Bankruptcy in the UAE

The most common perception about bankruptcy in the UAE is that it needs change. But what does this change mean? The government is planning to introduce a new law to reform bankruptcy and insolvency proceedings. The reason for a new law is that the government aims to foster the growth of small and medium sized enterprises. But what are the current regulations? This month, Freemont Group invites you to read the current regulations related to bankruptcy in the UAE.

Bankruptcy in the UAE – Regulations

First, there is one law that is UAE Law No. 18 of 1993 ‘Concerning Commercial Transactions providing a framework for the bankruptcy of persons engaged in trade. Part Five of the Commercial Transactions Law sets out provisions dealing with the bankruptcy procedure for traders who cease to pay their debts. To apply the law, one should be familiar with the definitions of bankruptcy and trader.

Based on Section 1 of Article 645 of the Commercial Transaction Law, bankruptcy can be defined as a condition where a trader fails to pay his commercial debts when due because of financial distress and credit issues. Moreover, UAE Courts constantly endorse the definition of bankruptcy in Article 645. The Federal Supreme Court has held: “A trader is subject to bankruptcy provisions if he is unable to pay his debts.” i.e. his debts must exceed his financial capacity. ‘The Federal Supreme Court has also confirmed that a trader’s financial distress would warrant a declaration of bankruptcy.

As per Article 11 a person filing for bankruptcy must be a trader in the sense of being engaged in a commercial activity either as an individual or as a corporate entity. Above all this aspect is vital because individuals who are not engaged in trade or a commercial activity may also become unable to pay their debts due to insufficient financial means. Being non-traders, these individuals are not subject to the Commercial Transactions Law but rather to insolvency provisions of Law No. 5 of 1984 ‘Concerning Civil Transactions’. This is because a non-trader, who is unable to pay his debts is considered to be in a state of insolvency, not bankruptcy.

Three Conditions for Bankruptcy:

• Only a trader can apply to be a bankrupt;
• The debtor must have ceased paying his commercial debts;
• Bankruptcy must be declared by order of the court.

Termination of Bankruptcy

There are two conditions for the termination of bankruptcy. First, Article 762 of the Commercial Transactions Law stipulates that bankruptcy is terminated after the schedule of debts referred to in Article 757 of the law has been satisfied. These debts would be uncontested and evidenced by proper documentation. At this stage, the debtor may apply for the bankruptcy judge for termination.

Second, Bankruptcy is also terminated on the approval of a deed of arrangement, after the bankruptcy judge invites creditors whose debts have been provisionally or finally accepted to attend negotiations on the deed of arrangement under – Section 1 of Article 764 of the Commercial Transactions Law.