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Over the past year or so, we have seen a number of examples of Dubai courts handling debtor-led insolvency cases with the utmost care, particularly when determining whether there is a legitimate adverse financial situation and inquiring about the behavior of the debtor. Managers who cause the company to go bankrupt.
The UAE Insolvency Law (Federal Law No. 9 of 2016, as amended) (Bankruptcy Code) provides insolvent debtors (i.e. in a state of bankruptcy) with possible avenues to restructure the company (if the reorganization plan is approved by the courts and creditors) or otherwise way to proceed with liquidation if the court finds that reorganization is not possible. These statutory mechanisms are designed to benefit the interests of creditors of distressed companies by providing a level of confidence in the legal process and maximizing the likelihood that creditors will be paid in the event of debtor insolvency.
in short:
- According to the Bankruptcy Law, if the debtor fails to pay the debt due for more than 30 UAE business days due to its unstable financial situation or the assets of the debtor are at any time insufficient, the debtor must file for bankruptcy to repay the debt due to the creditor debts;
- Creditors can also initiate insolvency proceedings against a debtor if they hold a debt of at least AED 100,000 and have sent a written demand to the debtor for repayment but it has not been satisfied within 30 UAE working days.
UAE courts have been dealing with insolvency cases under the insolvency law since it came into force in late 2016, but these cases have mainly been creditor-led filings with few debtor-led cases. It is fair to say that the total number of bankruptcy filings across the UAE is modest in anticipation of more filings.
While an analysis of possible reasons for this is beyond the scope of this article, they may include unfamiliarity or uncertainty among parts of the UAE business community as they engage in informal insolvency proceedings, as well as emergency legislative measures introduced at the height of the 2020 COVID-19 pandemic. The impact of the epidemic, which limited bankruptcy filings for a certain period of time. If such restrictions were no longer in place, the number of bankruptcy cases would increase, as would debtor-led filings.
In this article, we comment on some aspects of recent Dubai court cases regarding debtor-led insolvency cases and the potential liability of insolvent company managers.
Debtor-led bankruptcy filing
A recent case in Dubai involved the owner and operator of a restaurant group filing for bankruptcy after failing to pay debts as they fell due. The Dubai Court of First Instance questioned the reasons for the company’s poor financial condition, although bankruptcy appeared to be an easy matter and the evidence presented to the court showed that the company was unable to pay its debts. In particular, the court-appointed expert who assessed the company’s financial position early in the case (i.e., before any declaration of bankruptcy) appeared to have an interest in the debts the company incurred to purchase the goods it needed to operate and, on that basis, the court referred the matter to prosecutors , to determine whether there is fraudulent activity.
Although prosecutors found no fraud, the ensuing process took about 24 months from filing for bankruptcy to a court order to liquidate the company.
In another case, the Dubai Court of First Instance rejected the application of a debtor who filed for bankruptcy proceedings because the debtor had not provided the necessary evidence to prove its financial condition despite providing evidence of its financial condition. Unable to repay debts. Despite an appeal against the judgment, which is currently being considered by the Court of Appeal, the judgment of the Court of First Instance is a surprising example of the court’s extremely rigorous procedural and evidentiary approach to the information provided by the debtor regarding its (in)solvency.
In another similar example, the Dubai Court of First Instance also dismissed the application of a debtor filing for bankruptcy because it had failed to submit an audit report ascertaining its financial position in the year preceding the bankruptcy filing, despite not stipulating the requirement under the bankruptcy law .
Responsibilities of Directors and Managers
in a landmark judgmentWhen the case‘ In October 2021, the Dubai Court of First Instance ruled that the directors and managers of the insolvency debtor company (a public joint stock company) were personally liable to pay the company’s outstanding debts (approximately AED 450 million) as the company’s assets were deemed insufficient to pay At least 20% debt.
Shortly after the Malka case, the Bankruptcy Code was amended to require directors and/or managers to Contribute to losses that lead to the insolvency of the company. Thus, the Marca judgment at first instance was a high-water judgment, and the law evolved rapidly with some improvements to the personal liability regime and legal procedures.
The directors and managers of the debtor company appealed against Marka’s judgment and the Court of Appeal decided to remand the case to the trial court.
In October 2022, the court of first instance (under reconsideration) clarified in its judgment that the responsibility of the company’s decision-maker does not automatically assume its debts when the company’s assets under its management are not sufficient to settle at least 20% of the assets. To be liable, the decision maker (manager, director or de facto decision maker) must have contributed to the losses that caused the company to become insolvent, for example by:
- dispose of the asset at a price below market value; or
- dispose of property for no or insufficient consideration, or dispose of property where the benefit obtained is disproportionate to the disposition; or
- When the company is insolvent, the debt of the creditor is discharged, which damages the interests of other creditors.
Courts distinguish, on the one hand, decision makers who cause the company’s losses and bankruptcy, and on the other hand, appoint managers (who will not be liable) who in good faith try to improve the financial situation of the company that was already insolvent before bankruptcy proceedings began.
In order to limit the risk of liability for managers and directors of companies that are considering filing for bankruptcy, it is recommended that managers/directors obtain advice before the company files for bankruptcy on what they can and cannot do on behalf of the companies they manage. It also emphasizes record keeping and good company The importance of governance.
In addition, in order to ensure the smooth progress of the bankruptcy procedure, it is recommended that the debtor prepare all the documents stipulated in the Bankruptcy Law before applying for the bankruptcy procedure, and detail the financial status of the company to limit the risk of the court doubting the financial status of the company.
If you have any questions about the bankruptcy process in the UAE, please contact keith hutchison, Sherif Maher or nicola jackson.
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