The New Bankruptcy Law caters for the creation of Bankruptcy Courts (at both a federal and local level) that are intended to manage and adjudicate preventative settlement, financial restructuring and bankruptcy processes moving forward. One theme which can be drawn out of the changes imposed by the New Bankruptcy Law is the clear desire to improve the speed and efficiency of formal restructuring and insolvency cases in the UAE. Having a dedicated set of Bankruptcy Courts will undoubtedly support this and brings the UAE further into line with international best practice, appearing a similar model to the bankruptcy court in the United States. All claims, legal proceedings, grievances and actions which are pending before the courts under the OId Bankruptcy Law, and which have not been adjudicated prior to 1 May 2024, will be transferred to the relevant Bankruptcy Court for determination upon the New Bankruptcy Law coming into effect. In addition to hearing and determining preventative settlement, financial restructuring and bankruptcy applications, the Bankruptcy Courts will have an active role in bankruptcy proceedings. Their functions will include overseeing the management of the assets and business of debtors so as to ensure the efficient progress of proceedings. They will also have the power to meet with creditors to discuss any matters considered by the Bankruptcy Court. Notably, decisions of the Bankruptcy Courts shall be writs of execution and so shall be immediately enforceable (without requiring service) and enforcement of those decisions may not be challenged. Reinforcing the status of the Bankruptcy Courts is a helpful clarification as often onshore processes under the OId Bankruptcy Law had been interrupted by parties seeking to initiate conflicting proceedings in other courts of the UAE.

The New Bankruptcy Law introduces two new administrative functions dedicated to bankruptcy and financial restructuring cases. The "Bankruptcy Department" is expected to be an extension of the Bankruptcy Courts and the "Financial Restructuring and Bankruptcy Unit" is expected to be an arm of the Ministry of Justice. Each is expected to improve the infrastructure, administration and processes of the bankruptcy regime in the UAE. While it remains to be seen how these administrative functions will interact in practice we now expect bankruptcy and financial restructuring cases to be processed much more efficiently. The Financial Restructuring and Bankruptcy Unit will be primarily responsible for handling the administrative aspects of bankruptcy and restructuring cases but will also have the power to give its opinion on certain applications, providing support to the Bankruptcy Court. It will also be responsible for creating and administering a register of court judgments and insolvency applications against debtors which is a significant development and the first time that such a register will be available in the UAE. These administrative arms replace the Financial Restructuring Committee (FRC) under the OId Bankruptcy Law. This is a helpful clarification since under the OId Bankruptcy Law it was previously unclear as to the judicial authority of the FRC and whether an application submitted by a debtor to the FRC would afford the debtor moratorium protection similar to an application under the preventative settlement procedure.

The test for debtor insolvency under the OId Bankruptcy Law embodied both a cashflow and balance sheet test, with the debtor being able to submit to a preventative settlement procedure if it has not ceased to pay its debts for a period of more than 30 consecutive working days "due to the instability of its financial position, or in case of a debit estate". Alternatively, the debtor could submit to a financial restructuring or bankruptcy procedure under the Old Bankruptcy Law if the debtor has ceased to pay its debts for a period of more than 30 consecutive working days "due to the instability of its financial position, or in case of a debit estate".

Under the New Bankruptcy Law, there is no longer a distinction in the insolvency assessment of a debtor application under the preventative settlement and bankruptcy procedures. Rather Article 15 provides: "The debtor may submit to the Bankruptcy Department an application for the initiation of preventive settlement, or bankruptcy proceedings, not later than sixty [60] days from the cessation of payment date or from the date on which it becomes aware of information confirming that it would be unable to pay off its debts when they fall due, unless any of the creditors or regulatory authorities has submitted an application for initiating the proceedings within the aforementioned period. Failure to submit the application within the deadlines stipulated in this clause does not result in the application not being admitted." There are myriad observations which can be made here:

1.    There would no longer appear to be a balance sheet insolvency test for the purposes of assessing whether a debtor can submit to a preventative settlement or bankruptcy procedure under the New Bankruptcy Law. Rather a cashflow insolvency test would appear to exist only.

2.    The New Bankruptcy Law has taken steps to make clear the benchmark for assessing insolvency by defining "cessation of payment" as "the failure on the part of the debtor to pay off any debt due after (10) days have passed beyond the deadline specified in the relevant notice [1], even if the debtor's assets are valuable enough to pay off its debts, and even if the debt that has not been paid is secured by securities that are valuable enough to pay off the debt."  The date the debtor ceased making payments is used as a benchmark throughout the New Bankruptcy Law so this is a helpful clarification.

