Dubai: Winning an additional 12 months to pay off claims will be the biggest gain for troubled business from the UAE’s newly reworked Bankruptcy Law.
What this does is introduce “flexibility” into the UAE’s still-developing bankruptcy regime. “Of particular note appears to be the suspension of the requirement for the debtor to file for bankruptcy should they fail the usual “cashflow” and/or “balance-sheet” tests,” said Matthew Dyson, banking and restructuring expert at the law firm Pinsent Masons.
“This is welcome as debtors who otherwise have the support of their creditors to continue trading while technically unable to satisfy the tests for solvency would otherwise have had little option but to file for bankruptcy.”
What the revised law does
Now, the debtor needn’t file immediately for bankruptcy proceedings, but will need to submit an application. If cleared to do so by the concerned court, the business owner can resort to a settlement agreement mechanism with creditors.
This way, the debtor has the right to request time to negotiate with creditors to reach an agreement to settle all debts within a period of 12 months.
If the court approves the bankruptcy request, no measures will be taken on the funds that are necessary for the business to continue within this the specified period.
“The pandemic related lockdown has strangled many small and medium size businesses,” said Anita Yadav, CEO of Global Credit Advisory Ltd.. “In times like these, short-term liquidity challenges can sometimes kill an otherwise healthy business with long-term potential.
“The update to the Bankruptcy Law provides framework for protecting such debtors while still ensuring that creditors' rights are not compromised.”
Yadav added that the move allowing debtors to access liquidity will benefit businesses in the tourism, F&B, and events and conferences organisers.
These “have been hit the hardest by the lockdown and will likely get some breathing time and to salvage themselves instead of getting liquidated,” she added.
“The amendment will also benefit individual freelancers - the law will also help people working in the SME sector keep their jobs as chances of their employer's survival increase.”
"What constitutes an emergency and what burden of proof is required to establish that such an emergency situation exists remains to be seen," said Matthew Escritt, Head of Banking and Restructuring at Pinsent Masons . "The aim of a bankruptcy regime is to encourage prudent entrepreneurialism whilst protecting the interests of creditors.
"Whist the pandemic has undoubtedly affected almost all sectors of the economy, debtors should not assume these amendments to the UAE insolvency regime allow them to continue trading with absolute impunity.”
Throw a ‘lifeline’
Allowing businesses access to funds that they generate – rather than have it denied to them – is nothing short of a “lifeline”, according to Scott Cairns, Managing Director of Creation Business Consultants.
It will boost trust in the credit market, prevent struggling businesses from collapsing, and reassure foreign investors in the “integrity of the UAE commercial environment”. And “providing the ability to obtain new funding could prove to be the lifeline businesses require to survive.”
Get in new funds
As important as allowing access to funds generate, the amended Law also provides options to tap new funds “in accordance with specific rules and conditions”. Again, this is done to offer more flexibility for impacted businesses to try and stage a turnaround.