Dubai: Bankruptcy is a term that many people think of as scary, when, in fact, it is meant to be a legal instrument to help and assist financially troubled entities that may be facing consequences that are much worse than going bankrupt. It is a legal system used almost all over the world, but misunderstood by many – the purpose of this system is to assist creditors in collecting the debtor’s assets, not to protect the debtor or dismiss debts.
In the UAE, bankruptcy is a legal process designed to help debtor companies get a fresh financial start as well as offering legal protection to creditors from losing their compromised funds entirely.
How companies can declare bankruptcy
According to the provisions of the UAE Bankruptcy Law – Federal Decree Law No. 9 of 2016 on Bankruptcy – a debtor company may apply for the commencement of bankruptcy procedures if it has stopped repaying its debts for a period exceeding 30 days.
The Law obligates the debtor to submit certain documents, which include commercial books and financial statements relating to its business for the financial year preceding the submission of the [bankruptcy] application, statements of all its properties and assets together with an acknowledgement of all debts payable by it. Without these documents, the court will not accept the commencement of its bankruptcy procedures.
Such documents are critical in determining the debtor’s financial situation and specifying whether or not the request for declaration of bankruptcy is based on deceit or fraud, with the intention of evading repayment of payable debts.
The bankruptcy trustee will rely on these documents when preparing his report on the debtor’s financial status, and whether or not the declaration of bankruptcy is acceptable.
Every debtor company that applies for the declaration of bankruptcy should, therefore, exercise complete accuracy in the information it submits to the court to avoid being convicted of either of the crimes under fraudulent bankruptcy declaration.
Legal action against individuals who may benefit from fraudulent bankruptcy
The Law makes provisions for those who may be negatively affected in case the debtor manipulates the information contained in such documents, or in the event that a creditor can prove that the debtor company concealed or embezzled part of its properties, or if the debtor is proven to have acknowledged untrue debts, with the intention of causing harm to creditors. In such cases, the Law permits all those who are affected by the debtor’s act to lodge a complaint against it, the punishment of which may reach a sentence of up to five years’ imprisonment.
Where such documents are proven to be valid, together with proof that the declaration of bankruptcy was attributed to the debtor’s fault, the court shall order a sentence for a period not exceeding two years in prison, and a fine not exceeding Dh60,000, or either of the two punishments.
Who can be convicted?
The punishment could apply to individuals if they operate under the capacity of a 'merchant'. A ‘merchant’ is defined in Article 11 of the Commercial Transactions Law as every person performing, in his own name and for his own account, acts of commerce, as well as every company exercising a commercial activity or adopting one of the forms prescribed in the Commercial Companies Law, even if such activity is a civil activity.
The Higher Court adjudicated in this connection that the Decree promulgated by the Federal Law No. (9) of 2016 and amendments thereof on bankruptcy provides that “the debtor must apply to the court for the commencement of the procedures in accordance with the provisions of this Section if he ceases to repay his debts within their due dates for a period exceeding 30 days, attaching to the application names of known creditors and debtors, their addresses, debts and the guarantees provided thereto”. The same Law also provides that such a person “shall be sentenced to a period not exceeding five years in prison under a final judgment, if he perpetrates either of the following acts, among which is the debtor’s acknowledgement of his unpayable debts…”.
A judgement by the Court of First Instance, as well as the Appellate Court, which upheld the appealed judgement, has demonstrated that […] the appellant proved to have submitted a fabricated acknowledgment of a debt, with the intention of causing harm to creditors. The judgment ended with the proof of the crime against the appellant.
Every debtor company that applies for the declaration of bankruptcy should, therefore, exercise complete accuracy in the information it submits to the court to avoid being convicted of either of the crimes under fraudulent bankruptcy declaration.
- The writer is the founder and CEO of Kashwani Law Firm in Dubai
