The eagerly anticipated Federal Law No. 9 of 2016 (or the “New UAE Insolvency Law”) came into force on 29 December 2016 and was positively received by the market as a welcome step forward towards a more effective insolvency regime for the UAE.
The old regime, embodied under the Commercial Companies Law, the Commercial Transactions Law and the Civil Code, was largely untested and was perceived by many to be administratively burdensome, slow and expensive with low recovery rates for creditors when compared with other jurisdictions with more developed insolvency regimes.
The New Insolvency Law draws upon the best practice of other established insolvency regimes and the ethos underlying the new legislation appears to be an emphasis on the rescue and rehabilitation of companies in financial difficulties rather than liquidation.
In favour of debtors, the new insolvency legislation applies to more types of entities within the UAE than the old regime and an additional balance sheet insolvency test has been introduced. In addition, a minimum threshold for commencing insolvency proceedings has been introduced, "bankruptcy by default" has been de-criminalised and there is a partial stay on criminal proceedings for bounced cheques, among other measures.
In favour of creditors, the New Insolvency Law introduces three clearly defined insolvency procedures: protective composition (a court supervised measure – akin to Chapter 11 in the United States - designed to rescue and rehabilitate companies in financial difficulties prior to the onset of insolvency), a court supervised restructuring scheme for companies in insolvency, as well as liquidation.
By contrast to an earlier draft of the legislation, the New Insolvency Law which has come into force does not provide for an out-of-court financial re-organisation process and the regime is instead still very much court-driven.
This means that the success of the legislation will largely depend on the ability of the UAE Court system, its judges and the cadre of court-appointed experts to implement the new law effectively. There is likely to be a significant administrative burden placed on the Courts and perhaps a need for the recruitment of additional judges and other experts to manage the extra workload. In addition, the judges, legal practitioners and the court-appointed experts will need extra training in the new law and its procedures and time to develop best practices within the framework of this new legislation.
As 2017 progresses, we may observe how the New UAE Insolvency Law is applied by the UAE Courts in practice and whether the positive legislative reforms aimed at promoting a rescue and rehabilitation culture in the UAE are fully realised.
Authors: Nicholas Robinson, Matthew Escritt