Businesses under financial pressure often delay creditor engagement until the position has deteriorated beyond easy resolution. Under UAE law, the timing, tone, and structure of that engagement can determine whether a company retains the ability to restructure — or loses it. This article complements our foundational article on UAE bankruptcy law and examines the legal and practical considerations that should shape early creditor communication.
Why Early Creditor Engagement Matters
The instinct to delay creditor communication during financial difficulty is understandable, but it is almost always counterproductive. By the time a creditor initiates formal recovery proceedings or a supplier suspends credit terms, the range of options available to the debtor company has usually narrowed significantly.
Under the UAE’s Federal Decree-Law No. 51 of 2023 on Financial Restructuring and Bankruptcy (the “New Bankruptcy Law”), early engagement is not merely good practice — it is embedded in the legislative design. The law’s preventive settlement procedure, for instance, is available only to debtors who have not yet reached the point of formal insolvency. That mechanism requires the cooperation of creditors, and cooperation is far easier to obtain from creditors who have been informed, consulted, and presented with a credible proposal — not creditors who have been left in the dark.
Early engagement also has a direct bearing on director liability. Directors who allow a company to continue accumulating obligations after the point at which they knew, or ought to have known, that the company was unable to pay its debts may face personal exposure. The delayed or procrastinated behaviour of the directors falls foul of their fiduciary duty towards the shareholders and other stakeholders (including the directors). A documented creditor engagement strategy — undertaken at the right time — forms part of the governance record that can protect a director from such claims.
This Article is a Part of our Bankruptcy and Insolvency Laws in the UAE: Procedure, Consequences, and Prevention Blogpost.
Recognising the Triggers: When Is the Right Time?
There is no single indicator that marks the right moment to begin creditor engagement. In practice, the question is whether the company’s financial position has reached a point where its existing obligations are unlikely to be met on their current terms without some form of adjustment. Some of the more common indicators include:
- The company has begun paying creditors selectively, prioritising certain relationships over others.
- Cash reserves are projected to fall below the level required to meet payroll or critical supplier payments within a foreseeable period.
- The company has defaulted on, or is likely to default on, a material contractual payment obligation.
- A key counterparty has raised concerns about the company’s ability to perform, or has sought additional security.
- The company’s liabilities exceed its assets on a balance-sheet basis, or it is unable to pay debts as they fall due — the two markers of insolvency under UAE law.
The presence of any one of these indicators should prompt serious consideration of a structured creditor engagement strategy. The presence of two or more should be treated as a clear signal that the time to act is now, not later.
Structuring the Approach: What Creditors Actually Respond To
Creditor engagement is not a single conversation. It is a structured process, and the quality of the preparation behind it determines the outcome far more than the communication itself. There are three elements that creditors consistently respond to.
A Candid Assessment of the Position
Creditors who feel they are being given a partial or optimistic picture will disengage quickly. The initial communication should present the financial position accurately, including the nature of the difficulty, its causes, and — critically — the anticipated trajectory if no action is taken. This does not mean disclosing every detail of the company’s internal affairs. It means being honest about the material facts that affect the creditor’s position.
A Realistic Proposal
Approaching a creditor with a request for forbearance or deferral without a concrete repayment or restructuring proposal is unlikely to succeed. The proposal need not be final — it may be framed as an opening position for negotiation — but it should be specific enough to demonstrate that the company has thought carefully about how it intends to address its obligations. This might include a revised payment schedule, a partial lump-sum settlement, or a proposal for the conversion of debt into some other form of consideration.
An Understanding of the Creditor’s Position
A creditor is more likely to agree to a restructured arrangement if they believe the alternative — formal proceedings, litigation, or write-off — will produce a worse outcome. Framing a proposal in terms that acknowledge the creditor’s commercial interests, and that demonstrate why cooperation is the better outcome for both parties, is significantly more effective than a one-sided request for time.
The Legal Framework: What UAE Law Requires and Protects
The New Bankruptcy Law provides two mechanisms that are directly relevant to early creditor engagement.
