The UAE Bankruptcy Law applies to Companies governed by Commercial Companies Law, Most of the Free Zone companies, Civil companies conducting professional business, sole establishments and Government owned companies not established under CCL. A Financial Restructuring Committee has been established by the UAE Bankruptcy Law that is responsible for monitoring the implementation of the law — the committee is designed to ensure that the approach taken to restructuring under the new law is commercial, modern, and industry-focused — responding to specific criticisms of the previous regime.

What is bankruptcy?

Bankruptcy is a judicial proceeding associating a business that is incapable to repay outstanding dues/liabilities. The process of bankruptcy begins with a petition filed by the debtor, which happens usually, or on behalf of creditors, which happens very rare. The assets of the debtors are measured and evaluated, and these assets might be used to repay a portion of business liabilities. Bankruptcy proffers the business owner a chance to start afresh by absolving debts that naturally cannot be paid, while offering creditors a chance to secure some course of repayment based on the business’ assets available for liquidation. In the abstract, the ability to file for Bankruptcy can benefit the overall economy by permitting the businesses man a second chance by providing creditors with a measure of debt repayment and gain access to consumer credit.

Facing with foreclosure or any such kind of financial difficulty, the final option or last resort in this circumstance should be filing a bankruptcy in the court. Proclaiming yourself bankrupt is the only legal way to dispose of your financial setbacks. However, the process of filing for Bankruptcy is easier said than done. When you file for bankruptcy, you have to explain to the presiding bankruptcy judge about how you got into this financial furrow. Meanwhile, the bankruptcy court will ask the debtor to file the entire list of assets and outstanding debts with him.

The UAE government has issued a new Bankruptcy law. Law 9 of 2016 was published in the

 Official Gazette on 29 September 2016 and comes into force on 29 December 2016.  It aims to streamline and modernize the bankruptcy procedures which are available for UAE companies onshore in line with international best practice, and nonpros business failure while maintaining accountability for directors of failed organizations. The Emirates’ bankruptcy laws have historically been biased by French civil law traditions consistent with other areas of UAE legislation. Federal Decree Law No. 9/2016 has also incorporated modern French law mechanics, and best practice concepts found in German, English and US insolvency legislation without avoiding those basic principles. Application and scope of Federal Decree Law No. 9/2016 applies to companies which are established according to the UAE Commercial Companies Law (Federal Law No. 2/2015), corporate entities and individuals trading for profit (such as lawyers and accountants). However, there are certain key exceptions including governmental bodies, and companies incorporated within free zones (such as the DIFC and ADGM) which have their own comprehensive insolvency laws which provide for composition, restructuring or bankruptcy procedures. Entities which are wholly or partially owned by the local or Federal government and are not established according to Federal Law No. 2/2015 may wish to opt into Federal Decree Law No. 9/2016 in line with their constitutional documents. In the UAE there are also a number of commercial enterprises established as decree companies, whose levels of government holdings vary from being direct to indirect or ultimate beneficial ownership stakes. UAE legislation does not generally provide an unambiguous definition of a ‘government entity’ so it is unclear if decree-formed commercial companies which are indirectly held through government-owned investment.

According to this, businesses that are currently in dire straits and are going to be in trouble in short future are permitted to facilitate immediate finance and helping the business to push off the payments like bank loans, supplier bills, etc. from one year to the maximum of 3 years. This gives the business a new leaf of life and strengthens the organization (Bankruptcy – Protective Composition).

For business firms that are already in big financial troubles and in a position yet to be restructured, the Court will intervene and provide restructuring assistance. So that, business firms can take up to 3 years to pay off their current liabilities and they get new financial assistance as well for business restructure (Bankruptcy – Restructure).

Businesses that are already closed down or wound up due to financial crisis can use bankruptcy procedures for liquidation in a legal way and could get rid of all the business liabilities (Bankruptcy – Liquidation).

