UAE Bankruptcy law

The court, when delivering its judgement, usually appoints a trustee or receiver (the Receiver) to take charge of the bankrupt property.

• Gulf News Report
• Published: 23:38 January 7, 2009
• 

The court, when delivering its judgement, usually appoints a trustee or receiver (the Receiver) to take charge of the bankrupt property.

The Receiver may be either an official or a private individual and the property of the bankrupt will vest in the court and the Receiver from the date of the bankruptcy judgement.

To ensure the impartiality of the Receiver, he must not be one of the bankrupt's creditors or a spouse or a close relative to the fourth degree.

The Receiver must also not be an ex-partner, accountant, agent or employee of the bankrupt. He must be an individual of good standing and repute.

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It is important to draw a distinction between winding up and bankruptcy. Notwithstanding the fact that the procedures are separate and distinct, they also have many features in common.

Under both regimes, a receiver is appointed (variously as trustee of the bankrupt and a liquidator of a company in the case of winding-up).

They are both appointed to collect and realise the assets and distribute them between creditors according to a statutory order of priority. There are other common underlying principles such as the principles of preferential debts and pro-rata distribution among ordinary unsecured creditors.

However, there are also major differences because the ultimate objective of the bankruptcy process is to discharge the bankrupt from his debts and liabilities so that he can begin with a "clean slate", free from the burden of his debts.

On the other hand, the ultimate objective of winding-up a company is the termination of its existence.

It is important to note that under the Companies Law, all business associations specified therein are generally referred to as 'companies'.

Thus, a partnership between persons, even if it has no separate legal personality or limited liability, is still a 'company' under UAE law.

There is no specific recognition of the term which describes the situation where shareholders have limited liability, as would be the case in a Common Law jurisdiction.

The term "trader" includes individual traders as well as companies. However, the process of winding up and liquidation applies only to companies. A company may be liquidated even if it has not become 'bankrupt', for example, if the partners or shareholders elect to liquidate the company.

However, if a company becomes unable to pay its debts or commits an act of bankruptcy, it may be adjudicated as bankrupt, irrespective of whether the partners have agreed to the liquidation of the company.

The test for bankruptcy of a company (except for simple partnerships) is if the company ceases to pay its debts on their due dates. It should be noted that while a company may be legally 'bankrupt', according to the above test, the liquidation or 'death' of the company is a separate process.

The liquidator must notify the company's creditors of the commencement of the liquidation of the company. The trader must notify them to submit their claims within a period of not less than 45 days from the date of notice.

Following this step, the liquidator commences the settlement of the company's debts. If the company's assets are not sufficient to meet the debts then he shall settle them proportionally without prejudice to the right of priority of secured creditors.

Finally, the liquidator will distribute any remaining funds or assets amongst the partners of the company proportionate to their shares. If the assets fall short or are insufficient to cover payment to all partners, then the losses are also distributed amongst them.

This distribution of losses, of course, only applies to "unlimited" companies that take the form of a partnership. Shareholders in either a joint stock company or a limited liability company have their losses statutorily limited to the paid-up value of their shareholdings.

A petition for the liquidation of a company may be filed by a creditor of the company or by one of the partners of the company.

In the case of a joint stock company or limited liability company, the petition may not be made by any manager or company appointed liquidator unless it has been sanctioned by the majority of the shareholders at a general assembly.

This requirement is similar to that existing under some Common Law jurisdictions.

- Courtesy: Al Tamimi & Company

UAE Bankruptcy Law

The rules and procedures of bankruptcy are set out in Book Five of the UAE Commercial Transaction Law. That law shows the rules and procedures in relation to the bankruptcy of individuals as well as the insolvency of commercial entities.

It should be noted that the Commercial Companies Law, Federal Law No. 8 of 1984 (the Companies Law), regulates commercial entities in the UAE, the provisions regulating the bankruptcy of companies and other businesses are provided for under the Law, which does not differentiate between individual and corporate bankruptcy.

The Law does not have a specific definition of "bankruptcy", but merely highlights the situations in which a trader will be regarded as bankrupt. Article 645 of the Law provides that, "a trader who ceases to pay his debts can apply to the court for his adjudication as bankrupt".

In order to distinguish between bankruptcy and civil insolvency, the law says, it is important to understand that bankruptcy applies only to 'traders' (being those covered by the Law) and not to civil debtors. Pursuant to Article 4 of the Law a 'trader' is defined as being "an individual or company that carries out commercial activities".

