By Bruno Gremez, Co-founder of Fincluziv, Smart Fintex and CT&F, ex-ABN AMRO and BNP Paribas.
During the last few years I have lived and worked in Dubai, I often heard that there was no effective bankruptcy law in the UAE. That would create an imperfect world where companies facing financial hardship would not be able to seek protection from creditors while restructuring their debts. In the absence of adequate laws, businessmen would face arrest and criminal prosecution for unpaid debts and would then often flee the country to avoid jail, leaving behind them unpaid employees and a pile of defaulted debts to their creditors.
Actually, many local businessmen ignore it, but the situation has changed. The new UAE Bankruptcy Law (Federal Law No. 9 of 2016) came into force on 29 December 2016. It applies to both onshore and free-zone companies established in the UAE and offers protection for employees, shareholders and directors of companies undergoing court-led insolvencies.
Some of the major changes
The new law designs a number of new procedures, each supervised by the court, to help companies facing financial hardship go through their difficulties in an orderly way. These include a “light” rehabilitation process for solvent debtors facing temporary financial difficulties called the “preventative composition”, a more substantial rehabilitation process for insolvent debtors that require deeper restructuring solutions, and an “end-of-the-line” liquidation process.
The most interesting option for solvent companies facing temporary difficulties is the preventive composition. The new law provides a court-sponsored process to allow a company in financial difficulties to reach binding agreements with its creditors, as an alternative to filing for bankruptcy. This is a major change and a very positive move, which should encourage companies and their directors to deal with financial troubles and the company’s inability to meet its financial obligations as early as possible and in an orderly way.
In the UAE, everyone knows that a person who writes a cheque in favour of a third party that later bounces back in case insufficient funds are available to honour the payment faces criminal liabilities. When a company writes a cheque, the individual writing the cheque on behalf of the corporate entity potentially faces the same criminal liability. However, the offence may be remedied by payment of the debt at any time, including after the criminal court has passed its judgment.
Under the new law, criminal proceedings related to bounced cheques will be suspended if the cheque was written in the period before the company enters a preventive composition or a court ordered financial restructuring. After the terms of the repayment scheme have been approved by the court and the creditors, the debt, which is the subject of the cheque, may be settled under those terms and the consequent criminal offence remedied.
However, it is important to note that the potential criminal liability has not been removed entirely by the new law. If the company’s financial situation deteriorates further and it is eventually wound up in a bankruptcy process, criminal proceedings may not be suspended.
Potential offenses to keep in mind when a company faces financial hardship
Under the new law, there are a number of potential offences, which directors and managers of companies that are later wound up by court order should be very much aware of.
Preferences: approving the repayment of one creditor to the detriment of others, or giving special privileges to one or more particular creditors, constitute an offence if the preference was granted after the company ceased to pay its debts when they fell due.
Sales at undervalue: it is unlawful to sell, in bad faith, any of the company’s assets under its market value. Companies selling distressed assets should carefully document what they do to avoid prosecution.
Non-core & speculative business: corporate activities that were not core to the licensed business activities of the company, particularly where such activities were speculative in nature and significant enough to have contributed to the company’s financial difficulties, are potentially criminal. This could be of particular importance for those many companies active in commodities trading in Dubai.
Fraudulent bookkeeping & falsified accounting: activities designed to deliberately conceal a company’s financial position or to dishonestly benefit certain parties over others may also constitute criminal acts.
Shareholders, directors and managers of companies going through financial difficulties should keep in mind the above-mentioned offenses when running their business and should be particularly careful not to do anything, which creditors could later on use against them after a company failed by arguing that they committed criminal offenses.
At the same time, the new bankruptcy law opens the door for structural solutions for any company that faces difficulties in its business and that cannot meet its financial obligations timely, the most significant being the possibility of a preventive composition. Business leaders should seriously consider this avenue, which may enable structurally sound companies facing temporary difficulties to trade themselves out of those difficulties in an orderly way while keeping their creditors quiet and relatively safe.
Companies facing financial hardship would often be well advised to do all the following: (1) identify and recognise the difficulties they face as soon as possible, (2) define, based on these new business conditions, the strategies that are the most likely to enable their company to recover, and tentative cash-flows associated to each of these strategies, (3) put forward potential debt restructuring plans that match cash-flows with debt repayment obligations, (4) do all the above in full transparency with all their creditors.
The above is often the best way out of financial hardship. Some companies are perfectly equipped to do that with they qualified and experienced staff. Some others might find it useful to be properly advised throughout the process to avoid the usual pitfalls and, more importantly, the potential criminal offenses that may result from any mistake.
Lastly, one should bear in mind that the above applies only to companies. Individuals who are unable to repay their debts will not get protection under the law and will not be able to resort to the new bankruptcy law to avoid criminal prosecution.