The UAE Bankruptcy Law: Stepping up to the challenges raised by the COVID-19 crisis

With the significant strain placed on market participants as a result of the combined impacts of the global COVID-19 pandemic, the oil price war and the ensuing liquidity and credit crunches, we expect that a number of enterprises in the United Arab Emirates ("UAE") will either be forced to carry out restructurings or otherwise undergo formal court-supervised insolvency processes. As a response to the 2008 Global Financial Crisis (which highlighted that the previous UAE insolvency regime was not adequate in that it did not provide a robust framework for the rescue of distressed businesses), and in line with the UAE Government’s push to modernize its business legal framework, the UAE overhauled its bankruptcy regime on December 29, 2016 with the introduction of the New UAE Bankruptcy Law (the "Bankruptcy Law").

For the business community and legal practitioners, the Bankruptcy Law was a welcome change as it has streamlined the insolvency procedures available for UAE enterprises in line with international best practice (with certain key elements of the Bankruptcy Law being inspired by modern French insolvency law mechanics and the US bankruptcy regime). Generally, the Bankruptcy Law has destigmatized business failure with a greater focus than previously on turnaround and rescue whenever possible whilst maintaining a high degree of accountability for directors of troubled businesses.

Thus far, the Bankruptcy Law has only been anecdotally applied to a fairly small number of low profile insolvencies but is now likely to be tested on a larger scale both in terms of numbers and size of debtors affected by insolvency proceedings under the Bankruptcy Law. Against this backdrop, this alert is a refresher of some of the key features of the Bankruptcy Law and potential areas of concerns for debtors, their directors and their shareholders (including private equity sponsors who have injected cash in local UAE enterprises).

Application of the Bankruptcy Law

The Bankruptcy Law mainly applies to commercial companies governed by the Commercial Companies Law (Federal Law No.2 of 2015) (that is, generally speaking for-profit commercial enterprises), however, the scope of its application is much wider, as reflected in the below chart:

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