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2021 in Review: The Legal & Regulatory Changes Impacting Bankruptcy and Insolvency in the UAE

A major headline in 2021 was the entry of the mammoth construction firm Arabtec Holding and its subsidiaries into insolvency under the UAE Bankruptcy Law (Federal Law no. 9 of 2016, as amended). As the market’s leading construction company, Arabtec’s decision to apply for Bankruptcy protection and the Court’s subsequent acceptance of the application sent shockwaves through the market as it will have significant and unpredictable effects upon its numerous creditors as well as the broader related industries in general.

Another major headline was the Dubai Court of First Instance’s judgment issued in October 2021 in Bankruptcy of Marka PJSC, imposing personal liability upon Marka’s directors for all of Marka’s losses of AED 448 million. This judgment, in an important matter of first impression, demonstrates application of the managers’ and directors’ statutory personal liability for an insolvent entity’s debt, pursuant to Bankruptcy Law Article 144, where the entity’s assets are insufficient to meet at least 20% of its liabilities.

The Bankruptcy Law was amended the month prior to Marka, effective November 2021, to somewhat limit the circumstances in which a debtor company’s managers and directors will be exposed to personal liability for the company’s liabilities.

1. Legal & Regulatory Update 1: Federal Decree-Law No. 35 of 2021, amending Federal Law No. 9 of 2016 (the Bankruptcy Law)

The amendment clarifies and limits the circumstances under which a debtor’s directors and managers may be held personally liable for the company’s debts if at least 20% of the debt cannot be repaid.

What does this change?

Bankruptcy Law Article 144 as initially promulgated, imposed this personal liability on a discretionary basis, where a debtor entity is unable to meet at least 20% of its liabilities, and where the directors’ and managers’ responsibility for the losses is evident under the provisions of the UAE Commercial Companies Law (the "CCL").

The amendment removes the reference to the CCL and now attaches personal liability in circumstances where, "it is established to the Court that any of them has committed any of the acts provided for in paragraphs (a), (b) and (c) of Article (147) hereof, without prejudice to paragraphs (2, 3) of the said Article." While the CCL sets forth various articles under which liability might attach, Article 147 only specifies three circumstances where liability may be found – thus, a personal managerial liability finding in Bankruptcy would appear to possible in fewer circumstances.

Additionally, the amendments now make explicit the rights of company managers/ directors to appeal any decision imposing liability under Article 144. Similarly, Bankruptcy Law Article 201, which imposes criminal liability against managers/ directors for various enumerated acts, has been amended to explicitly reserve the charged persons’ rights to obtain a stay of any provisional measures, such as travel ban or attachment of funds, "based on serious valid reasons".

What is the impact on business owners?

The situations in which the combined Bankruptcy Law Article 144 and 147 liability is now triggered have been limited from the much broader set of possible triggers under the CCL, to the three circumstances set forth in Article 147, at subparagraphs (a), (b), and (c). These primarily involve conduct related to an imminent insolvency, including where the debtor’s managers make risky transactions, such as disposing property for below market value, to avoid a bankruptcy filing (subparagraph (a)) as well as where payments are made to creditors to the detriment of other creditors while the company is in a default situation (subparagraph c)).

However, sub-paragraph (b) imposes this liability for engaging in transactions "with third parties to dispose of properties without consideration or against insufficient amount and without certain benefit or not proportionate to the properties of the debtor". Arguably, sub-paragraph (b) could be applied in circumstances of an obviously poor business decision that led to insolvency and may now serve as a stand-in for the no longer applicable CCL provisions, such as the gross mismanagement standard of CCL Article 84 for limited liability companies, or the mismanagement standard of CCL Article 162 applicable to public companies.

2. UAE Cabinet Decision No. 5 of 2021

The Bankruptcy Law was amended in late 2020, pursuant to Federal Law No. 21 of 2020, to provide for various forms of enhanced debtor protections, including suspension of the requirement to file in cases of insolvency, expedited claims relief and settlement procedures, and a suspension of any bankruptcy proceedings filed by a creditor, if an “Emergency Financial Crisis” has been declared, which is defined as “a general condition affecting trade or investment in the country, such as an epidemic, natural or environmental crisis, war, etc…. determined by a decision of the Council of Ministers”.

A Cabinet Decision was thereupon issued in January 2021, retroactively declaring the existence of an emergency financial crisis arising from the Covid pandemic, effective from 1 April 2020 through 31 July 2021.

What does this change?

For a time in 2021, the above emergency provisions were in force. However, as of August 2021 upon expiration of the emergency declaration, debtors’ obligations have reverted to the pre-emergency rules, importantly including a debtor’s obligation to file for Bankruptcy if in an insolvent condition. Likewise, the stay on creditors’ filings has been lifted.

What is the impact on business owners?

As the emergency rules are no longer in effect, minimal continuing impact from the expired emergency declaration is expected.

However, the existence of the declaration may provide some opportunity for debtors to assert the filing toll to mitigate liability during the emergency declaration period when no filing was required.

Our expectations for 2022

The Bankruptcy Law, which was intended to create a rescue culture rather than a punishment culture with respect to how debtors should be treated, has been relatively little used since its enactment. This is at least partly due to the market’s uncertainty as to the practical risks the law presents to both creditors and debtors.

All eyes will be on both the progress of the Arabtec Bankruptcy as well as the impact of the Marka decision. How these matters proceed will determine the extent to which the market develops confidence in the Bankruptcy Law’s capacity to adequately provide a remedy under which struggling firms may obtain debt relief, with an appropriate balance being maintained between the debtors’ and creditors’ divergent interests.

On one hand, an orderly liquidation of Arabtec that allows creditors to achieve a reasonably just recovery under the difficult circumstances therein, and perhaps permits at least some of Arabtec’s subsidiaries to be restructured, may give assurance to a nervous market that the Bankruptcy Law can be applied to large commercial entities in an even-handed fashion.

On the other hand, should the logic of the more punitive holdings in the Marka judgment gain traction and other Courts adjudicating Bankruptcy cases look to aggressively apply the punitive provisions of the Bankruptcy Law - which provide for both civil and criminal sanctions against a debtor’s responsible persons in some circumstances – confidence in the Bankruptcy Law will be eroded, at least from the debtors’ side. This more punitive judicial approach, if applied to non-responsible company officers, would likewise encourage creditors to utilize the Bankruptcy Law as a threat to derive concessions from struggling debtors, which would in turn accelerate a downward spiral for many debtors, thus undermining both the intent of the Bankruptcy Law and more generally, market confidence.

It is certainly a matter of both public order and maintenance of market confidence that company officers charged with prudent corporate oversight adhere to their statutory obligations. Likewise, it is equally important to the market that the pendulum not veer too far in the direction of applying unwarranted punitive measures. The market will thus be looking for signals that the judiciary will find balance between the need to appropriately regulate rouge corporate behavior and overzealous enforcement.

About Bankruptcy and Insolvency at BSA

Our bankruptcy and insolvency lawyers advise on some of the largest cases in the region. Acting on behalf of both debtors and creditors, we find our clients solutions to their NPLs, underfunded liabilities, and other areas of financial distress, by considering all options available under the new bankruptcy law in relation to insolvency, preventative composition, bankruptcy and liquidation.

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