Introduction
In the ever-evolving UAE legislative landscape, the introduction of Federal Decree-Law No. 51/2023 on Financial Restructuring and Bankruptcy in the United Arab Emirates (the "New Law") marks a significant milestone. This comprehensive law, published on 31st October 2023 and due to come into force on 1st May 2024, replaces Federal Decree-Law No. 9/2016 (the "Old Law") and ushers in a myriad of transformative changes aimed at fortifying economic resilience and streamlining debt restructuring mechanisms. Let's embark on exploring the key procedural and substantive changes and enhancements brought about by this groundbreaking legislation which will prove to be crucial for stakeholders.
1. Preventive Settlement and Restructuring Procedures:
The New Law introduces two fundamental procedures aimed at addressing financial distress while preserving economic stability as preventive strategic tools designed to avoid bankruptcy.
1.1. Preventive Settlement Procedure:
1.1.1. Debtors can apply for a preventive settlement plan under Bankruptcy Court supervision.
1.1.2. A debtor must demonstrate the inability to pay unsecured debts and propose a settlement plan.
1.1.3. Applications for preventive settlements should be submitted within a specific period (typically within 60 days) post-initial financial distress signal aiming for swift resolution and minimal operational disruption. However, applications after the lapse of 60 days will not be barred for late submission.
1.1.4. The process entails a Bankruptcy Court-supervised negotiation where debtors propose settlement terms to creditors.
1.1.5. The plan must be approved by at least two-thirds (66.67%) in value of ordinary creditors representing more than half of the total unsecured debts (50%+).
1.1.6. Secured creditors' approval is not required for the settlement plan unless it alters their rights.
1.1.7. This mechanism offers a crucial moratorium period of 3 to 6 months, extendable with Bankruptcy Court approval up to a total of six months. During this period, debtors retain control over business operations under Bankruptcy Court supervision, fostering continuity while settlement negotiations unfold.
1.2. Restructuring Proceedings and Creditors' Committees:
1.2.1. This procedure offers a lifeline for debtors that, despite distress, possess viable business models worth salvaging.
1.2.2. Debtors have the option to initiate restructuring proceedings to propose plans for debt adjustment, equity conversions, and operational reorganization.
1.2.3. This process mandates the formation of a creditors' committee comprising major creditors from each debt category.
1.2.4. The restructuring plan's approval hinges on creditor acceptance, ensuring a collaborative approach to debt resolution.
1.2.5. The restructuring plan must be ratified by the Bankruptcy Court, ensuring "fairness standards" are met and creditor protection.
1.2.6. Notably, the moratorium during restructuring remains in effect until plan ratification by the Bankruptcy Court, providing a stable environment for negotiations.
1.3. The New Law sets specific timeframes during preventive settlement and restructuring processes, such as:
1.3.1. The 3 months for the debtor submission of proposals from the date of the Bankruptcy Court’s order of opening the procedures. This period is crucial as it dictates the urgency with which a distressed debtor must act to propose a viable plan aimed at addressing the financial challenges before proceeding to more drastic measures like bankruptcy. The objective is to encourage early action and negotiation, potentially leading to a consensual resolution that can prevent bankruptcy. This period may be extended by the Bankruptcy Court several times after a review by the Unit, but if the period in total exceeds 6 months, the creditors’ majority approval is required.
1.3.2. The 10-day notice period for creditors' meetings. This minimum advance notice is required to be given to creditors regarding the scheduling of meetings related to the preventive settlement or restructuring processes. The purpose of this 10-day notice is to ensure that all relevant stakeholders have sufficient time to prepare for the meeting, review any proposals or documents, and thus participate meaningfully in the discussions and decision-making processes. It's a procedural requirement designed to enhance transparency, fairness, and engagement among the parties involved.
1.4. Exceptions to the Moratoriums:
The said moratorium in both procedures suspends claims against the debtor regardless of their nature with exceptions such as:
1.4.1. employment claims; and
1.4.2. personal status claims.
2. Enhanced Judicial Oversight and Powers:
2.1. The New Law establishment of a specialized Bankruptcy Court and a dedicated Bankruptcy Unit signifies a crucial development in the legal infrastructure to oversee proceedings efficiently.
2.2. Decisions rendered by the Bankruptcy Court will be treated as a writ of execution, ensuring immediate enforceability, providing legal certainty, and expediting resolution.
