On May 1, 2024, Federal Law Decree No. 51 of 2023 on Financial Restructuring and Bankruptcy (the “New Bankruptcy Law”) took effect, replacing Federal Decree-Law No. 9 of 2016 (the “Old Bankruptcy Law”). Although much of the structure from the previous law remains intact, the new legislation introduces significant updates, especially regarding how insolvency laws in the UAE is determined and the obligations of debtors and creditors. This article explores the procedures for company liquidation, the consequences of bankruptcy or insolvency, and strategies to prevent insolvency. 

Procedure for Liquidating a Company 

Under the New Bankruptcy Law, companies facing financial distress may pursue liquidation if other forms of restructuring are not feasible. Below is a step-by-step outline of the process: 

Filing for Bankruptcy 

The debtor (company or individual trader) or a creditor can initiate bankruptcy proceedings by filing an application with the Bankruptcy Department. The law permits a debtor to file for bankruptcy within 60 days from the date it ceased making payments or became aware that it could no longer pay its debts when they fall due. Creditors can also initiate proceedings if their claims meet the statutory threshold and are unconditional, undisputed, and payable. 

Court Involvement 

Once the application is accepted, the court will assess the debtor’s financial condition. A court-appointed trustee will oversee the bankruptcy process, including identifying and liquidating the company’s assets to satisfy creditors. 

Moratorium on Claims 

Upon initiating bankruptcy proceedings, the court issues a moratorium that halts any enforcement actions by creditors, giving the debtor breathing space. During this period, no legal action can be taken to recover debts unless explicitly allowed by the court. 

Liquidation of Assets 

If the court determines that liquidation is the best course, the company’s assets are sold, and the proceeds are distributed among creditors in accordance with the priority of claims. Secured creditors are typically paid first, followed by unsecured creditors. 

Discharge or Insolvency Order 

Upon completion of the liquidation process, the court may issue an order discharging the debtor from further liabilities or declare the company insolvent. In the latter case, the company is officially closed, and any outstanding liabilities that cannot be satisfied are extinguished. 

For more details on the step by step procedures for liquidating a company please see our article Liquidating a Company under UAE’s New Bankruptcy Law: A Step-by-Step Guide 

This blog is a part of our Insolvency and AML Compliance Services.

Consequences of Bankruptcy or Insolvency 

Bankruptcy and insolvency laws in the UAE have far-reaching legal, financial, and reputational consequences. Below are the key implications for businesses and individuals: 

Loss of Control Over Company Operations 

Once bankruptcy proceedings are initiated, the debtor’s management loses control over the company’s operations. A trustee or liquidator assumes responsibility for managing or liquidating the company. 

Legal Actions and Restrictions 

The initiation of insolvency proceedings triggers various legal restrictions. Directors and managers of the company may face investigations to determine if any wrongful trading or fraudulent activities occurred before filing for bankruptcy. If found guilty, they could face civil or criminal penalties. 

Impact on Credit Rating and Market Confidence 

For companies, bankruptcy results in a damaged credit rating, making it difficult to secure future financing or re-enter the market. Individuals, especially traders, may face similar credit constraints and restrictions on future business activities. 

Termination of Contracts and Employment 

Bankruptcy can lead to the automatic termination of certain contracts, such as leases or supply agreements. Employees may also lose their jobs unless the company undergoes restructuring rather than liquidation. 

Personal Liability for Directors and Traders 

Directors or individuals engaged in wrongful or negligent trading may be held personally liable for the company’s debts. Traders operating as sole proprietors may have their personal assets liquidated to repay business debts. 

To understand the impact of bankruptcy and to avoid such implications on the business, the consequences of bankruptcy can be viewed here.How Bankruptcy and Insolvency Impacts Businesses and Leaders

Preventing Bankruptcy or Insolvency 

The New Bankruptcy Law emphasizes early intervention and offers several mechanisms to prevent insolvency, allowing companies to avoid full liquidation. Below are strategies that distressed companies and individuals can pursue: 

Preventive Settlement Procedures 

This procedure allows debtors to negotiate with creditors to restructure outstanding debts before they become unmanageable. It requires the approval of a majority of creditors and must be sanctioned by the court. 

Out-of-Court Financial Restructuring 

The law encourages consensual financial restructuring, where debtors and creditors work together without court intervention to reorganize the company’s finances. This approach is often quicker and less costly than formal insolvency proceedings. 

