The proposed changes to the Saudi Arabian bankruptcy regime will provide the judiciary the right to obligate creditors to accept a settlement proposed by the debtor (the “new Law”).

The Ministry of Commerce and Investment is currently in the latter stages of reforming the Kingdom’s bankruptcy laws and regulations. The new Law is intended to replace certain sections in the Commercial Court Law and the Bankruptcy Protecting Settlement Law dealing with bankruptcy.

A declaration of bankruptcy, according to Article 645 of the Commercial Transactions Law, can be imposed on any trader who ceases to pay some or all of its commercial debts. While a debtor’s cessation of payment is a presumption against him, the trader might not be considered bankrupt if the failure to pay is due to a dispute regarding the debt. In other words, it is important to prove that the debtor ceased to pay a certain commercial debt due to financial distress and credit issues.

The long-awaited UAE Federal Bankruptcy Law (the New Law) is expected to take effect on 29 December 2016. The reforms aim to modernise the largely untested existing bankruptcy legislation in a manner suitable to the economic and business landscape of a fast-developing country like the UAE. The move is away from the stigma of bankruptcy and business failure to rescue and rehabilitation.

January 2017

Practice Group: Banking & Asset Finance

New UAE Insolvency Law

By Simon Mabin

Executive Summary

The new bankruptcy law was published in the Official Gazette dated 29 September 2016 following the issuance of Federal Decree Law No.9 of 2016 on Bankruptcy (the "Bankruptcy Law"). The Bankruptcy Law is expected to become effective in December 2016 / early 2017.

UAE Law No. 18 of 1993 ‘Concerning Commercial Transactions’ (the “Commercial Transactions Law”) provides a framework for the bankruptcy of persons engaged in trade.

Part Five of the Commercial Transactions Law sets out provisions dealing with the bankruptcy procedure for traders who cease to pay their debts. This article will take a look at the bankruptcy provisions of the Commercial Transactions Law.

Definition of Bankruptcy

Section 1 of Article 645 of the Commercial Transactions Law provides:

In these challenging economic times, some businesses are struggling to cope with financial pressures and financiers are concerned with their customers’ ability to service their financing arrangements. An effective insolvency regime is, therefore, an important element of financial system stability. The statutory insolvency regime in the United Arab Emirates (“UAE”) has often been regarded as under-developed and remains largely untested.

This article is a case study on how the UAE, a country with two cities which are significant international financial and business centres (namely Dubai and Abu Dhabi), functions without effective insolvency laws; and why this state of affairs is likely to continue for some time.

Whilst it is not strictly true that the UAE has no insolvency laws at all, it is fair to say that no one (debtors or creditors) makes use of the existing laws. A new UAE insolvency law has been drafted, but in the writer’s view it will be years before it sees the light.

Dubai currently has no effective insolvency law. Try to imagine it: How would creditors recover their entitlements? Does it lead to more arbitration activity? Does it explain why the Dubai International Arbitration Centre received more than 300 new cases last year and why arbitration is increasingly used?

Insolvency Law—Is It Necessary?

Arbitration and insolvency law in Dubai - is there a link?

Try to imagine a legal system without an effective insolvency law, as in Dubai. How would creditors recover their entitlements? Does it lead to more arbitration activity? Does it explain why the Dubai International Arbitration Centre had over 300 new cases last year and why arbitration is increasingly used?

Insolvency law - is it really necessary?

In last month's edition of Middle East Exchange,we looked at the risks for directors of UAE companies in financial difficulties. In this month's edition, we consider the position from the other side of the negotiating table, namely the risks for creditors when a UAE company faces financial difficulties.