Managing the Coronovirus-Crisis: Bankruptcy

12 April 2020

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By: Marcel Trost

The outbreak of Coronavirus (COVID-19) has caused a massive impact on global supply chains, manufacturing, and cross-border trade. Coupled with the travel restrictions and government lockdowns, businesses have been affected. This has, in turn, led to cash flow disruptions for businesses. Due to this cash flow disruption, it is expected that businesses would default their payment obligations. This article answers relevant questions pertinent to measures that can be adopted in such circumstances as per the UAE Laws.


1. How could Bankruptcy Law be of assistance?

Federal Decree Law No. 9 /2016 on Bankruptcy (“Bankruptcy”) came into effect on 29 December 2016. The Bankruptcy Law aims to provide businesses with financial difficulties the means to engage with their creditors whilst ensuring accountability for directors of failed businesses.

The Bankruptcy Law applies to entities incorporated in the mainland and free zones which do not have their own bankruptcy laws. As such, the Bankruptcy Law does not apply to entities located in DIFC or ADGM.


2. What recourse is available under the Bankruptcy Law? 

The Bankruptcy Law provides companies with two options, namely:

  1. Preventive Composition Scheme – which permits a company in financial difficulties to reach an arrangement with its creditors instead of filing for bankruptcy.
  2. Bankruptcy – which includes rescue process similar to Preventive Composition Scheme, followed by liquidation of debtor’s assets.

The Bankruptcy Law provides two tests to determine if a company is insolvent, namely a balance sheet test and cash flow test. The balance sheet test is applicable if the assets of the debtor are, at any time, insufficient to cover its debts. The debts to be considered are debts actually due and payable, rather than contingent or prospective liabilities. The cash flow test applies when a debtor is unable to pay its debts.

Preventive Composition Scheme

The concept of preventive composition scheme is based on the French safeguard model. The procedure allows a debtor to reach an arrangement with its creditors and avoid bankruptcy. It is worthy to note that preventive composition scheme is a recourse only available to the debtor. It can either be initiated by the debtor itself or the court. The conditions to apply for preventive composition are that the debtor has not been insolvent or has been insolvent for a period of less than thirty (30) consecutive business days. The option for preventive composition scheme ceases to exist where the debtor has already entered into bankruptcy proceedings or into a preventive composition scheme within the past year.

  • Upon filing an application for the preventive composition scheme, the court appointed expert determines whether the conditions for preventive composition scheme have been met by the debtor and the debtor’s ability to fund the preventive composition scheme.
  • Upon the approval of the application for the preventive composition scheme, all actions filed by creditors against the debtor, any enforcement proceedings are automatically suspended, and the debtor is put under the supervision of the court appointed expert. Secured creditors are, however, exempted and may continue pursuing their claims, subject to permission from the court.
  • The debtor is then required to present a preventive composition plan which must not exceed a period of three (3) years, unless approved by majority of the creditors.
  • Upon the approval of the plan by the court, it must be approved by a two-thirds majority of the creditors, whose debts has been acknowledged by the court.

The underlying benefits of the preventive composition scheme are that the debtor can continue to manage its business, although it is under the supervision of the court-appointed expert. Most importantly, the counterparties cannot terminate the contracts based on insolvency-related provisions in the contract. It may also be possible to obtain funding to keep the business afloat.


Bankruptcy is a two-step process which involves a process similar to the preventive composition scheme which is followed by liquidation of debtor’s assets. Bankruptcy proceedings can be initiated by the debtor itself, public prosecutor, court or a creditor or group of creditors holding ordinary debts of at least AED 100,000 which have issued a written demand for repayment which has not been satisfied within 30 consecutive business days.

  • Upon the submission of bankruptcy application, a court-appointed expert determines the whether the conditions for bankruptcy have been met and if the assets are sufficient to meet the costs of the procedure.
  • Upon approval of the bankruptcy application, the management of the company is taken over by the court-appointed expert, which is also tasked to submit a report detailing the possibility of restructuring as well as a restructuring plan. The report is then shared with the creditors for their comments.
  • Upon submission of the report to the court, the court determines whether to proceed for restructuring or liquidation. Should the court decides to proceed with restructuring, the procedures mentioned for the preventive composition scheme mentioned above would apply except for the fact that the time period for such restructuring / preventive composition scheme may be longer than three years.

The purpose of liquidation is to sell a company’s assets in order to meet its liabilities. The process is carried out by a court-appointed liquidator. It is worthy to note that if bankruptcy liquidation, it is found by the court that the assets of the debtor are not sufficient to pay at least 20% of its debts, the court may order all or part of the directors, jointly or severally, to pay all or part of the debt of the debtor in the event that they are held liable for the loss of the company.


3. What documents are required in order to file an application?

In order to file for either preventive composition scheme or bankruptcy, the debtor must submit, among other documents, a brief description of its economic and financial position, details of its properties, employees, creditors, cash flow, profit, and loss projections.

For preventive composition scheme, a shareholders’ resolution approving the application must also be submitted to the court.


4. Conclusion

Particularly, in light of the current COVID-19 crisis, the UAE Bankruptcy Law provides practical solutions to protect businesses which are facing financial difficulties. It is vital that managers, directors, shareholders and other stakeholders should:

  • assess the company’s obligations and its ability to meet such obligations;
  • make themselves aware of the provisions of the bankruptcy law;
  • seek legal advice to ascertain the recourse available to them; and
  • not leave it until too late in order to avoid personal liability.



Marcel Trost

Managing Partner GCC | Co-Founder

+971 (0)2 694 8562 | |

Germela Law LLP | Al Sila Tower, 24th Floor | Abu Dhabi Global Market Square | Abu Dhabi | United Arab Emirates