Even if the business is closed down years back, yet using the bankruptcy in legal way could help to write off all the debts, dues and liabilities and liquidate the business in proper way.

Business men, managers, directors, etc. whoever got tied up with business liabilities can use this option of bankruptcy to escape from all the business burdens and save themselves from all the related legal issues. 

By filing Bankruptcy in the court, those business firms, the owner/director/manager of the firms are relieved from all the legal cases once and for all. All existing cases are being cancelled and the owners are becoming free from all kinds of cases, like criminal, civil, commercial, etc. Anyone who has won Bankruptcy will not be able to start a new business for the next 3 years, but will be able to stay on any work visa in UAE and continue the job as long as he wishes to continue it. Obviously if all are going to be settled well and the business man could shrug off all the liabilities from his shoulders, still there is a catch – the person who is pronounced as bankrupt is not allowed to start any kind of business on his name for the next 3 years from the date of judgment date but he is allowed to work in any other organization on employment visa.

Sweet and not-so-sweet effects of bankruptcy

Individual and corporate bankruptcies can affect the economy both positively and negatively depending on the scope of the debtor’s influence in society.

In general, bankruptcy has a positive effect on the economy. If a debtor’s debts are discharged, the debtor should (in theory) be able to spend and borrow when they weren’t able to before. Over time, you can also rebuild your credit in order to receive loans. These transactions are beneficial for the economy. Someone straddled with debt, on the other hand, cannot contribute to the economy in meaningful ways. The law protects your assets during bankruptcy, so you don’t completely lose your livelihood if you do file.

Individual consumer bankruptcy only has overarching effects if lots and lots of people file. A high number of individual bankruptcies decreases consumer confidence in spending and also decreases the savings rate.

A corporate bankruptcy, which typically involves a large number of people, can also negatively affect the economy. A company that employs a huge workforce, sustains much of the economy in a given geographic area, and has widely distributed corporate debt will have a major impact on the country’s economy if it goes bankrupt. General Motors, which filed for bankruptcy in 2009, is a good example of this. Thousands of people lost their jobs and the bankruptcy contributed to the general economic downturn.

When large-scale bankruptcies like this occur, businesses can’t pay back their creditors, who in turn have to make up for the loss of money and may end up increasing prices. This influences consumers, who end up paying more for products.

Small Business Bankruptcy in United States

Small business bankruptcy happens. Sometimes small business firms don’t make it. They fail financially for various reasons and find themselves faced with deciding if bankruptcy is necessary. Bankruptcy is a process you go through in federal court that is designed to help your business eliminate or repay its debt under the protection of the bankruptcy court. Business bankruptcies are usually described as either liquidations or reorganizations depending on the type of bankruptcy you take.

There are three types of bankruptcy that your business may file for depending on its business form. Sole proprietorships are legal extensions of the owner. The owner is responsible for all assets and liabilities of the firm. A sole proprietorship can take bankruptcy by filing for Chapter 7, Chapter 11, or Chapter 13. Corporations and partnerships are legal entities separate from their owners. As such, they can file for bankruptcy protection under Chapter 7 or Chapter 11.

Business Bankruptcy – Chapter 7

Chapter 7 bankruptcy may be the best choice when the business has no future. It is usually referred to as liquidation. It is usually used when the debts of the business are so overwhelming that restructuring them is not feasible. Chapter 7 is also appropriate when the business does not have any substantial assets. If a business is really just an extension of a particular owner’s skills, it usually does not pay to reorganize it and Chapter 7 is appropriate.

Chapter 7 bankruptcy usually means that the business is over.

In Chapter 7 bankruptcy, a trustee is appointed by the bankruptcy court to take possession of the assets of the business and distribute them among the creditors. After the assets are distributed and the trustee is paid, a sole proprietor receives a “discharge” at the end of the case.

A discharge means that the owner of the business is released from any obligation for the debts. Partnerships and corporations do not receive a discharge.