3.    The window for assessing the debtor's solvency has increased from 30 consecutive working days to 60 days which will certainly allow debtors additional breathing space before having to consider petitioning under the New Bankruptcy Law.

4.    The distinction drawn under the Old Bankruptcy Law which provided that a debtor "shall submit" an application for financial restructuring or bankruptcy procedures if the insolvency test under the Old Bankruptcy Law was met. Under the New Bankruptcy Law, a debtor "may submit to the Bankruptcy Department an application for the initiation of preventive settlement, or bankruptcy proceedings…". This is a potentially troublesome change since there would not appear to be a hard obligation on the debtor to file for bankruptcy under the New Bankruptcy Law even if the new cashflow insolvency test was met. This is exacerbated by "…  Failure to submit the application within the deadlines stipulated in this clause does not result in the application not being admitted." We expect insolvency practitioners advising debtors and management teams in the UAE will have to grapple with this latest addition since, unlike in the insolvency regimes of other countries, there does not appear to be a fixed point in time (or jurisprudence to rely on) where it becomes clear that a debtor should file for bankruptcy. From a creditor's perspective, the ability to submit an application for financial restructuring or bankruptcy in respect of a debtor is broadly similar under the New Bankruptcy Law (with the exact threshold amount to be determined in the Executive Regulations to be published) save for the additional step that the relevant creditor or group of creditors must show that the debt is "unconditional, undisputed and payable".

There was hope that the UAE would follow the DIFC and ADGM in enacting bankruptcy legislation which adopts the UNCITRAL Model Law on Cross-Border Insolvency, particularly after Saudi Arabia's decision to do so at the end of 2022. The UNCITRAL Model Law provides a procedure-based framework aimed at streamlining cross-border insolvency proceedings. Crucially, it establishes a simplified procedure for recognition of foreign proceedings in jurisdictions which adopt the UNCITRAL Model Law. Unfortunately, the New Bankruptcy Law does not adopt the UNCITRAL Model Law and will mean that it will be necessary to continue to obtain separate recognition of the UAE bankruptcy process in foreign jurisdictions. There will be understandable concern that the New Bankruptcy Law does not implement the UNCITRAL Model Law on cross-border insolvency, and particularly the impact this may have on the recognition and enforcement of UAE bankruptcies in foreign jurisdictions. However, the recent decision of the English court in Re: Almuhairi and another [2] shows a willingness for UAE bankruptcy proceedings to be recognised outside of the UAE in any event [3].  In this case, recognition of Abu Dhabi-based bankruptcy proceedings was sought in the England, which does adopt the UNCITRAL Model Law (contained at Schedule 1 of the Cross-Border Insolvency Regulations 2006 (CBIR)). In accordance with the UNCITRAL Model Law, to satisfy the test for recognition, the applicants had to show that the bankruptcy proceedings were:

1.    "foreign proceedings" in accordance with Article 2 of Schedule 1 of the CBIR. This required satisfying the court that the proceedings were:

i.    collective judicial or administrative proceedings in a foreign state;
ii.    pursuant to a law relating to insolvency;
iii.    proceedings in which the assets and affairs of the debtor was subject to control or supervision by a foreign court; and
iv.    for the purposes of reorganisation or liquidation.

2.    "foreign main proceedings", being foreign proceedings taking place in the State where the debtor has its centre of its main interests.

The English courts held that the UAE bankruptcy proceedings were both "foreign proceedings" and "foreign main proceedings", therefore, the Trustees could realise assets owned by the debtors in Great Britain. This provides an important indicator of how English courts, and potentially other jurisdictions that have adopted the UNCITRAL Model Law, will determine the recognition of UAE bankruptcy proceedings. The decision in Re Almuhairi follows the wider trend of the English courts enforcing UAE judgments, as was the case in Invest Bank PSC v El-Husseini & Ors [2023] EWCA Civ 555 last year. In this context, it seems the absence of implementation of the UNCITRAL Model Law is at least unlikely to prevent recognition of UAE bankruptcies in England. It does though remain to be seen whether other jurisdictions follow the lead of the English courts in recognising UAE bankruptcy proceedings. However, the steps that have been taken by the UAE to bring the UAE's bankruptcy and restructuring regimes in-line with recognised global standards are likely to mean that these processes are capable of recognition in other foreign jurisdictions.