Access to New Financing 

Debtors undergoing financial restructuring may secure new loans under the supervision of the court. This “debtor-in-possession financing” allows companies to continue operations while they restructure, helping them avoid liquidation. 

Monitoring Cashflow and Financial Health 

Businesses can avoid insolvency by regularly monitoring their cash flow and financial position. Timely interventions—such as negotiating extended payment terms with suppliers or securing short-term financing—can prevent a financial crisis. 

Early Engagement with Legal and Financial Advisors 

Proactively engaging with legal and financial advisors helps businesses understand their obligations and options under the New Bankruptcy Law. Early advice can guide companies toward preventive measures rather than reacting too late when liquidation may be the only option. 

To prevent Bankruptcy and insolvency and to better understand it’s legal intricacies, please visit our blog Preventing Bankruptcy or Insolvency: Key Strategies for Financial Stability.

Application of the New Bankruptcy Law 

The New Bankruptcy Law applies to a range of entities, including: 

• Companies governed by the Commercial Companies Law 

• Natural persons with the status of a trader 

• Licensed civil companies engaged in professional activities 

This broad scope ensures that both individuals and businesses can benefit from preventive mechanisms, promoting financial stability across various sectors. 

Circumstances in Which a Company or Person is Considered Bankrupt 

Under the New Bankruptcy Law in the UAE, a company or individual is considered bankrupt when certain financial conditions and statutory criteria are met. The law provides a framework to identify financial distress and enables companies, creditors, and individuals to take proactive steps when bankruptcy is imminent. The key circumstances that lead to a bankruptcy designation include cessation of payments, financial inability to meet obligations, and the initiation of formal proceedings under specified legal thresholds. 

Here is a closer look at the scenarios that establish a company or person as bankrupt: 

Financial Insolvency and Cash Flow Challenges

Financial insolvency, defined by a company’s inability to meet its current and future obligations, is another primary factor in bankruptcy proceedings. Insolvency can manifest in two forms: cash flow insolvency, where immediate debts cannot be paid as they fall due, and balance sheet insolvency, where total liabilities exceed assets. 

• Cash Flow Insolvency: This is a common basis for bankruptcy, as it directly impacts the company’s operations. When a business consistently fails to maintain sufficient liquidity for daily obligations, creditors may file for bankruptcy to protect their interests. 

• Balance Sheet Insolvency: Though less common as a standalone criterion, balance sheet insolvency serves as an early warning that financial restructuring may be needed. Persistent balance sheet deficits increase the risk of creditor action if liabilities remain unaddressed. 

Creditor-Initiated Bankruptcy Proceedings 

Creditors also have the right to initiate bankruptcy proceedings if a debtor defaults on qualifying obligations. A creditor can file a bankruptcy petition if: 

• The debt is unconditional, undisputed, and payable. 

• The amount of the claim meets the statutory threshold, which will be detailed in forthcoming Executive Regulations. 

• The creditor has fulfilled any legal requirements to notify the debtor of the payment default. 

This avenue allows creditors to protect their financial interests if they believe the debtor cannot meet obligations. Creditors must, however, provide evidence that the debt qualifies under the bankruptcy law to proceed with their claim. 

Voluntary Liquidation vs. Court Liquidation 

Under the UAE’s New Bankruptcy Law, liquidation refers to the process by which a company’s assets are converted into cash to pay off creditors, resulting in the dissolution of the business. There are two main types of liquidation processes: Voluntary Liquidation and Court Liquidation. Each has distinct procedures, triggers, and legal consequences, designed to balance the interests of both creditors and debtors. 

Voluntary Liquidation 

Voluntary Liquidation occurs when a company or individual debtor initiates the liquidation process independently, without a court mandate. This type of liquidation is typically undertaken when the company’s management or shareholders recognize financial distress or decide that the company should no longer operate. Voluntary Liquidation is often seen as a strategic decision to manage insolvency without additional legal pressures. 

