00:00Preventive Settlement and Restructuring Procedures
00:03Under the UAE Bankruptcy Laws
00:06Running a business involves taking risks in order to continue to scale new grounds.
00:12Sometimes these risks may not be successful, leading to debts.
00:16Even without risks, debts may be incurred as a result of not being able to generate profits due to the changing market trends.
00:23Thus, loss in business and falling into debts are a common and universal factor in the business world.
00:29Debts may exist throughout the course of running a business and are not necessarily a negative indication on the status of the business.
00:37However, one has a legal duty to discharge debts towards another.
00:41Neglected or ignored debt may eventually sink a business leading to insolvency,
00:46and the legal liability of the debt will fall on the owners, directors, and the shareholders of the business,
00:52depending on the legal structure of the business entity, insolvency and bankruptcy.
00:58The terms insolvency and bankruptcy are often used interchangeably.
01:03Although related, the terms have distinct meanings.
01:06Insolvency refers to the financial state wherein a legal or a natural person is unable to discharge his debts.
01:12Bankruptcy refers to the particular legal procedure initiated by the person after becoming insolvent.
01:18Although bankruptcy can follow insolvency, it is not the only available solution to an insolvent person.
01:24In the UAE, insolvency of natural persons is regulated by Federal Decree Law No. 19 of 2019 on insolvency,
01:36while insolvency of non-natural persons, i.e. entities that acquire the status of legal persons and natural persons in the capacity of a trader,
01:45is governed by the Federal Decree Law No. 51 of 2023, promulgating the Financial Reorganization and Bankruptcy Law,
01:55popularly known as the Bankruptcy Law.
01:57Entities outside the purview of bankruptcy law, the Federal Decree Law No. 51 of 2023,
02:04popularly referred to as the Bankruptcy Law of the UAE,
02:08governs the conditions under which a legal entity will obtain the status of insolvency
02:13and regulates the steps that are to be taken in such a scenario.
02:16However, the provisions of this law do not apply to the following.
02:22Companies wholly or partly owned by the government that have their own governing rules and regulations
02:27relating to preventive settlement, restructuring, or bankruptcy procedures.
02:33Entities in free zones that have special rules relating to preventive settlement, restructuring,
02:39or bankruptcy procedures.
02:41Banks, financial institutions, and insurance companies licensed by the central bank debts
02:47covered that are related to personal, family reasons,
02:50including the purchase of goods or services,
02:53or the purchase of a property for his own residence or for his family.
02:57Bankruptcy Court
02:58Article 5 of the Bankruptcy Law provides for setting up of bankruptcy courts in the UAE
03:05that will handle bankruptcy proceedings in the country
03:08with the assistance of experts and auditors.
03:11The law also provides for the establishment of the financial reorganization and bankruptcy unit
03:17that will deal with the administrative aspects of the bankruptcy laws,
03:21including record-keeping, approval of the roster of experts,
03:26coordination with the judicial authorities, and the ministry, etc.
03:30As per Article 8 of the law, decisions by the Bankruptcy Court will be deemed to be a writ of execution
03:39enforceable immediately.
03:42Faced with the inability to repay the debts borrowed as a result of doing business,
03:46many choose to initiate bankruptcy proceedings.
03:49This process involves the settlement of all debts by liquidating the business and all its assets
03:54and distributing the liquidation proceeds to the creditors.
03:58Thus, this process involves halting the business completely and dissolving the entire business entity.
04:05To prevent the complete termination and liquidation of the business,
04:09debtors have certain legal avenues that they may utilize in the event of an insolvency.
04:14The Bankruptcy Law thus provides for preventive settlement and restructuring procedures,
04:18both aimed at supporting the continuation of the business while formulating a plan that will help in the settlement of debts.
04:25Preventive Settlement
04:26This procedure helps the debtor continue running his business or any commercial activity
04:32and simultaneously paying his debts.
04:35The procedure of preventive settlement is approved and supervised by the Bankruptcy Court.
04:39As per Article 56 of the law, a debtor is eligible to initiate preventive settlements
04:45if he is unable to repay his current debts or anticipates the inability to repay debts in the future.