The New Bankruptcy Law maintains the framework that the Bankruptcy Department, the Financial Restructuring and Bankruptcy Unit and the Bankruptcy Courts will ultimately oversee and control any preventative settlement, financial restructuring or bankruptcy process. The New Bankruptcy Law includes provisions which would appear to extend the powers and duties of Trustees (compared with those under the Old Bankruptcy) to, for example, deal with the debtor's assets. We do not expect that this will pass complete control over any formal process to the Trustees and the guiding principle remains that they will carry out their function with the oversight of the Bankruptcy Court and the relevant administrative function.

The New Bankruptcy Law does not prescribe for any creditor driven process or out-of-court appointment of an independent office-holder in the same manner as in other jurisdictions.  Creditors in the UAE who have become exacerbated with long and drawn-out restructuring processes in the UAE may see this is a missed opportunity (though creditors do nevertheless remain able to petition to open financial restructuring or bankruptcy procedures in respect of a debtor under the New Bankruptcy Law provided the relevant conditions have been met).

The preventative composition procedure under the Old Bankruptcy Law has been renamed "preventative settlement" procedure under the New Bankruptcy Law. The principle of the process remains the same – this is a debtor led process which allows a relevant debtor to complete a composition, scheme or restructuring plan with its creditors. Crucially the New Bankruptcy Law does not automatically impose that a Trustee be appointed in respect of the relevant debtor when the application is made, as was the case under the Old Bankruptcy Law. Instead, the New Bankruptcy Law gives the debtor the power to continue to manage its business and affairs during the process provided that it does not harm the interests of creditors. A Trustee can only be appointed in respect of a preventive settlement procedure with leave of the Bankruptcy Court. This is an important change and will be viewed favourably by the business community in the UAE. It is also a change which brings the preventative settlement procedure into line with the equivalent "protective settlement" tool under the KSA bankruptcy regime. One important distinction between these regimes however is that the moratorium under the preventive settlement procedure of the UAE is automatic, which is not the case under the regime of the (KSA).

The New Bankruptcy Law has also reduced the moratorium period following the commencement of preventive settlement proceedings from ten months (which was previously extendable by four months) to three months. However, one or more extensions are available to debtors (with the permission of the Bankruptcy Court) provided that such extensions do not exceed one-month and that the moratorium does not exceed six months in total. This is in keeping with the overall theme of improving the speed and efficiency of the procedures under the New Bankruptcy Law. Debtors will have to consider carefully whether the preventative settlement route is most appropriate for their given situation since a maximum six-month moratorium period would not appear to give a significant window to negotiate a restructuring plan with its creditors with appropriate moratorium protection.

Article 168 of the OId Bankruptcy Law set out the types of transactions which are classified as antecedent. These included donations, gifts, payment of any debt before its maturity date, creation of new security to secure pre-existing debts and any transactions where a debtor's obligations significantly exceed the counterparty's obligations, whether they are cash or in-kind liabilities. Article 148 of the New Bankruptcy Law has introduced certain changes to the provisions concerning antecedent transactions, including:

• a reduced examination period which will now cover a six-month window preceding the date of cessation of payment, which can be extended to two years if the transactions involve an insider or a "related party"; and
• the introduction of a "commercial considerations" justification for certain transactions such as the premature repayment of a negotiable instrument. Despite this, it should be noted that the court is still empowered to unwind transactions which are considered harmful to creditors.

However, similar to the defences afforded under the OId Bankruptcy Law, the Bankruptcy Court may approve a transaction which would otherwise be classed as an "antecedent transaction" if it is persuaded that the debtor has acted in good faith and with the aim of carrying on its business and when doing so there were reasons to believe that such actions could be beneficial to its business (Article 150(1)).

[1] While there is no definition of "relevant notice" in the New Bankruptcy Law, Article 16(1) requires a creditor to notify a debtor of the necessity to pay its outstanding debt within 30 days from the date of such notice. If payment is not received, then the creditor may apply to initiate bankruptcy proceedings in respect of the debtor 10 days after the expiry of the 30-day period for payment. We expect that the "relevant notice" is likely to be the most recent notice which led to the bankruptcy proceedings, however it is not currently possible to predict how this will be interpreted by the UAE Courts.

[2] Re Almuhairi and another [2024] relates to the KBBO bankruptcy process under the OId Bankruptcy Law which also does not implement the UNCITRAL Model Law on cross-border insolvencies. Therefore, it provides a good indication of how the English courts will approach the issue of recognition of UAE-based bankruptcy processes initiated under the New Bankruptcy Law.