the trustee who, if required, has wide ranging powers to act on behalf of the debtor in relation to preservation of assets, dealing with claims and any other actions required to achieve the purpose of the procedure.
Other useful tools under the composition procedure include:
- prevention of insolvency related contractual termination by the debtor’s counterparties;
- the ability to raise priority funding on a secured or unsecured basis in order to allow the business to continue during the composition process although the court will have to approve any arrangement that has the potential to affect the position of any existing secured creditors; and
- provision for appointment of a creditor-led supervisory committee to monitor the implementation of the composition plan although the fact that no fee may be paid to the committee members for performing this role may prove an obstacle to their formation.
These additional tools are clearly influenced by equivalent provisions in US insolvency law.
Failure to comply with the terms of the composition may lead to nullification and an order by the court to convert the proceedings to bankruptcy and liquidate the debtor’s assets. Further, the composition may be annulled for any fraud by the debtor. Otherwise, the composition ends once the debtor has honoured all of its obligations.