Business | Economy
UAE bankruptcy law
History is being made in Dubai. In the last decade the emirate has recorded unprecedented levels of economic growth.
- By Raza Mithani, Special to Gulf News
- Published: 23:58 January 6, 2009
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Dubai: History is being made in Dubai. In the last decade the emirate has recorded unprecedented levels of economic growth. This, together with prestigious projects such as the Palm Jumeirah and the soon-to-be-completed Burj Dubai has made the emirate the envy of the Middle East.
Until recently, the parts of the law that dealt with bankruptcy had been only of academic interest, rarely referred to by lawyers in the region. However, given the credit crunch and its impact locally, there has been both uncertainty and interest from the general public on the issue.
This article seeks to give a brief overview of the law as it relates to bankruptcy in the UAE and clarify some popular misconceptions that appear to have been in circulation.
In so doing, it addresses the position of individuals in financial trouble and what steps can be taken by businesses that are in difficulty.
It does not address the separate insolvency regime that applies to the Dubai International Financial Centre (to a significant degree modelled on the UK Insolvency Act, 1986) or the interesting question of whether current laws and institutions are sufficiently equipped to deal with large-scale insolvencies. Those are perhaps issues to be covered in a future article.
The starting point at first glance may appear paradoxical - it is that business insolvencies are part and parcel of any advanced, and healthy, economy.
One only has to look at the pre-credit crunch insolvency figures for any of the G8 countries - even in times of economic success, there are not insignificant numbers of businesses that end up having to close their doors or restructure because of an inability to pay their debts when they fall due.
This in no small part is due to the fact that entrepreneurship, which forms the basis of any vibrant economy, inevitably has its casualties as well as its successes.
It is worth noting first that the bankruptcy regime contained in the Commercial Transaction Law (Federal Law No 18 of 1993) only applies to "traders", which, broadly speaking, covers companies and individuals that carry out commercial activities.
What, then, are the options for a trader who cannot pay his, or in the case of a company, its debts? The first option is to attempt to reach an accommodation with creditors.
It may also be possible for such a debtor to enter into a formal preventative composition with his creditors, although such a composition is not available to joint stock companies or a company already in a state of liquidation, according to Article 831/3 of the UAE Commercial Transactions Law.
In order to enter into a preventative composition, an application must be made to the Court. The advantage to the debtor is that if the majority of creditors accept the proposal, he may be allowed an extension of time to make payments or even a reduction in the total liability.
It does not, however, release the debtor, inter alia, from debts that have been secured by a mortgage or other priority rights.
If it is not possible for a trader to enter into an informal arrangement or formal composition with his creditors, he may petition for his own bankruptcy. Alternatively, one of his creditors may do this.
For a creditor, the principal advantage is preservation and orderly realisation of the debtor's assets. For a debtor, the advantage is that if he makes proper disclosure and complies with the relevant laws, he will be discharged from his debts which he had previously been unable to pay off.
Possibly more important, though, is the fact that if thirty days expire from the date when the trader ceased paying his debts, he is under a duty to apply for a declaration of his own bankruptcy. Failure to do this potentially renders him liable to criminal prosecution under the UAE Penal Code, Federal Law 3 of 1987.
The effect of a bankruptcy on a trader is far-reaching. The Court will usually appoint a trustee or receiver to administer the bankruptcy, subject to the supervision of the judge.
Following the adjudication of bankruptcy, with some exceptions, the bankrupt is immediately deprived from managing his own money or property and must cease paying his debts.
Whilst brevity prevents a full exposition of the effects, they include that the bankrupt may not leave the jurisdiction of the Court without the prior approval of the Receiver and may be arrested if it is shown that, for example, he intended to conceal his money or property.
Non-traders whose debts exceed their liabilities, or their creditors, may make use of a process known as "Hajr" in Arabic, or a "Restriction", which has some similarities to bankruptcy.
The restriction is placed on the debtor's assets upon a petition issued either by the debtor himself or one of his creditors. The effect is, inter alia, to prevent the debtor from dealing with his property and to render ineffective his dispositions over existing or future property.
Following the issue of the Restriction, the property of the debtor is sold and distributed pro-rata amongst his creditors in accordance with the procedures set out in the Civil Code.
This writer, for one, does not think that it is the end of the Dubai Dream. The underlying fundamentals remain strong and they are backed by a visionary leadership. If there are going to be bankruptcies along the way, they should not be looked upon as causes for panic. Rather, they should be recognised as what they are - steps on the path to economic progress.
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