The newly enacted bankruptcy law, Federal Decree-Law No. (51) of 2023 (FDL 51), which came into effect on 1 May 2024 (6 months after its publication in the Official Gazette on 31 October 2023) supersedes the prior law on bankruptcy, Federal Law No. 9 of 2016 (Repealed Law), However, all regulations and decisions that were issued to implement the Repealed Law will continue to apply until they are replaced by regulations necessary to implement the provisions of FDL 51. This change represents a significant evolution of the bankruptcy regime in the UAE. Historically, the UAE has seen a preference for resolving corporate insolvencies through consensual restructuring of the debtor company's debts, largely due to a lack of confidence in untested legislation. The introduction of FDL 51 marks a remarkable advancement, drawing inspiration from various aspects of insolvency laws in other jurisdictions and reflecting international trends and practices in insolvency law.
FDL 51 introduces significant improvements to the UAE's existing bankruptcy framework, including the establishment of a dedicated Bankruptcy Court, a new preventive settlement procedure (replacing preventive compositions in the Repealed Law), and increased management liability. Below, we outline the key features of the the new law:
Who Does It Apply To?
According to Article 3, Chapter 1 of FDL 51, its provisions apply to:
Companies that are subject to the provisions of Commercial Companies Law;
Any natural person having the capacity of a trader; and
Licensed civil company of a professional nature.
The following are exempted from the application of the law:
Companies wholly or partially owned by the federal or local government;
Companies and establishments established in the free zones; and
Banks, financial institutions and insurance companies licensed by the Central Bank.
Key Changes
Establishment of a Bankruptcy Court
A significant development under the FDL 51 is the establishment of a new Bankruptcy Court. As of May 1, 2024, all ongoing claims and legal proceedings filed under the Repealed Law, will be transferred to the Bankruptcy Court without fees.
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Enhanced Corporate Accountability
New Financial Restructuring and Bankruptcy Unit
Key Aspects of the New Preventive Settlement Mechanism
Article 15(1) of FDL 51
Debtors can initiate preventive settlement proceedings under specific conditions, such as defaulting on payments or anticipating an inability to repay debts on time.
Article 15(2) of FDL 51
Article 59 of FDL 51
Article 63 of FDL 51
Article 67 of FDL 51
Article 69 of FDL 51
One significant and noticeable drawback of FDL 51 is that secured creditors are not obliged to adhere to proceedings initiated under it. As a result, they can still enforce their security with the permission of the court. This aspect is expected to hinder the practical effectiveness of the new bankruptcy law and could reduce the instances where debtors involved in substantial financing transactions opt for protection under this legislation.
Supplementary Regulations
No supplementary regulations has been passed under FDL 51. Therefore, those passed under the Repealed Law will continue to be valid and enforceable, provided they do not conflict with the provisions of FDL 51.
Overall, the new bankruptcy law, FDL 51, not only provides clearer guidelines for debt restructuring and safeguards the rights of debtors but also enhances transparency in insolvency proceedings. These measures would not only bolster confidence in the legal system but also solidify the UAE's standing as one of today's prime destinations for investment and business operations. The enactment of FDL 51 represents a proactive step towards modernising the UAE's legal framework, aligning it with international best practices, and promoting a culture of responsible financial management.
In terms of its expected effectiveness, that would significantly depend on its practical implementation. The success of these laws will ultimately rest on the support, structure, and training provided to the judiciary, and to the newly introduced and established units such as the Financial Restructuring and Bankruptcy Unit as outlined in Article 12 of FDL 51.
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