Is Insolvency and Bankruptcy the same?
Insolvency is the legal term describing the situation of a debtor who is unable to pay his/her debts.
The Insolvency Law differs from the Bankruptcy Law which was promulgated by Decree-Law No. (9) of 2016, particularly in the definition of the debtor. However, the primary purpose of both laws is the same, as both exist to protect the interests of both the creditor and the debtor in a fair and balanced manner.
The insolvency law will bolster the economic stability of the nation and provide a secure environment for personal loans to the contentment of both the creditor and the debtor. The law provides the necessary balance to guarantee the rights of creditors and debtors, and encourages increased cash flows, in support of comprehensive and sustainable development efforts in the country.
Insolvency Tests
- Unpaid Debts/ “Cash Flow” Test: A debtor is deemed to be insolvent if it has seized payment of its debts as they fall due for more than 30 successive days.
- Over-indebtedness/ Balance Sheet Test: A debtor shall be deemed to be on a a state of over-indebtedness when the debror’s assets, at any given time, do not cover the debror’s liabilities.
The Bankruptcy Law places an obligation on a debtor to file for bankruptcy within 30 days of it becoming insolvent under either test or, alternatively, the debtor is able to apply for protection within that period.
Court-supervised settlements under the bankruptcy law
Preventive Composition Procedure (PCP)
PCP aims to facilitate the rescue of a business experiencing difficulties (subject to certain conditions being met) by helping a debtor reach a court-supervised settlement with its creditors. As such it is similar to the so-called \”voluntary safeguard proceedings\” (\”procedure de sauvegarde\”) under French insolvency law in that it provides a legal and judicial framework for a solvent debtor to avoid liquidation by agreeing with its creditors to repay all or part of its debts pursuant to a court-approved settlement plan.
PCP involves the following steps:
- Application: First, an application has to be made to the court for PCP.
- Court and Expert Review: The court will appoint trustee and the trustee will make a report and the court has to review the trustee report of the debtor.
- Notification of the creditors: Creditors shall be notified and preventive composition plan prepared and voted on by creditors.
- Confirmation of the court (if liquidation test is met)
- PCP implementation.
Application. The PCP application can be made only by the debtor (and no other interested parties contrary to a bankruptcy application). PCP is only available to a debtor who is experiencing financial difficulties but is not yet technically insolvent (under either of the tests mentioned above) so long as the debtor has not been in payment default for a period of more than 30 business days. Furthermore, PCP will not be available where the debtor is (i) already subject to such a procedure, or (ii) has already entered formal bankruptcy proceedings.
The court must decide within five business days whether to accept or reject the application on an ex-parte basis. The court may then appoint an expert to prepare a report on the financial standing of the debtor to assist with its decision. If the court accepts the debtor’s PCP application, the debtor will be placed under the supervision of a court-appointed trustee and all bankruptcy proceedings, enforcement actions and other claims relating to the debtor will then be automatically stayed. Once appointed, the trustee will publish the court’s decision and invite creditors to submit their claims within 20 business days.
The procedure allows an initial period of 45 business days from publication of the court’s decision for the debtor to cooperate with the trustee to prepare and submit a draft PCP. This period may be extended by application to the court.
Conclusion
The Bankruptcy Law represents a significant improvement over the previous regime available in the UAE with a more modern approach focused on the rescue and turnaround of strained businesses (and liquidation being viewed as a last resort after other options have been explored). The success of the new regime, however, will largely depend ultimately on how effectively it is used in practice, especially as it heavily relies on local courts (and the law did not establish bankruptcy courts with a specialized bench) and court-appointed trustees and experts. We also very much welcome the introduction of an out-of-court process for licensed financial institutions (and would support the extension of such processes to other categories of debtors). While the law has generally moved away from the previous approach which criminalized the liquidation process, one area of concern is that directors of the debtor continue to be personally exposed to serious criminal penalties. It is therefore important to take appropriate steps and seek expert advice early before serious difficulties arise.