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:
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.
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.
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.
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:
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