Key Characteristics of Voluntary Liquidation

1. Shareholder/Board Decision: In a corporate setting, the decision to voluntarily liquidate often originates from a shareholder or board resolution. The company’s management may determine that its obligations cannot be met and seek to liquidate assets in an orderly manner. 
2. Appointment of Liquidator: A licensed liquidator is appointed by the company to oversee the process. The liquidator’s role is to manage asset sales, settle outstanding debts, and distribute any remaining funds to shareholders if possible. 
3. Greater Control Over Process: Voluntary Liquidation offers companies more control over the timing and strategy of asset sales, providing an opportunity to manage liquidation outcomes more favourably than in court-supervised proceedings. 
4. No Formal Insolvency Declaration: Since Voluntary Liquidation is self-initiated, there is typically no formal court declaration of insolvency, which may help preserve some aspects of the company’s reputation and reduce the likelihood of director liabilities associated with insolvency. 

Court Liquidation 

Court Liquidation, also referred to as Compulsory Liquidation, is initiated by a court order, often following a creditor petition or a failed preventive settlement. This form of liquidation is typically pursued when a company cannot meet its debt obligations, and creditors or the court seek to protect the interests of all stakeholders by ensuring an orderly distribution of assets. 

Key Characteristics of Court Liquidation

1. Creditor-Initiated or Court-Ordered: Court Liquidation can be initiated by a creditor’s petition to the Bankruptcy Department or directly by the court. This approach is generally taken when creditors believe that the company has no viable option to pay its debts. 
2. Appointment of Court-Approved Liquidator: The court appoints a trustee or liquidator to manage the liquidation process. This liquidator’s duties include identifying assets, satisfying debts in accordance with statutory priorities, and reporting to the court throughout the process. 
3. Loss of Company Control: In Court Liquidation, the company’s management loses control over its operations and financial decisions. The appointed trustee assumes full responsibility, including any legal actions required to recover funds for creditors. 
4. Legal Implications: Court Liquidation often involves investigations into the company’s financial practices, as well as potential liabilities for directors or managers. If wrongful trading, fraud, or negligence is found, responsible parties may face personal liability. 

Legal Support in Voluntary and Court Liquidation 

Navigating liquidation requires a thorough understanding of the legal, procedural, and financial landscape, and our law firm is here to offer tailored support at each stage. 

1. Voluntary Liquidation Services
   For clients opting for voluntary liquidation, our firm can assist in preparing the necessary documentation, coordinating with shareholders, and engaging a certified liquidator. We provide legal counsel to ensure that all statutory obligations are met efficiently, helping minimize potential risks for directors and shareholders throughout the process. 
2. Court Liquidation Support
   When a business faces insolvency and court liquidation is inevitable, we guide clients through the entire court-mandated liquidation procedure. Our attorneys work closely with company directors and creditors, preparing court submissions and defending the client’s interests during the liquidation. Additionally, we provide representation in director liability cases, ensuring that the company’s assets are fairly distributed while mitigating any personal legal repercussions for the management. 

Our team is well-versed in the New Bankruptcy Law and committed to safeguarding our clients’ legal rights, reducing the impact of liquidation, and helping them achieve the best possible outcome in these challenging situations. 

The New Bankruptcy Law reflects the UAE’s evolving approach to managing financial distress by balancing the interests of debtors and creditors. While liquidation procedures remain available, the law emphasizes restructuring and preventive settlement as primary solutions, encouraging businesses to act early to avoid insolvency. By offering additional flexibility and new financing options, the New Bankruptcy Law aims to foster business continuity and bolster investor confidence in the UAE market. 

The law also provides two clear pathways for companies facing inevitable liquidation: voluntary and court liquidation. Voluntary liquidation allows companies to initiate their own closure, often under shareholder or board approval, enabling them to manage asset distribution and debt repayment in an orderly manner. In contrast, court liquidation is initiated through the courts, typically by creditors, when a company can no longer meet its financial obligations. This process involves a court-appointed liquidator who oversees the asset distribution to satisfy creditors’ claims in accordance with legal priority. 

Companies and individuals must recognize the legal obligations and consequences associated with insolvency. A strategic focus on cash flow management, proactive restructuring efforts, and early consultation with advisors can help businesses navigate financial challenges and avoid the severe consequences of bankruptcy. 

By fostering a culture of responsible financial management and providing clear legal mechanisms, the New Bankruptcy Law supports economic stability while ensuring that stakeholders have access to fair and efficient insolvency procedures. Whether through preventive restructuring or one of the liquidation pathways, the law provides a structured framework for businesses to make informed decisions that align with their financial situation.