Amendments on bankruptcy - Federal Decree Law No. 35

1^st November 2021 saw a pivotal amendment to the UAE’s Bankruptcy Law. Federal Decree – Law No. 35 of 2021 was passed which amends certain provisions of the Federal Decree – Law No. 9 of 2016 on bankruptcy. This important amendment comes at a pivotal time, giving much needed clarification on allowing named individuals the right to a fair hearing and to defend themselves if found in a corporate bankruptcy scenario, and the liabilities of such individuals in cases of corporate bankruptcy filing, in the case of negative activity from company directors or named officials.

Illustrating the importance of this amendment, we can refer to the case of Marka Holdings PJSC, the UAE based retail and leisure company, who were declared bankrupt by Dubai Court in a landmark judgement in October 2021. With all of the groups' assets brought into liquidation with a court order applying to all of the Marka subsidiaries, Board members were also required to pay up to AED 448m to creditors. The company’s managers and directors were stripped of all rights to manage the company or its subsidiaries.

It is important to note that no company is ‘outside’ the law. At their peak, Marka was a hugely successful corporation with franchise contracts with brands such as Real Madrid and Reem Al Bawadi. They had gone through a hugely successful IPO and were listed on the Dubai Financial Market in 2014. However, they suffered consecutive quarterly losses since the IPO and up to 2017, with blame being assigned to various different parties.

The new amendment is a highly important step for UAE corporate entities in terms of clarifying the law and is positive news for businesses and business directors in the UAE as a whole, alongside global market confidence in the region. 

Jimmy Haoula, Managing Partner, BSA Ahmad Bin Hezeem & Associates LLP, Headquartered in DIFC, Dubai and one of the region’s most prominent, full-service law firms comments on the importance of the amendment. Haoula said, “This amendment to the bankruptcy law of the UAE is a positive clarification on the liabilities of individuals named in corporate scenarios. The previous Marka Holdings ruling was indicative of the risk that a company’s Managers and Directors may face in an underfunded bankruptcy under the provisions of the UAE Bankruptcy Law. Previously, the Bankruptcy Law presented serious risks in instances where a debtor cannot achieve a recovery of at least 20% of its debts. Likewise, the criminal prohibitions of Bankruptcy Law Title 6 could be cited to support the imposition of civil liability, when funneled through the provisions of Article 144. Since the matter of Managers and Directors personal liability is a material consideration in attracting investment into the UAE, this further judicial guidance is extremely consequential. It is a matter of both public order and maintenance of market confidence that any company officers charged with prudent corporate oversight adhere to their statutory obligations and the amendment now makes it clear where these obligations lie”.

Key points of the amendment to the UAE’s Bankruptcy Law as of 1^st November 2021;

• In a court declaration of company bankruptcy, whereby the assets are insufficient to settle at least 20% of its debts, the Court may order all or any members of the board of directors or managers to pay all or any of the company’s debts, (within their respective liability for such debts) if i the Court finds that any of them have committed any of the acts provided for in paragraphs (a), (b) and (c) of Article (147) hereof, without prejudice to paragraphs (2, 3) of the said Article.

• Any member of the board of directors or manager against whom an order has been issued pursuant to paragraph (1) above may appeal such order in accordance with the provisions stated in the Civil Procedures Code.

• Appeal of order issued against the members of the board of directors or managers shall not result in the stay of execution, or affect the res judicata force of the order declaring bankruptcy of the company.

• The members of the board of directors, the managers and the liquidators of the company declared bankrupt by a final order shall be sentenced to imprisonment for a term not exceeding (2) two years and/or a fine not exceeding AED 100,000 if they commit any of the following acts:
• Deliberately fail to keep commercial books sufficiently reflecting the actual financial position of the company or fail to carry out the inventory required by law, with the intent to cause harm to the company or its creditors.
• Deliberately withhold the information required by the trustee appointed pursuant to the provisions of Chapter Four of this Decree-Law or by the Court, or deliberately submit false information to him.
• Dispose of the company’s assets after the Cessation of Payments, with the intent to conceal those assets from the creditors.
• Pay the debt of a Creditor after Cessation of Payments to cause damage to the other creditors, or accept securities or special benefits for a creditor which are more favorable than for the other creditors, even if the same was with the intention of concluding the Protective Composition or restructuring.
• Dispose of the company’s assets for lower than their market value in bad faith or use methods or means that would cause harm to the creditors’ interests with the intention to receive funds in order to avoid or delay the Cessation of Payments or a declaration of bankruptcy or termination of the Protective Composition Procedure or restructuring.
• Spend gross amounts on gambling or speculative ventures that are outside the scope of the company’s business.
• Enter into gross undertakings for an interest other than the interest of the company, and without consideration, compared to the company's financial status as at the time of entering into such undertakings.

• The penalty provided for in this Article shall not apply to a person whose participation in the acts prohibited hereunder is not established, or whose reservations on the company decision to perform the said acts are established.  

• Any member of the board of directors or manager against whom a decision was rendered by the competent court considering the application for bankruptcy to impose travel ban on him, place his funds under provisional attachment or any other measures may appeal such decision or measure before the competent court of appeal in accordance with the procedures and requirements stipulated in Civil Procedures Code.

• The Court of Appeal may order the stay of execution of the decision or order pending the adjudication of the subject matter of appeal, if the execution of such decision or order results in irreparable damages and the application is based on serious valid reasons.

The new amendment to the UAE Bankruptcy Law is published in the Official Gazette and was entered into force from 1^st November 2021.

For more information on BSA Ahmad Bin Hezeem & Associates LLP visit www.bsabh.com. 

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About BSA:

BSA – Ahmad Bin Hezeem & Associates LLP was founded in Dubai in 2001. Now headquartered in DIFC and with offices around the Middle East, BSA is now one of the region’s most prominent, full-service law firms. BSA helps people do business all over the Middle East. Irrespective of sector or size. With offices in Dubai, UAE, Saudi Arabia, Oman, Lebanon and Iraq, BSA helps organisations negotiate the maze of regional regulations, with people at the very heart of the business. BSA has consolidated on excellence-driven regional reach. The access to key local authorities and solid legal expertise across a broad spectrum of industries sets BSA apart as one of the few Dubai headquartered legal practices that have exceeded their original boundaries. To find out more visit www.bsabh.com 

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© Press Release 2021