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  • Writer's pictureMirna Lakah

Preventative Settlement: A Legal Channel under the New Bankruptcy Law




On 1 May 2024, Federal Law Decree No. (51) of 2023 concerning financial restructuring and bankruptcy (referred to as “New Bankruptcy Law”) entered into force and effectively repealed the old Federal Decree-Law No. (9) of 2016 (referred to as “Old Bankruptcy Law”). The executive regulations and decisions of the Old Bankruptcy Law remain, however, valid (as long as they do not contradict with the New Bankruptcy Law) until the issuance of the new executive regulations.  

While the New Bankruptcy Law introduces several amendments and new concepts, this article only focuses on a new mechanism called preventative settlement available to debtors subject to fulfilling certain conditions.

 

What is Preventative Settlement?


Preventative settlement is a mechanism for debtors to maintain their business activities while settling outstanding debt vis-à-vis their creditors via a settlement proposal approved by the required majority of the creditors and certified by the Bankruptcy Court (referred to as “Preventative Settlement”).


Generally, the right to vote on the proposal of the Preventative Settlement is limited to creditors with unsecured and final debt, subject to the proposal not affecting the collateral of secured creditors.


It follows that the required majority is achieved based on the creditors’ classification (secured vs. unsecured creditors) and if the following conditions are met:


(i)  the creditors holding more than at least half of the debt are present during the meeting; and

 

(ii) the creditor(s) holding three quarters of the debt presented in such meeting approve(s) the proposal of the Preventative Settlement.  


The Preventative Settlement proceedings are initiated by the debtor and do not require the appointment of a trustee. The proceedings are supervised by the Bankruptcy Court.

 

Conditions to Apply for Preventative Settlement


  • If the debtor defaulted*, or believes there are reasons that prohibit him from settling some or all its outstanding payments at their due date;

 

  • Following the lapse of 3 months of the meeting of creditors where the latter rejected the preventative settlement proposal/restructuring plan;     

  • Following the lapse of 3 months of the Bankruptcy Court’s rejection to certify the proposal of the Preventative Settlement or the restructuring plan;

 

  • Following the lapse of 3 months from the Bankruptcy Court’s decision or judgment to conclude the Preventative Settlement or the restructuring plan proceedings, even if such proceedings relate to a debt other than the debt for which the application is submitted; or          

  • Following the issuance of a final judgment declaring the debtor bankrupt and debtor being rehabilitated in accordance with the provisions of the New Bankruptcy Law.


*a default is defined under the New Bankruptcy Law as the debtor’s failure to settle any outstanding debt after the lapse of 10 days from being notified to, even if the assets of the debtor are sufficient to settle such debt, and even if the outstanding debt is secured with sufficient collateral to settle it.

   

Key Advantages of Preventative Settlement


  • Moratorium: one of the most significant effects of the Bankruptcy Court’s decision to approve the commencement of the Preventative Settlement proceedings is a moratorium of the creditors’ claims for 3 months. This moratorium may be extended by a decision of the Bankruptcy Court provided that each extension may not exceed one month, and the total moratorium period does not exceed 6 months.

 

  • Business continuity: the debtor can manage its business and assets in the normal course of business provided such actions do not harm the interests of the creditors. That said, any actions not considered as part of the debtor’s normal course of business must be approved by the Bankruptcy Court. In all cases, the debtor is not required to appoint a trustee to manage its business.

 

  • New financing: the debtor may obtain secured or unsecured financing after initiating the Preventative Settlement proceedings and prior to the issuance of the Bankruptcy Court’s approval to commence the proceedings. The debtor may also obtain financing after the commencement of proceedings if stipulated as such in the Preventative Settlement proposal or approved by the required majority, unless decided otherwise by the Bankruptcy Court.             


Conclusion


The introduction of the Preventative Settlement is one of the elements under the New Bankruptcy Law indicating a shift towards a business-friendly approach, and a view of maintaining the sustainability of economic development and business in the UAE. This falls in line with the New Bankruptcy Law’s objectives and the UAE vision 2030 and will be further bolstered with the issuance of the executive regulations in due course.




Mirna Lakah

Associate

NHB LEGAL

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