The UAE’s New Bankruptcy Law, effective from May 1, 2024, sets out a structured approach for entities facing insolvency, providing a pathway for liquidation as a final option. This article complements our foundational article on UAE bankruptcy law by offering a clear, step-by-step guide for stakeholders to understand and navigate the liquidation process under the new law.
Step 1: Filing for Bankruptcy
Initiating the Process
The first step in the liquidation process is the formal filing for bankruptcy. Either the debtor or a creditor may initiate this step if specific criteria are met. Under UAE law, a bankruptcy application must be filed within 60 days of missed payments or as soon as a debtor recognizes they can no longer meet their financial obligations.
Creditors can also file for bankruptcy on behalf of the debtor, provided their claims are unconditional, undisputed, and payable. The UAE Bankruptcy Law provides clear filing requirements, ensuring both debtors and creditors have a structured approach, with the aim of fair claim handling and maintaining balance in financial distress situations.
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Eligibility and Documentation
- Eligible Entities: The law applies to various entities, including government-owned companies, free zone companies, traders, and civil companies involved in professional activities.
- Documentation Required: Key documents for filing include trade licenses, constitutional documents, a financial situation memorandum, cash flow forecasts, lists of creditors, and a comprehensive credit report. These documents form the backbone of the bankruptcy filing, providing an accurate snapshot of the financial status for assessment.
Step 2: Court Involvement
Role of the Court and Appointment of a Trustee
Once the application is filed, the court plays a pivotal role in assessing the financial status of the debtor. Upon receiving the bankruptcy application, the court evaluates the debtor’s financial situation.
- Trustee: The court may appoint a trustee to supervise the proceedings, ensuring transparency and fair distribution to creditors. Trustees are responsible for appraising assets, organizing creditor meetings, and overseeing asset management.
- Bankruptcy Court: To streamline proceedings, a dedicated Bankruptcy Court handles these cases, ensuring adherence to the UAE’s structured insolvency framework. This specialized court follows the Dubai Courts Insolvency Guide, which outlines each step, from initiation to case closure.
Step 3: Moratorium on Claims
Protection Period for the Debtor
Once the bankruptcy application is accepted, the court issues a moratorium on all creditor enforcement actions. This “automatic stay” halts any lawsuits, debt collections, or other enforcement efforts, providing the debtor with a reprieve from mounting creditor pressure. This legal breathing room allows the debtor to focus on stabilizing finances and working through the liquidation process.
- Protection for Debtors: This period of protection is crucial for balancing debtor and creditor rights, ensuring that debtors can pursue resolution without constant interruptions.
- Court Approval for Secured Creditors: Creditors with secured claims must obtain court approval before taking any further action on secured assets, maintaining fair treatment of all parties.
Step 4: Liquidation of Assets
Supervised Asset Sale and Distribution
If the court determines that liquidation is necessary, the debtor’s assets are sold under the trustee’s supervision, following the UAE’s priority guidelines. The law’s structured hierarchy ensures that proceeds from asset sales are distributed equitably, beginning with secured creditors, followed by unsecured creditors, based on the nature of claims.
The UAE’s asset liquidation guidelines are designed to assure creditors of an orderly and transparent process, maintaining accountability and fairness in asset distribution. Trustees manage the asset sale process, working to maximize returns and fulfill as many creditor claims as possible.
Step 5: Discharge or Insolvency Order
Finalizing the Process and Offering Debtors a Fresh Start
Following the asset liquidation, the court may issue a discharge order, which releases the debtor from remaining liabilities, offering closure to the bankruptcy process. If the debts remain partially or entirely unsatisfied, the court can officially declare the debtor insolvent. This insolvency order marks the completion of the bankruptcy case and enables the debtor, whether an individual or a company, to start anew, with an opportunity to rebuild their financial standing post-bankruptcy.
The UAE’s approach embodies the principle of relief following debt resolution, a key component of modern bankruptcy frameworks that support both debtors and creditors. By incorporating discharge orders, the UAE law aligns with the global trend of allowing debtors a fresh start after bankruptcy.
New Bankruptcy Law: Structured Approach to Insolvency
The UAE’s New Bankruptcy Law provides a structured, fair, and transparent approach to handling insolvency cases. From the filing process to discharge, each step balances the interests of debtors and creditors, promoting responsible financial resolution while allowing businesses and individuals a potential second chance. This guide serves as a roadmap through the intricate journey of liquidation under the UAE’s evolving insolvency framework, equipping stakeholders with essential insights to navigate this challenging process.
