The UAE first introduced a bankruptcy law in 2016 to address rising insolvency cases in the business environment

Managers and directors of struggling businesses in the UAE will face expanded personal liability under key amendments to the country’s bankruptcy law taking effect in May next year.

The changes were outlined by Bassel Boutros, senior associate at UAE law firm BSA Legal, who noted the updated rules increase the period for which top executives can be held responsible for unlawful actions.

“Under the previous law, there was no determined delay for unlawful actions committed by managers, board members,” Boutros told Arabian Business. “Under the new law, managers, board members, actual managers, and liquidators, will be personally liable for unlawful actions committed within two years from the date of debtors’ cessation of payment.”

Any acts involving reckless risk-taking, fulfilling obligations of some creditors in a way that damages others, or other commercial improprieties during the defined liability period could open individuals up to legal or financial consequences. This expanded two-year window is intended to discourage wrongdoing that contributes to a company’s distress.

“Managers, board members, auditors, liquidators, should keep records of all books and financials pertaining to the business and should present the same upon courts or trustee’s request,” said Boutros.

Key amendments to UAE Bankruptcy Law

The UAE first introduced a bankruptcy law in 2016 to address rising insolvency cases in the business environment. However, over seven years of implementation revealed practical difficulties that required regular updates. The pandemic further drove the need for reforms as more large companies filed for restructuring or liquidation due to financial distress, Boutros explain.

The updated law, which was issued recently, aims to improve proceedings and ensure their effectiveness. A key focus is assisting debtors in financial trouble while also protecting creditor interests. Major amendments include allowing debtors to directly ask courts for assistance with preventive restructuring plans without appointing a trustee. Courts are now tasked with determining the exact date of a debtor’s cessation of payments.

The law also expands the scope of mandatory restructuring moratoriums and lowers creditor approval thresholds for plans. Most notably, it gives debtors the right to petition courts to ratify restructuring plans even if creditors reject them. This significant change grants debtors more power to pursue debt adjustments over creditor objections in certain justified scenarios.

Debtors gain more power to pursue restructuring against creditor objections

A significant change allows debtors to petition courts approving a restructuring plan creditors reject. “Debtors will still have a chance to apply a plan if creditor objections are unjustified or show bad faith,” Boutros said.

While this could pose challenges, he noted creditors should focus on reasonable, good faith negotiations rather than full debt recovery seen as unlikely given distressed situations. Reform aims reasonable resolutions with minimal losses on all sides.

Courts take on expanded authority in bankruptcy proceedings

Perhaps the most impactful change allows debtors to ask courts to ratify rejected restructuring plans. Boutros said this gives insolvent but viable businesses another chance at recovery even if some creditors are not cooperative or act in bad faith against a restructuring.

“Bankruptcy courts powers under the previous law were wide and affected other ongoing legal proceedings, and the new law provisions grants bankruptcy courts additional powers such as the power to take precautionary measures and issue decisions to suspend ongoing claims against the debtors prior to the issuance of a final judgment opening preventive composition plan, restructuring plan, or bankruptcy,” said Boutros.

Courts will consider trustee recommendations and creditor objections, ensuring their rights are still protected in liquidation, before potentially enforcing debt adjustments over opposition. Boutros noted this should not be seen as weakening creditor power, but rather motivating reasonable, good faith negotiations for the best overall outcome and least damages across the board.

He explained that new trustee obligations also aim to provide opinions on reasons leading to bankruptcy and if managers’ actions complied with laws during financially troubled periods. Actions to avoid now include ill-considered risks knowingly damaging creditors.

Creditors must adjust negotiation strategies under new rules

With debtors able to pursue approved restructuring despite objections, creditors face new considerations in revamping strategies. Reasonable, balanced approaches hold precedence over full recovery ambitions seen as improbable.

All parties, including legal teams, must study implications on ongoing restructuring matters of rules taking effect next year, he advised. Potential impacts require examining closely to protect positions amid new procedural realities.

As effective dates near, businesses mulling restructurings should avoid creditor settlement pacts outside formal proceedings.

“Businesses who are facing financial distress should not finalize agreements with creditors outside bankruptcy proceedings unless they have approvals from all creditors, as executing settlement agreements during that phase should be justified and reasonable,” he added.

Source: https://www.arabianbusiness.com/politics-economics/uae-bankruptcy-law-new-rules-hold-managers-directors-more-accountable