It is important to understand the Civil Law distinction between commercial and civil activities.Professional consultancy-type activities practice by individuals (such as doctors, lawyers, consulting engineers, etc.) are not considered commercial activities. Rather, these activities will be considered "civil" if they are carried out by an individual.

However, should a business adopt a commercial form as set out under the Companies Law, then that business will be regarded as a commercial trader, even if its activities are essentially civil in nature.

Accordingly, a trader who ceases to pay his debts may be declared bankrupt. A civil debtor who ceases to pay his debts (or where his debts exceed his assets) is only subject to certain administrative restrictions.

These restrictions are called 'Hajr' in Arabic (a restriction), a concept from Islamic jurisprudence which is set out in the Civil Code of the UAE, Federal Law 5 of 1985 ( the Civil Code).

The restriction is usually placed over the civil debtor's property and assets by a court of competent jurisdiction upon a petition either by the debtor himself or one of his creditors. A court may then pass an injunctive order which will prevent the debtor from dealing with his property.

• All deferred debts immediately fall due for payment.
• All of the debtor's dispositions over existing or future property become ineffective.
• Any debt acknowledgement made by the debtor to the parties becomes ineffective.

Following the issue of the Restriction, the property of the debtor is sold and the value realised divided among the creditors on a pro-rata basis, in accordance with the procedures set out in the Civil Code.

The restriction on the debtor terminates in accordance with the following:

• Upon the distribution of the debtor's assets amongst his creditors; or
• If it is established that his debts do not exceed his assets; or
• If the debtor satisfies all his obligations and pays all debts that fell due before the Restriction was levied.

Bankruptcy under the law for traders and the passing of a Restriction on a civil debtor are distinct processes because under the Civil Code, there are no administrative bankruptcy procedures as such (such as the appointment of a receiver or trustee) and no residual effects (such as disqualification of the debtor from practising certain activities) as is the case under the Law.

A civil debtor may, however, face a charge of fraud if he has committed one of the following acts:

• After he is aware of a Restriction application being filed against him, he commits an act with intent to defraud his creditors.
• After a Restriction order is passed, he conceals or falsifies information with intent to defraud his creditors.
• He fraudulently changes his residence with the intention of avoiding his creditors.

By petitioning the court to bankrupt a debtor, a creditor avails himself of a set of proceedings and procedures that may secure his debt. The creditor may also benefit from any composition or scheme for settlement with the debtor which will enable him to recover at least some of what he is owed.

A debtor who makes full disclosure and conforms to the laws will be entitled to be discharged from his debts which he previously had no prospect of repaying.

A trader is not regarded as bankrupt unless he is declared bankrupt by a competent Civil Court.

Article 645 of the Law states that:

Any trader who is not able to pay his commercial debts on the due dates by reason of his financial instability, may be declared as bankrupt.

Any trader who uses illegal means for paying his debts shall be regarded as unable to pay those debts.

A trader shall be declared bankrupt only after adjudication by the competent court.

The court which is competent to try bankruptcy cases is described in Article 35 of the Civil Procedure Law of the UAE United, Federal Law 11 of 1992 as being either the court in which jurisdiction the trader carries on his business, or the court in which jurisdiction the trader is ordinarily resident).

Article 635 of the Law states that the court where the principal office of the trader is located or where he has stopped paying his debts will have jurisdiction.

A trader can apply to a competent court for a declaration of bankruptcy if he is not able to pay his debts.

It should be noted that this is not initially obligatory on the trader, but if thirty (30) days lapse from the date when he ceased paying his debts, then he is obliged to apply for a declaration of bankruptcy, otherwise he commits an act of bankruptcy by default which is a criminal offence under the UAE Penal Code, Federal Law 3 of 1987 (the "Penal Code").

The creditors of the trader, the public prosecutor and the court on its own initiative can also apply for bankruptcy of the debtor.

Article 649 of the Law sets out the procedure to be followed by a trader when applying for a declaration of bankruptcy. A petition must be presented to the court containing a statement that he is unable to pay his debts along with the following documents:

• Book of accounts.
• Copy of the last balance sheet duly audited.
• Complete details of personal expenditure of the trader for the two years preceding the application.
• The amount and particulars of all moveable and immovable property of the trader and estimations of its value.
• Declaration of names and addresses of creditors and debtors and statements of the amount of debt and receivables; and
• Specification of acts of protest during the last two years preceding the application.