Preventive Settlement
A debtor who has not yet reached the point of formal insolvency may apply to the court for approval of a preventive settlement. This mechanism allows the company to propose a plan for restructuring its debts, which — if approved by the required majority of creditors and sanctioned by the court — becomes binding on all creditors within its scope. The preventive settlement procedure provides judicial oversight and a degree of protection from individual creditor action during the process. It is, in practical terms, the formalisation of a creditor engagement strategy into a court-supervised framework. Importantly, preventive settlement operates as a debtor-in-possession regime, meaning that the management of the company remains in control of the business during the process, unlike in formal bankruptcy proceedings where a trustee may take over. This makes it a commercially viable option for businesses seeking to stabilise operations while negotiating with creditors. The mechanism is available only at an early stage of financial distress. Specifically, it may be initiated before the debtor has ceased to pay its debts for more than 30 consecutive business days. Once this threshold is crossed, the debtor is generally required to consider restructuring or bankruptcy proceedings instead. This reinforces the position of preventive settlement as a proactive, early intervention tool. In effect, preventive settlement reflects the UAE’s policy shift from liquidation-driven insolvency to a rescue-first approach, where early creditor engagement, court supervision, and business continuity are prioritised over value destruction.
Out-of-Court Restructuring
The law also encourages voluntary restructuring arrangements reached privately between the debtor and its creditors, without court involvement. These arrangements are generally faster, less expensive, and preserve confidentiality. They require, however, a level of trust and transparency that can only be achieved if creditor engagement has been initiated early and conducted professionally. For a broader discussion of these strategies, see our article on preventing bankruptcy through early intervention.
In both cases, the law rewards proactive engagement. A company that waits until it has no option but to file for formal insolvency proceedings will find the landscape considerably less favourable — both legally and commercially. This also implicitly encourages voluntary restructuring arrangements reached privately between the debtor and its creditors, without court involvement. These arrangements are generally faster, more cost-effective, and preserve confidentiality, making them an attractive option for businesses seeking to address financial distress at an early stage.
Out-of-court restructuring is typically driven by consensual negotiations, where the debtor and key creditors agree on measures such as rescheduling of debt, partial waivers, or revised payment terms. Unlike court-supervised processes, these arrangements are not legally binding on dissenting creditors unless all relevant stakeholders agree, which makes creditor alignment and trust critical to their success
Practical Considerations Across Jurisdictions
Businesses operating in the UAE frequently have creditor relationships that span multiple legal regimes: onshore UAE, the Abu Dhabi Global Market (ADGM), and the Dubai International Financial Centre (DIFC). Each of these jurisdictions has its own insolvency and restructuring framework, and the approach to creditor engagement must reflect those differences.
A deferral arrangement that is legally defensible under onshore UAE law may not carry the same weight in the DIFC, where the insolvency regime is modelled on common law principles. Similarly, a communication that is appropriate in the context of an ADGM-governed relationship may carry unintended implications under the UAE Civil Code. Where creditor relationships cross jurisdictional boundaries, the engagement strategy should be tailored accordingly, with input from advisors who understand the interaction between these regimes.
What to Avoid
Certain patterns of behaviour during creditor engagement create risk rather than reducing it. The most common mistakes we see in practice include:
- Making preferential payments to certain creditors over others without a clear commercial justification. Under the New Bankruptcy Law, transactions made within the claw-back period before insolvency proceedings can be challenged and reversed.
- Issuing written communications that contain representations about the company’s financial position which are later shown to be inaccurate. Such communications can form the basis of civil or, in extreme cases, criminal complaints.
- Delaying engagement until a creditor has already commenced formal proceedings. Once a court filing has been made, the dynamics of the negotiation shift materially and the costs — financial, reputational, and operational — increase significantly.
- Failing to document the creditor engagement process. In the event that the company’s financial position does deteriorate further, the absence of a clear record of proactive engagement can be used to support a claim of directorial failure.
- Continuing to incur new debt without a reasonable prospect of repayment.
- Disposing of assets below market value or transferring assets to related parties. Transactions that are not conducted at arm’s length, especially with affiliates or related parties, may be challenged and reversed. These actions can also raise concerns around asset stripping and prejudice to creditors.
- Providing more favourable or complete information to a subset of creditors. This can undermine the integrity of the process and expose the company to disputes. Transparency should be consistent across similarly placed creditors.
We advise businesses across the UAE on creditor engagement strategies that are both commercially workable and legally defensible. Our work in this area includes cashflow structuring, the preparation of deferral and repayment proposals, direct creditor communication and negotiation, and the documentation of board-level decisions that form the governance record during a period of financial difficulty.
We operate across onshore UAE, ADGM, and DIFC, and our corporate and disputes teams work together to ensure that creditor engagement is conducted with an awareness of the full range of legal and commercial risks — including the director liability implications that are addressed in our companion article, Personal Liability in a Downturn: What UAE Directors Need to Know Under Decree Law No. 51.
If your business is experiencing financial pressure, or if you are concerned about a counterparty’s position, early advice is the single most effective step you can take. Please feel free to reach out to us at office@atblegal.com for a non-obligatory initial consultation.
