The United Arab Emirates’ (UAE) new federal law on restructuring and bankruptcy, which comes into effect on 1 May 2024, has been broadly welcomed by lawyers polled by Debtwire.

Despite this, there is still room for further improvement, with more fine-tuning possible, they added.

“There are welcome enhancements in the new UAE Financial Reorganisation and Bankruptcy law, particularly around the focus on rescue, restructuring and balancing the interests of stakeholders,” said Keith Hutchison, partner at Clyde & Co.

Following the implementation of the new law, there will be a dedicated Bankruptcy Court, with decisions of the new court having the status of a writ of execution, noted Hutchison. A bankruptcy register will also be maintained, he added.

The court will carry out work related to preventive settlement, restructuring or bankruptcy proceedings, according to a Khaleej Times report.

The most impactful change in the legislation, though, includes replacing the preventive composition tool with a so-called “preventive settlement” mechanism, which allows for debtors to manage their business and assets while negotiating settlement terms with creditors, according to Michael Kortbawi, founding partner at BSA Ahmad Bin Hezeem & Associates LLP.

This allows for a moratorium period of between three and six months, Kortbawi added .

However, once restructuring proceedings have begun, the moratorium period will not be limited, the Khaleej Times report noted, adding that this was not the case under the previous insolvency law.

“The Bankruptcy Court has now the authority to institute a moratorium on creditor actions, prohibiting judicial and execution measures against debtors, starting from the initiation of the restructuring plan until its ratification, with no specified time limit as was required under the former law,” noted Kortbawi, who said that in addition, “the secured creditors are now enabled to enforce against assets during bankruptcy proceedings through the Bankruptcy Court, which will avoid separate enforcement proceeding.”

Additionally, the new legislation goes further against management engaged in financial misconduct, according to Nicola Jackson, a legal director at Clyde & Co.

“Following the introduction of the new law, [the UAE] has broadened the scope of persons that can be held accountable to include de facto managers and any person(s) that are responsible for the actual management of the company, and also expressly makes reference to auditors in this context,” said Jackson.

With respect to the accountability of board directors, the awarded fine against directors or de facto managers is proportional to their degree of fault, continued Kortbawi.

This is somewhat similar to the previous law, but will apply to actions committed up to two years before the date of cessation, the report by the Khaleej Times noted.

Not far enough

Despite the improvements made to the insolvency legislation, it is not as pioneering as some had expected, cautioned Kortbawi.

“Future legislation should be improved by incorporating provisions that support both creditors and debtor, clear and rapid procedures, and establishing more comprehensive measures for business rehabilitation,” he said.

In particular, many are looking at Saudi Arabia’s recent bankruptcy legislation to see where the UAE can make further enhancements to its onshore insolvency regime.

“The UAE’s current bankruptcy law requires adaptation to modern needs to match the legislation of Saudi Arabia. Embracing established practices and aligning with evolving business dynamics will be essential for attracting businesses to the UAE,” according to Kortbawi.

One key distinction of the Saudi bankruptcy law is the fact that Saudi has adopted rules based on the UNCITRAL Model Law, according to Clyde & Co’s Jackson.

“Those rules are aimed at streamlining cross-border insolvencies and envisage a greater level of cooperation between foreign courts or foreign officeholders and the Saudi Courts,” she said, adding that the rules came into effect in Saudi Arabia on 16 December 2022.

Advisers were calling for UNCITRAL Model Law to form part of the UAE legislation in April 2023, according to a Debtwire report.

Having a clear set of rules around cross-border insolvencies will be essential for the UAE to advance on the international stage, sources previously told Debtwire.

The administration of The International Banking Corporation (TIBC) is a good example of how cross border laws aided the administration process in Bahrain.

TIBC had a USD 3bn claim in 2009 against Ahmad Hamad Algosaibi and Brothers (AHAB), a Saudi Arabian business conglomerate, and over 60 banks were owed money by TIBC, according to reports.

There are workarounds under the current law, but they often erode the value preservation process, Debtwire previously reported.

The new law will be accompanied by executive regulations, which are yet to be published, said Clyde & Co’s Hutchison.

“It is possible that those executive regulations will deal with matters such as cross-border recognition of insolvency-related appointments and judicial decisions,” Hutchison added.

Given the UAE’s prominence in the context of global investment, cross-border provisions are a key component of the future insolvency landscape, noted Jackson.