As of May 1, businesses in the UAE will be playing by a new set of rules under Federal Law No. 51 of 2023. It’s an overhaul designed to make the bankruptcy system more balanced, efficient, and transparent to allow for more successful restructurings. Whether your finances are flourishing or floundering, this law affects you. This isn’t just about getting through the tough times; it’s about preemptive measures, clearer strategies, and knowing exactly where you stand.

What the new law entails

Before you can prepare, you must understand this new law, so let me break it down in simple terms:

Under the Bankruptcy Law, a new Bankruptcy Court will be established with jurisdiction to adjudicate on bankruptcy related matters.  This is expected to bring about more specialized, efficient handling of cases. This court will be the final authority on insolvency matters and will be staffed by experts in the field. The court even has the power to allow businesses to obtain new finance if needed. The revised Bankruptcy Law includes provisions for a “restructuring” process, which allows debtor companies to develop and propose settlement or restructuring plans for their creditors to approve. These new proceedings incorporate elements that are frequently found in the bankruptcy and restructuring laws of the United States and the United Kingdom. Notably, the law enables companies to secure new financing during the restructuring process and provides for a moratorium, which temporarily halts creditor actions against the debtor company while the restructuring plan is being developed and implemented. The new law also allows you to pursue a court-supervised “preventive settlement,” in the case that you are unable to, or don’t expect to be able to, pay unsecured debts on time. With this option, you need to prepare a settlement proposal regarding your existing liabilities to be approved by two-thirds in value of those ordinary creditors present at the meeting (provided that creditors holding at least more than half of the company’s debts attend the meeting). This buys you 3 months of legal immunity (extendable up  to a max of 6 months)  from creditors looking to collect. Following the preventative settlement, you may propose terms such as maturity extensions, payment deferrals or haircuts, or the ability to convert debt into equity.

Directors and senior managers are liable

Directors and senior managers are now on the hook for bad decisions made up to two years before a bankruptcy hits. This looks to me to be aimed at preventing the kind of reckless financial gambles that sinks companies. If you’re heading the business, keep your governance tight and clean. Negligence now has a personal price tag, and it could be a hefty one.

What the new law means for creditors

For the creditors sweating over their ability to collect, here’s some good news: the new law simplifies how you can claim your dues directly through the Bankruptcy Court.

Secured creditors will find it easier to enforce their security without the need for separate enforcement actions. It’s a more streamlined path to recovery, ensuring you get what you’re owed, faster.

Executive Regulations will provide further clarity on implementation

We’re still waiting on the Executive Regulations to provide more clarity on how this law will actually be implemented.

These regulations will be the nitty-gritty details that businesses need to know in order to fully take advantage of the law’s provisions. I’m hopeful that this law will prove to be a valuable tool not just for big corporations, but for the small and medium-sized enterprises (SMEs) that form the backbone of the UAE economy.

These businesses often operate on tight margins and don’t always have access to the same legal resources as their larger counterparts. It would be a real shame to see a viable business forced into liquidation over a relatively small debt.

So, what does all this mean for you as a business owner in the UAE?

It means staying informed, being proactive, and seeking expert advice when needed. It means understanding the key features of the new law and how they might apply to your specific situation.

Avoid bankruptcy

Understanding and knowing how to utilize the new bankruptcy law is a step in the right direction, but what you certainly want to do is to avoid bankruptcy itself. It’s easier said than done, but there are some steps you can take to keep your business healthier.  Start by stress-testing your financial models regularly. Run your projections through various scenarios – what happens if your revenue drops by 20%, or if your key costs increase by 15%? This will help you identify potential vulnerabilities and develop contingency plans. Simultaneously, work on diversifying your revenue streams.

Actively explore new markets, products, or services that can provide additional income cushions. The more diversified your sources of income, the more resilient your business will be to shocks in any one area. Next, tighten your cash flow management. Implement rigorous controls over your cash inflows and outflows. This could involve renegotiating payment terms with suppliers, offering discounts for early payment from customers, or cutting non-essential expenses. The goal is to maintain as much liquidity as possible.

Finally, strengthen your governance and risk management practices. The new law places increased responsibility on directors and senior managers, so make sure your business decisions are transparent, justifiable, and well-documented. And don’t wait until you’re in a crisis to seek expert help. Work with financial advisors, lawyers, and turnaround specialists to develop and implement your strategic plans. They can provide valuable outside perspective and expertise.

The Bankruptcy Law could provide a safety net for businesses facing financial challenges. It could mean the difference between shutting down and having a chance to restructure and rebuild. Take this new law as an opportunity to get bankruptcy preparedness right. Implement rigorous financial controls, understand the updated rules, and view this as an essential risk management strategy.