United Arab Emirates: New UAE Insolvency Law – What You Need To Know

Last Updated: 8 November 2016
Article by Adrian Low

The UAE government has issued Federal Decree Law No. 9 of 2016 on Bankruptcy (the New Law). The New Law was published in the Official Gazette with a publication date of 29 September 2016 and will come into force three months later on 29 December 2016.

Key Points

  • Current Commercial Code insolvency regime repealed
  • Wider application – not just "commercial traders"
  • New federal "Financial Restructuring Committee" to be appointed
  • New "balance sheet" alternative test of insolvency
  • Modernised restructuring and insolvency procedures, although still court-driven
  • Deletion of criminal offence of "bankruptcy by default" (the "30-day rule")
  • Stay of proceedings for bounced cheques when rescue procedures initiated
  • New AED 100,000 minimum threshold for creditor-initiated insolvency proceedings


Statistics show that, to date, insolvencies in the UAE have been more time-consuming, and have resulted in significantly lower recovery rates, than in other developed jurisdictions.

The UAE's current insolvency regime is principally contained in the Commercial Code (Federal Law No. 18 of 1993). These provisions, however, are largely untested and are generally regarded as needing modernisation for the UAE's economy today.

The UAE government has been formally considering amendments to the insolvency regime since 2009, and a previous draft insolvency law was published in 2011 (the 2011 Draft); the New Law, however, is different in certain respects, as discussed below.

Key changes under the New Law

  • Repeal of current regime: Chapter V of the Commercial Code, which sets out the UAE's current insolvency regime, will be expressly repealed, together with various bankruptcy-related crimes set out in the Penal Code.
  • Wider application: The New Law applies more widely than the current Commercial Code provisions, covering companies governed by the UAE Commercial Companies Law (CCL), most free zone companies, sole establishments, and civil companies conducting professional business, not just to "commercial traders". Government-owned companies not established under the CCL, for example, companies formed by Emiri decree, may "opt-in" to the provisions of the New Law by express provision in their constitutional documents. There are still some carve-outs, in particular for companies in the financial free zones (DIFC and ADGM) which have their own insolvency provisions. In contrast to the 2011 Draft, there are no provisions addressing individuals acting in a private capacity.
  • Administration: a "Financial Restructuring Committee" is to be formed by Cabinet Resolution under the authority of the Ministry of Finance. The Committee will maintain an approved list of insolvency experts and a register of insolvencies.
  • New insolvency test: the Commercial Code provisions apply to businesses which cannot pay their debts (essentially, a "cash-flow test"). The New Law introduces an alternative "balance sheet" test, where the assets of the business are insufficient to cover its liabilities.
  • Processes and procedures: The New Law sets out three main procedures for a business in financial difficulty:
    • Protective composition: this is a debtor-led, court-sponsored process, designed to facilitate the rescue of a business which is in financial difficulty but not yet insolvent. The scheme requires the approval of both a majority in number and two-thirds by value of the unsecured creditors. The scheme must be implemented within three years of court approval, which may be extended for a further three years with creditor approval.
    • Insolvency with restructuring: where a debtor is insolvent but the court determines that the business is capable of rescue, it may approve a restructuring scheme. Such a scheme is similar to the protective composition described above, requiring the same levels of creditor approval, but a longer period of five years (extendable by a further three years) is allowed for implementation.
    • Insolvency and liquidation: where a protective composition or restructuring scheme is not appropriate or approved or is terminated, or a debtor is acting in bad faith to evade its financial obligations, the court will order the insolvent winding-up of the business.

In each case, a "trustee", who must be independent of the debtor, is appointed to manage the process. The New Law includes strict time limits for making filings and lodging objections, and it is expressly provided that the relevant process continues while the court considers any objections. This is important, as time-consuming proceedings may otherwise prove to be a practical obstacle to using the procedures under the New Law.

Although the drafting is more modern and streamlined, the procedures under the New Law are not substantially different from those currently available under the Commercial Code. In particular, unlike the 2011 Draft, the New Law does not include provisions for an out-of-court financial restructuring procedure. It is possible that this may be addressed by the Financial Restructuring Committee in future.

  • Removal of offence of "bankruptcy by default": under the current regime, a trader which is unable to pay its debts must apply to be declared bankrupt within 30 days. Failure to do so constitutes the criminal offence of "bankruptcy by default", and may result in fines and potential imprisonment. Although not actively prosecuted, the risk of imprisonment may encourage a business owner in financial difficulty to abscond (or even expedite bankruptcy) rather than attempt to restructure the business. One of the key changes under the New Law is to decriminalise this behaviour. A debtor which fails to repay due debts for over 30 business days, or which is insolvent on a balance sheet basis, is required to initiate insolvency procedures. Failure to do so may result in a disqualification order against the debtor in certain circumstances - but it is not a criminal offence.
  • Bounced Cheques: potential criminal liability for the signatory of a bounced cheque applies in respect of non-UAE nationals under the Penal Code. This feature of UAE law is often cited as another key reason why so many traders in financial difficulty flee the country. The New Law provides for proceedings in respect of bounced cheques issued by the debtor to be stayed once a protective composition or restructuring scheme has been initiated, provided that the cheque in question was written prior to the application. The stay continues until the relevant procedure is completed and the holder of the cheque is treated in the same way as the debtor's other creditors, with settlement in accordance with the scheme discharging the debt and potentially rectifying the criminal breach. This is a particularly helpful change which is likely to encourage debtors to take proactive steps to address their financial difficulties.
  • Creditors: Under the Commercial Code, any creditor regardless of amount may apply to have a trader declared bankrupt. The New Law introduces some specific new requirements in this regard. Before filing insolvency proceedings against the debtor, a creditor or group of creditors must now hold debts of at least AED 100,000, and must first notify the debtor in writing to discharge the debt(s) allowing 30 consecutive business days for repayment.
  • New financing: provisions are included allowing priority to new finance following the commencement of a protective composition or restructuring scheme, with safe-guards for existing secured creditors.


The New Law represents a step forward for the UAE's insolvency regime and contains much to be welcomed. The removal of the criminal offence of bankruptcy by default, the provisions in relation to bounced cheques and the new threshold and requirements for creditor-initiated insolvency proceedings are likely to be particularly helpful for UAE businesses in practice.

Ultimately, of course, the success of the new regime will depend on the availability, expertise and willingness of both the local courts and UAE-based insolvency experts to implement it.

New UAE Insolvency Law – What You Need To Know

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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