The United Arab Emirates have implemented new laws under the title The Law of Preventive Composition in relation to bankruptcy, with the aim of trying to create a debtor-led, court-supervised procedure available to a debtor who is i) in financial difficulties but not yet insolvent or ii) has been insolvent (under either of the tests mentioned above) for a period of less than 30 consecutive business days.
This law is in place to aid debtors when circumstances are beyond their control, such as economic factors that affect the market, lack of liquidity or trade in general, especially in cases where it is evident that the financial market has directly affected the business and when they have acted in good faith and not negligent or willfully harmed any creditors.
The new preventive composition law is considered a measure to avoid bankruptcy and to enable the debtor to reach settlements with creditors under the composition plan. These measures are implemented under the supervision of the court and with the help of a composition trustee who will be appointed by the courts.
What is the process and how do I apply?
The process to file an application for preventive composition against bankruptcy, begins with a request which must be submitted to a legally competent court by the debtor. In order to submit an application, the debtor must have not ceased paying his due debts for a period of more than thirty consecutive working days, from the date of the application submission up until the court’s decision to accept or reject the application in accordance with the provisions of Article (68) of the same law. If the application is accepted, the debt repayments remain on hold until the completion of the procedure.
The application submitted to the court should include a brief description of the debtor’s financial and economic position, a report including profit and loss forecasts and cash flow for the year following the submission of the application, copies of commercial books and financial statements, a statement of the creditors’ names and information, a detailed statement of the company’s movable and immovable funds, the approximate value of those funds, a statement of any guarantees or rights of third parties with the composition proposal and guarantees of its implementation with the designation of a trustee nominated by the debtor to take over the procedures. The court will have the discretion to accept or reject the composition application based on these factors and submissions.
In the event of the composition, the debtor is prevented from managing or disposing of his money without the approval of the judge. The judge has the right to cancel the composition procedures if it is proven that the debtor has concealed any funds, has not adhered to the composition plan for a period of more than 30 days, or has committed any act in bad faith that would harm the interests of the creditors. The decision to start the composition procedures shall be approved after completing the papers, and the consent of the majority of the creditors owning more than a third of the debts. The composition decision cannot be appealed after its issuance in accordance with the provisions of the texts and articles of Federal Law No. (9) of 2016 regarding bankruptcy.
In the event that the court rejects the composition plan or issues a judgement invalidating the composition procedures, the court shall issue its decision to terminate the preventive composition against bankruptcy, and start the procedures for declaring the debtor’s bankruptcy and liquidating his money. The debtor or one of the accepted creditors has the right to file a grievance with the court against the decision refusing to approve the plan and amend it. The court shall decide on the grievance petition within ten working days and will provide a final decision.
What significant Judgements have there been at the Court of Cassation regarding Preventive Composition Against Bankruptcy?
There have been some instances in which the court has rejected an application for preventive composition against bankruptcy, this has occurred when it has been proven that the debtor has acted in bad faith or that the application constitutes an abuse of litigation procedures.
Article 15/3 Law 9 of 2016 Federal Law regarding bankruptcy and Article 6/2 of the Federal Decree-Law (9) of 2016 defines the rules surrounding the courts acceptance of an application
“In order for the preventive composition application to be accepted, the debtor shall not be in default for more than (30) thirty consecutive business days due to his unstable financial position or indebtedness”
This judgement indicates that a debtor has the right to apply for a preventive composition against bankruptcy when his financial business is disrupted or of he is reaching a bad level of debt, but if he ceased to pay his outstanding debts, at the time of the application the submission will be deemed inadmissible.
Further reasons for Application rejections
Article 15/3 of the same Law stipulates that the court shall reject the preventive composition application if the applicant evidently acts in bad faith or the application constitutes an abuse of litigation proceedings. The court has the discretion to depict and understand the facts of the case, search and evaluate the evidence and documents duly submitted to it, compare them, interpret the documents in view of their content, and evaluate the work of the experts as an element of the evidence in the case therefore subject to its absolute discretion in taking it into account whenever deemed ascertained, convincing and consistent with what it sees true in the case. Whenever such work is taken into account – based on its causes – and referred to, it shall be deemed ascertained convincing and consistent with what it sees true in the case. The resulting judgement must be based on justifiable reasons derived from the thorough review of the documents and evidence submitted.
Review of Judgement of the Court of Cassation – Dubai dated 15-10-2019 – Appeal No. 517 / 2019 Commercial Appeal and Review of Judgement of the Court of Cassation – Dubai dated 26-5-2022 – Appeal No. 171 of 2022 Civil
This judgement was in regards to challenging the court’s decisions on the preventive composition against bankruptcy. The court stated that it is stipulated in Article (68) of Federal Decree-Law No. 19 of 2019 regarding insolvency “No judgment or decision issued by the Court may be challenged during the proceedings for the settlement of financial obligations or the Insolvency and liquidation proceedings, except in cases expressly provided for in this Decree-Law.”
In reference to Article (67) of the aforementioned Law, once an application has been submitted whether it is accepted or rejected, there is an option to challenge the final decision by anyone relevant parties.
This judgement also indicates that once the court accepts an application for settling the debtor’s financial obligations, any decisions made by the judge throughout the process cannot be challenged, this includes when the insolvency procedures and liquidation of money has started.
The procedures for declaring a debtor’s bankruptcy will be continued in the next article.