04:51Article 15 stipulates 60 days from the date of cessation of payment of debt
04:56or from the date when the debtor acquired information indicating the inability to pay its debt
05:01as the time within which the debtor may initiate proceedings.
05:04As per Article 66, the preventive settlement proposal will include the following.
05:101. The debtor's business plan and viability of business.
05:132. A list of the names of all creditors and debtors, their contact information, value of the debt and guarantees, if any.
05:223. Any terms and conditions for the settlement of any obligation.
05:264. Any guarantees by the debtor for the proper implementation of the proposal.
05:325. Any offer to purchase the debtor's assets, in whole or in part, on the basis of an ongoing activity.
05:396. Any grace periods and payment discounts, if available.
05:447. Details on whether the debt can be converted into shares or stock in the capital of any company or project.
05:518. If the holders of the secured debts agree, details on any guarantees that can be created, redeemed, consolidated, sold, or replaced.
06:009. Suggested period for payment of debt.
06:0310. The extent of financing required by the debtor during this period.
06:0811. The mechanism that will be implemented to update the creditors on the proposal.
06:1312. Any other information that the debtor deems will be useful in implementing the preventive settlement proposal.
06:2013. A comparison on the rights that the creditors will obtain, with the implementation of the preventive settlement plan, and without the implementation of the plan.
06:3113. Effect of preventive settlement, as per Article 58.
06:3514. Once the decision to initiate preventive settlement has been issued by the bankruptcy court,
06:40the debtor may carry on his business activity as usual, and in a way that does not harm the interests of the creditors.
06:4715. But he must not carry out any activities outside the scope of his normal business without obtaining the approval of the court.
06:5416. Once the proceeding has been initiated, a claims moratorium will be imposed for three months,
07:00and the court may extend this period one or more times, provided that the period does not exceed six months.
07:0516. Preventive settlement process neither results in the maturity of debts against the debtor,
07:11nor does it indicate the suspension or cancellation of interests on the debts.
07:1517. However, the process allows the debtor to obtain bank loans and other types of financing,
07:20with or without guarantees, as per the directions of the court.
07:2517. Restructuring procedures.
07:2718. According to Article 87, similar to the requirements under the preventive settlement procedures,
07:34a debtor is eligible to initiate restructuring procedures if he has stopped the repayment of debts
07:39or if he is in a financial deficit, which may result in the inability to pay his debts in the future.
07:45Article 15 specifies a period of 60 days from either the stoppage of debt payment
07:50or the date the debtor becomes aware of their incapacity to fulfill the debt,
07:55within which debtors apply to initiate the proceedings.
07:58Once the court approves the application to open a restructuring proposal,
08:02it will appoint a trustee to oversee the process as per Article 36.
08:06Article 108 lists out the requirements for the restructuring proposal,
08:11which is in line with the proposal requirements under Article 66 pertaining to the preventive settlement process.
08:18Effect of Initiation of Restructuring Procedure.
08:22As per Article 89, after the initiation of the restructuring process,
08:27the debtor may continue its business activities and management of its assets under the supervision of a trustee.
08:33The business must be carried out in a way that does not hamper the interests of its creditors,
08:38unless decided otherwise by the court.
08:40The appointed trustee can gather all necessary information or documents regarding the debtor's debts,
08:46business, or assets, and may monitor the latter's financial operations.
08:50Furthermore, according to Article 90,
08:53the bankruptcy court may decide that the trustee must take over the management of the business
08:58and issue an order accordingly on the request of the trustee,
09:03one of the creditors, or the Financial Reorganization and Bankruptcy Unit.
09:08Article 92 states that initiation of the restructuring process
09:12will result in claims moratorium against the debtor
09:16in relation to the debtor's assets and liabilities
09:19from the day following the date of acceptance of the restructuring procedure
09:23until the date of ratification of the restructuring plan.
09:26The law does not provide any other restriction on this time period.
09:30The provisions regarding preventive settlement and restructuring procedures
09:34provide business entities a way to restructure its debts
09:37and formulate a business plan with an aim to repay its debts
09:40while also keeping the business alive.
09:43If the process is unsuccessful,
09:45bankruptcy proceedings will be initiated against the entity
09:48that will liquidate the business and settle the debts
09:51to the extent of the entity's available assets.
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