The preventive composition is available for companies that do not meet the bankruptcy test under the bankruptcy law, but wish to obtain the assistance of the court to settle their debts and cancel their debt. If the courts accept a claim for an arrangement with creditors, the company’s obligations will be suspended and the court will appoint a trustee to oversee the management of the company’s directors. The trustee would then seek approval from the majority of creditors for a plan that gets the company out of its existing financial situation. During the term of this plan, the company is limited to certain actions such as settling claims and taking on new debt.
The formal bankruptcy process can be used when a business meets one of two criteria:
- the cash flow test – when a company has stopped paying its debts when due for more than 30 consecutive working days due to the instability of its financial situation; or
- the balance sheet test – when a company’s assets are insufficient to meet its current liabilities.
If any of these criteria are met, the directors of the company must file for bankruptcy with the local courts. Alternatively, a creditor, or group of creditors, who owes at least AED 100,000 (USD 27,200) for more than 30 consecutive business days can petition the court for bankruptcy of a business.
Upon request, the court will consider whether the company can be restructured to become profitable again. If restructuring is not possible, the court pronounces bankruptcy and orders the liquidation of the company’s assets.
Liability of Directors under UAE Bankruptcy Law
Bankruptcy law provides a series of penalties that can be imposed on the officers and directors of a business in the event of a business going bankrupt. Offenses such as fraud, embezzlement, distribution of false profits, and falsifying company books can carry significant penalties of up to five years in prison and a $1 million fine. AED. Additionally, directors can be disqualified from managing any other UAE company for up to five years if they are found to have breached bankruptcy law.
Directors and managers may also be held criminally liable if they:
- failed to keep satisfactory financial records reflecting the true financial condition of the business;
- fail to provide information upon request to a court or trustee;
- selling undervalued assets to delay suspending debt payments or declaring the company bankrupt;
- hiding company assets from creditors; or
- pay one creditor at the expense of others.
The definition of “manager” in bankruptcy law is broad and includes anyone who plays an active role in the decision-making of the business. Therefore, directors of parent companies or others involved in the management of the business may be affected by the definition. In addition, if a company does not have sufficient assets to cover at least 20% of its debts, the courts can order its managers or administrators to pay all or part of the debt jointly if they have defaulted on their obligations. under companies law, including if they failed to take steps to inform shareholders of the company’s financial difficulties and sought to remedy those difficulties.
As bankruptcy law is relatively new, it has not yet been fully tested in court and therefore it would be advisable to take a cautious approach in order to avoid any potential liability. Anyone in a management position in a company or a director of a group company should be fully aware of their responsibilities and take a prudent approach to management decisions and record keeping in times of financial difficulty.
If a manager or director has fully complied with their obligations under UAE company law and followed international best practice, bankruptcy law actually provides an additional layer of protection. Signatories of checks who would have been the subject of criminal proceedings in the event of insufficient funds at the time of the cashing of the checks will see all criminal proceedings suspended during a restructuring or bankruptcy proceeding.
Liability of Directors under DIFC and ADGM Bankruptcy Laws
The DIFC and ADGM are financial “free zones” in the UAE, each with its own insolvency law. The DIFC’s recently revised insolvency law incorporates the UNCITRAL Model Law, which aims to facilitate cross-border insolvency proceedings. In addition to the potential offenses contained in the UAE Bankruptcy Law, directors of a DIFC company may also be held liable for the concealment or fraudulent withdrawal of any property with a value greater than USD 200; or to pledge, pledge or dispose of any property obtained on credit which has not been paid for, unless done in the ordinary course of business. In the event of a breach, the DIFC courts can order the directors to return any money or property that has been misused; to indemnify the Company for any wrongdoing or breach of fiduciary duty; make contributions to the assets of the company that the court deems appropriate; or to do or not to do an act or thing.
As is common in many jurisdictions, DIFC insolvency law allows courts to void undervalued transactions and privileged transactions. In addition, the DIFC Insolvency Act also makes illicit trading an offence. An illicit transaction would occur when a company is in insolvent liquidation and at some point before the start of the company’s liquidation, one or more of the directors should have known that there was no reasonable prospect of the company avoiding insolvent liquidation. The DIFC has temporarily suspended the Unlawful Business Offense, currently in place until July 31, 2020, as part of measures to minimize the impacts of Covid-19 on businesses. This should give directors more breathing room to navigate the turbulent conditions.
The ADGM Insolvency Regulations, last updated in 2018, are very similar to the DIFC Insolvency Act. A violation by an administrator of the ADGM Insolvency Regulations may result in a fine of up to $50,000. Similarly, ADGM courts can dismiss undervalued transactions and privileged transactions. At present, illicit dealings continue to be an offense under the ADGM Insolvency Regulations, although this can be avoided if the court is satisfied that the administrator has taken all necessary steps. to minimize the potential loss to the company’s creditors.
Co-authored by Natalia Elhage, corporate law expert, and Charlotte Holden, senior practice development attorney, at Pinsent Masons, the law firm behind Out-Law.