Currently in the UAE, laws related to insolvency are unclear. Companies face harsh penalties in a bankruptcy scenario, and individuals can face criminal sanctions and penal sentences. However, a new bankruptcy law drawing from international best practice is expected to come into force in early 2017, in the wake of low oil prices since 2015. With the implementation of the new law, the UAE government seeks to create a robust legal insolvency framework, within which all businesses can operate and parties can be sufficiently protected.

The lack of a modern bankruptcy law, and possible criminal prosecution for debt default, has long been a major issue for entrepreneurs in many parts of the Middle East. That may all be about to change in the UAE as the Cabinet has approved a new draft Bankruptcy Law which aims to encourage foreign investment, boost investor confidence and assist SMEs in managing their business operations. That law is expected to be introduced in early 2017.

The slowdown in the UAE economy has resulted in a corresponding slowdown in loan growth for the UAE banks and some debt delinquencies, especially in the SME market, and that has lead in some cases to a drop in bank profits as a result of increased bad debt provisions. While we understand that contractors who were the first to be affected have largely already made arrangements, that still leaves many bank customers who are feeling the stress of making scheduled loan repayments when their own profitability and cashflows are coming under pressure.

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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

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.

There has been a lot of excitement generated around the fact that the UAE has finally adopted a Federal bankruptcy law. But this is not strictly accurate. Although the new Federal Bankruptcy Law No. 8 of 2016 (BL) is the first standalone bankruptcy legislation coming into force end of December 2016, the UAE has had a bankruptcy regime since 1993, laid down in the Commercial Transactions Code (CTC). However, it was rarely used.

The current law regarding insolvency in the UAE is not a comprehensive regime, and the present framework is found across three different laws (mainly in the Commercial Companies Law, as well as the Commercial Transactions Law and the Civil Code). Additionally, companies faced harsh penalties in a bankruptcy scenario, and individuals could also face criminal sanctions and penal sentences. In the wake of low oil prices since 2015, and more companies facing distress, a new bankruptcy law drawing from international best practice will come into force in the UAE, from the beginning of 2017.

In our previous two briefings on the Bankruptcy Law, we have looked at a summary of the key changes made by the Law, and the potential personal liability faced by directors of UAE companies in financial difficulty. In this briefing, we turn to creditor protection.

Legal Overview 

Among the most challenging issues facing international companies doing business in the United Arab Emirates (UAE) is the ability to take and perfect security over assets. This is due largely to the developing nature of the country's legal system, requiring businesses to resort to less orthodox methods to reduce risk in the event of default or non-payment.