3. Liability, Accountability, and Governance:
The New Law imposes enhanced accountability measures targeting managers, board members, and liquidators for misconduct leading to financial distress.
3.1. Specific acts that attract liability, including fraudulent trading and preferential transactions, are addressed, particularly one of the following gateways:
3.1.1. Using unusual commercial methods, whose risks are not thoughtfully studied, such as disposing of goods at prices lower than their market value in order to obtain amounts with the intention of avoiding bankruptcy proceedings or delaying their initiation.
3.1.2. Entering into transactions with third parties to dispose of assets without compensation or in exchange for insufficient compensation and without a confirmed or proportionate benefit to the company's assets.
3.1.3. Paying the debts of any creditor with the intention of causing damage to other creditors.
3.1.4. If it becomes clear after the company's bankruptcy that its assets are insufficient to pay at least 20% of its debts, as long as it is proven that they failed to manage the company in a way that led to the deterioration of its financial condition.
4. Strategic Options and New Money Financing:
The New Law also introduces strategic options such as new money financing, along with mechanisms for debt-to-equity conversions, which is pivotal enhancement aimed at providing distressed businesses with a lifeline for recovery and sustainable operation. Debtors benefit from these strategic options such as new money financing, enabling them to secure interim financing during proceedings or offer them viable pathways to debt recovery and business continuity.
4.1. New Money Financing:
4.1.1. The debtor in financial distress can secure new loans or financial injections during the restructuring or preventive settlement proceedings. This is crucial for businesses that need liquidity to maintain operations, invest in critical areas for turnaround, or stabilize their financial health.
4.1.2. Conditions and Requirements:
4.1.2.1. Approval: Typically, obtaining new money financing requires the approval of the Bankruptcy Court or a certain percentage of creditors, ensuring that the new financing does not unjustly prejudice existing creditors' rights.
4.1.2.2. Priority: The New Law often grants such financing a priority status in the repayment hierarchy, recognizing the risk lenders take by providing capital to a distressed business. This priority can be over existing unsecured debts but may still rank below secured debts unless otherwise agreed.
4.1.2.3. Usage: The use of proceeds from new money financing is generally restricted to essential operational needs, restructuring efforts, or specific projects approved by the Bankruptcy Court or creditors that are deemed beneficial for the company’s recovery.
4.2. Debt-to-Equity Conversions
4.2.1. Debt-to-equity conversions allow a company to transform a portion of its debt into equity shares. This mechanism dilutes existing shareholders but can significantly reduce the debt burden on the company, making it a potent tool for financial restructuring.
4.2.2. Conditions and Procedures:
4.2.2.1. Creditor Agreement: This process usually requires the agreement of the affected creditors, who will become equity holders in the company. The terms, such as the conversion rate and the valuation of the equity, are critical points of negotiation.
4.2.2.2. Legal and Regulatory Compliance: The conversion must comply with corporate governance regulations, including any requirements for shareholder approval and amendments to the company's articles of association.
4.2.2.3. Bankruptcy Court Oversight: In the context of a restructuring or preventive settlement under the New Law, such conversions may need the endorsement of the Bankruptcy Court, ensuring that the conversion is in the best interests of the company and its stakeholders.
5. Conclusion:
5.1. The New Law embodies a significant shift towards a comprehensive and stakeholder-centric approach to financial restructuring and debt resolution. Its procedural intricacies, creditor safeguards, and debtor protections create a robust framework conducive to economic stability and sustainable business practices.
5.2. The New Law counts as a significant step forward in strengthening the legal framework for financial reorganization and bankruptcy. By incorporating modernized procedures, enhanced creditor protections, and judicial oversight, the New Law aims to strike a balance between promoting economic activity and safeguarding the rights of all stakeholders involved in restructuring and insolvency proceedings. These reforms are expected to have far-reaching implications, fostering a more resilient and robust business environment in the UAE for years to come.
5.3. While the New Law sets forth overarching principles and procedures, its effective implementation relies on forthcoming regulations and guidelines from regulatory authorities. Clarity on specific procedural aspects, creditor rights, and debtor obligations will be elucidated through these regulatory frameworks, providing practitioners and stakeholders with actionable guidance. It is recommended to stay tuned, as we will articulate practical guidelines with greater detail when such regulations are published and come into force.
Ibrahim Salaheldin
Associate
NHB LEGAL