Monika Humphreys-Davies Senior Associate
Creditor initiated bankruptcy proceedings in the UAE onshore courts
The new UAE Bankruptcy Law, Law No. 9 of 2016 (the “Bankruptcy Law”), entered into force on 29 December 2016. It has been a welcome development by creditors as it presents another potential avenue for recoveries via winding up or restructuring process.
In this article, we focus on the procedure that applies to a creditor wishing to commence bankruptcy proceedings against a debtor in the UAE onshore courts.
Procedure set out under the Bankruptcy Law
Pursuant to Article 69 of the Bankruptcy Law a creditor can submit an application to the court for the commencement of bankruptcy proceedings provided that he (a) is owed a debt of at least AED 100,000 (approximately USD 27,300); (b) sent a demand letter to the debtor; and (c) debt remains outstanding after 30 consecutive working days from the date of the demand letter.
The application itself must be filed with the court which has jurisdiction over the debtor, which is generally the court of the emirate where the debtor is located.
The creditor is required to provide the court with a copy of the demand letter and any other data relevant to the debt.
Once the application is submitted, the court must either decide on the application or appoint an expert to opine on the financial position of the debtor and the possibility of restructuring. Based on the outcome of the report, the court should hand down a decision either (i) approving the application and commencing bankruptcy proceedings, (ii) approving the application subject to conditions, or (iii) rejecting the application.
If the creditor’s bankruptcy application is undisputed, the Bankruptcy Law requires the judgment to be handed down within 20 days from the date of the application to the court.
The test cases currently progressing through the UAE courts show that in practice obtaining an order commencing bankruptcy proceedings is not as simple as the above outline of the Bankruptcy Law may suggest.
The problems seem to arise at the stage of judicial evaluation of the bankruptcy application. In particular, the courts grapple with the issue of evidence required to prove the debt. The Bankruptcy Law does not require the creditor to obtain a judgment against the debtor prior to applying for commencement of bankruptcy proceedings, but the courts are reluctant to start costly bankruptcy proceedings on the back of a claim which is genuinely disputed by the debtor. The Bankruptcy Law does not provide clear guidance in this regard. In practice, the courts have been rejecting applications on the basis of insufficient evidence of the debt even in cases where there is no defendant representation.
In one judgment, the court commented that whilst the court will not investigate the underlying debt itself as part of the bankruptcy proceedings, the debt must be adjudicated and ascertained before the court can accept the bankruptcy application. This is reflective of the approach taken by the courts under the old bankruptcy legislation. The law has changed and the new Bankruptcy Law does not require the creditor to obtain a judgment as evidence of debt before applying for bankruptcy.
In other cases, whilst the courts have not insisted on a judgment being obtained by the creditor, they have still been reluctant to decide on the applications without consulting experts and, in some cases, even public prosecutors. The tasks given to the experts have also varied from investigating the financial status of the debtor company (which would be in line with the law) to purely ascertaining the debt as presented by the creditor.
The approach taken by the courts is far from consistent and it will take time for the local courts to build up their insolvency law expertise. Whilst the Bankruptcy Law seems to suggest that bankruptcy proceedings can be commenced within 20 days, in reality it takes longer, even when the applications are not contested, which is something to bear in mind prior to commencing the proceedings. That said, the introduction of the Bankruptcy Law is still a welcome development for creditors as it provides additional tools for putting pressure on the debtors and recovering the outstanding amounts. Since the introduction of the law, we have acted for creditors successfully starting bankruptcy proceedings.