The UAE's new Bankruptcy Law has come into effect from May 1. This is seen as one of the high-stakes regulatory reforms that the UAE has initiated in recent years. Image Credit: Shutterstock

Dubai: The UAE’s new Bankruptcy Law has come into effect from today (May 1, 2024), and by this, even senior management figures at a company can be held responsible. Earlier, the onus and the liabilities associated with a company going bankrupt were primarily on the company's directors.

“The new law extends the potential liability to de facto managers and any person responsible for the actual management of the company,” said Stephany Malhame, Senior Counsel - Dispute Resolution at the law firm Al Tamimi. “This may include controlling shareholders.

“This is another positive change that the legal community welcomes.”

What creditors should take note of

Under the new law, there will be a 'two-year limitation period' from the date of the bankruptcy declaration to initiate liability proceedings against individuals in the company, whether members of the board or senior management. These officials may be exempt from liability if they can prove they took all standard measures or had documented objections to the actions in question.

Who made the decisions?

Under the previous law, individuals could be held financially accountable for certain actions taken during the two years before the start of bankruptcy proceedings. These could be for:

  1. Taking uncalculated business risks.
  2. Enter into undervalued transactions.
  3. Favouring certain creditors to the detriment of others. (For instance, it could be through an early settlement of a debt of one of the creditors and to the detriment of others).

“Such individuals can be exempt from responsibility if they can prove that they took all measures to minimize potential losses to the debtor and creditors,” said Stephany. “Or if they were not involved in the specified actions.”

Changes to the bankruptcy rules constitute one of the big bang reforms for the business sector that the UAE instituted in recent years, which also includes 100 per cent ownership of companies for foreign investors. There have also been changes to intellectual property rights and arbitration for fast-track settlement of disputes. (Another major reform was the decriminalization of bounced cheque cases.)

Even amidst all these high-profile reforms, the new Bankruptcy Law stands apart. It offers a clear legal roadmap for the businesses caught up in such proceedings and for its shareholders, clients, lenders and creditors.

Setting the liability payout

The new UAE Bankruptcy Law also specifies that the amount awarded against company directors or the de facto manager should ‘correspond to their level of fault’.

"These changes reflect a more streamlined approach to holding the company leadership accountable in bankruptcy cases," said Stephany. "The law now considers the degree of fault and the impact of management decisions on the company’s financial health.

"This update is expected to encourage more responsible business practices and decision-making among company leaders..."

The director’s liability comes into play when:

  1. Through the settlement of a debt of one creditor with the aim of causing damage to others.
  2. Also, if a creditor proves that the company’s assets are insufficient to cover at least 20 per cent of its debts, directors and managers could be held liable to repay. If it becomes evident that they were negligent in managing the company that led to its financial distress.

Another major change from the new law

Coming into effect from today, it is no longer mandatory for the business - the debtor - to initiate bankruptcy proceedings (as was the case under the old law). Given the higher liability burden they may face, the board of directors and/or managers could be 'hindered' from filing bankruptcy proceedings.

"It remains to be seen if debtors will now be reluctant to file bankruptcy proceedings on their own," said Naief Yahia, Partner and Head of Litigation (Dubai) - Dispute Resolution, at Al Tamimi. "Especially given that it is no longer mandatory to file the proceedings and given their concern about their potential personal liability.

"We are awaiting the (local) court's reaction to the main developments (under the new law), and it may take months for trends to crystalize."

More to follow...