As stated above, the creditors of the trader may also apply if they satisfy the court that the debtor has ceased to pay his debts; or that he has closed his place of business; or that he has absented himself with intent to defeat or delay his creditors. The debtor can always appear at any subsequent time to defend himself and prove that he is able to pay his debts.

After the bankruptcy application is submitted, the court must take all necessary steps to preserve and protect the debtor's assets.

The court will make all necessary investigations with the assistance of experts, if so required, to report to the court on the financial affairs of the debtor and the reasons for non payment of his debts.

After satisfying all the necessary procedures and resolving all disputes and applications concerning the case, the court would then pass a judgement adjudication declaring the debtor bankrupt.

The Law gives jurisdiction to the UAE Court to hear bankruptcy cases for or against foreign traders who have branches, local agencies or any other establishment in the country irrespective of whether or not they are also declared bankrupt abroad.

The Civil Procedure Law, Federal Law 11 of 1992 (the "Civil Procedures Law") also gives the UAE courts jurisdiction in respect of actions against foreigners relating to bankruptcy proceedings in the UAE.

In these circumstances the competent court here is the court where the branch office or agency of the foreign company is located.

Upon satisfying all formal procedures, and where a bankruptcy petition is not rejected, the court fixes a date for a hearing and shall order that notice be given to all creditors to notify the court on or before a specific date of any debts.

The Law does not specify any particular procedures to be adopted by the courts for giving notice to creditors before passing judgement, but usually this is done through local newspapers.

This may be compared to Common Law jurisdictions where notice is usually given by publication in an official Gazette or by other forms of public advertisement. However, once the bankruptcy judgement is passed, it must be published in a local newspaper by the official receiver.

After the court delivers its judgement declaring bankruptcy, there are certain procedures that must be followed subsequent to that judgement. The court in its ruling usually specifies a temporary date for the trader to stop payment of his debts.

All his places of business shall be closed and a receiver is appointed. A copy of the bankruptcy judgement is sent to the Public Prosecutor, the Ministry of Economy and Commerce, the receiver, the Central Bank and the competent Commercial Registrar.

This process is similar to the Common Law procedure whereby the court usually examines the debtors, hears the creditors, considers any opposition to the debtor's petition and may call for and receive further evidence before passing its order.

Where, after sufficient deliberation the court is satisfied that there is not sufficient grounds for proceeding with the petition, the court shall then dismiss the petition but if the court is satisfied that sufficient grounds exist, it makes an "order of adjudication" adjudicating the debtor as bankrupt unless the debtor is able to propose any composition or scheme which is accepted by the creditors.

The judge that passes the bankruptcy judgement also supervises the bankruptcy and may make any necessary ancillary orders.

As a next step, the bankruptcy judgement is affixed at the offices or place of business of the trader and the receiver must within 15 days publish a summary of the judgement in a local newspaper.

The summary must include the name of the trader, his residence, his business registration number, the temporary date for the trader to stop payment of his debts, the court and the judge who issued the judgement and the name of the official receiver. The notice also invites creditors to apply to register their debts.

A court must resolve objections and disputes filed by interested parties during the proceedings and before delivering its judgement on the bankruptcy.

It should be noted that some traders try to avoid payment of their debts to certain creditors by applying to the court for a declaration of bankruptcy.

Therefore, since these creditors have a direct interest in the proceedings they can object and show reasons why the court should reject the debtor's application.

If the court rejects the creditor's objection and passes its judgement, the creditor still has the right to appeal against the ruling within 10 days from the date of the publication of the judgement Any judgement in this regard is appeal able to the competent Court of Appeal according to the procedures provided for in the Civil Procedures Law.

In the event that the court dismisses the debtor's petition for a declaration of bankruptcy, it may also levy a fine up to a maximum of Dh1,000 on the applicant, if it is satisfied that the petition was frivolous or vexatious.

The above is consistent with Article 111 of the Companies Law which provides that "the chairman of the board of directors and the directors shall be liable towards the company, the shareholders and third parties for all acts of fraud, abuse of authority and any violation of the law or the company's articles as well as mismanagement. Any provision to the contrary shall be considered void".

- Courtesy: Al Tamimi & Company

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