UAE Bankruptcy Law Preventive Settlement is a critical mechanism for businesses seeking early restructuring under the UAE’s new insolvency framework. The legal architecture of the new law seeks to minimize the loss of enterprise value during periods of financial distress, thereby preserving economic activity and employment. It introduces a framework that balances the interests of debtors, creditors, and other stakeholders, fostering an environment conducive to economic stability and growth.

The revamped Preventive Settlement process and Restructuring Plan option is designed to facilitate early intervention and consensual restructuring outside of formal bankruptcy proceedings, which aids in potentially avoiding more complex and costly liquidation scenarios. This mechanism encourages debtors to address financial difficulties proactively, aiming for a negotiated resolution with creditors that can preserve business operations and stakeholder value.

The following article provides an overview of these mechanisms and their functioning.

Understanding the UAE Bankruptcy Law Preventive Settlement

Any application for the initiation of preventative settlement or bankruptcy proceedings must be submitted before the point of insolvency and should be submitted no later than:

• 60 days from the cessation of payment date.
• The date the debtor becomes aware of information guaranteeing it will be unable to pay off debts.

Unless creditors or authorities have already submitted an application within this time period. Though it should be noted that failure to submit within this time frame does not necessarily mean the application has not been submitted (Article 15).

Replacing the earlier preventive composition tool, the new law establishes a ‘Preventive Settlement’ process. This is a court-supervised restructuring mechanism, with its key features including (Article 56):

• Debtor control over business operations.
• Debtor freedom to negotiate and implement debt settlements with its creditors.
• Court oversight to ensure fairness and transparency.
• No trustee appointment unless necessary, preserving debtor autonomy

A debtor may apply for preventive settlement if its business is at risk due to (Article 56):

• Default or anticipated inability to pay debts.
• Rejection of a prior preventive settlement or plan by creditors or the court (for other debts) after three months have passed.
• Termination of previous preventive settlement or other proceedings (for other debts) after three months.
• A prior bankruptcy declaration, after the debtor has been rehabilitated.

An application cannot be filed if the same debt is already subject to ongoing proceedings under a prior initiation decision. However, the debtor may apply at any time, even despite these restrictions, if it has evidence that the required creditor majority has already approved the preventive settlement proposal (Article 56). This affords debtors additional freedom to attempt to reach an agreement in hopes of avoiding bankruptcy and liquidation proceedings.

This application should include (Article 57):

• Proof that all legal conditions for filing are met.
• A brief outline of the preventive settlement proposal, including terms, execution method, any guarantees, and timeline.
• A summary of contracts or agreements to be signed with creditors to implement the proposal.
• The ranking of creditors.
• If a Creditors’ Committee is formed, a list of its members with representatives’ details, proof of appointment, and the scope of their authority.
• Procedures for convening a creditors’ meeting, the voting process, and who is entitled to vote.

Key Stages of the UAE Bankruptcy Law Preventive Settlement Process (Reshaping UAE’s Financial Landscape: The New Bankruptcy Law Explained):

• Debtor Control: Once proceedings begin, the debtor may continue managing its own business and assets as normal, provided it does not harm creditors’ interests.
  • Any activities outside the normal scope of business require prior Bankruptcy Court approval (Article 58).
• Suspension of Claims: Once proceedings begin, all creditor claims are suspended for three months, extendable in monthly increments up to a total of six months.
  • During this time, the debtor must act diligently to secure creditor approval for the settlement plan by providing full information, documents, and responses to creditor inquiries (Article 59). This gives the debtor relief and space to negotiate restructuring.
  • This period will come to an end if (Article 60):
    • The preventative settlement proposal is ratified by the court
    • The Bankruptcy Court decides to terminate these proceedings
    • The time limit specified above expires
  • Further Financing: The debtor is allowed to obtain additional financing as part of the process (Article 62).
    • Loans or banking facilities may be obtained before or after proceedings begin, subject to conditions in the proposal or creditor approval.
    • The Bankruptcy Court may authorize new financing, with priority over existing ordinary debts, if essential for the business and does not harm creditors’ common interests, subject to conditions.
  • Creditors’ Committee: Within 10 days of starting proceedings, the debtor must work with creditors to form a Creditors’ Committee representing creditor groups (Article 65).
    • Each group should be chaired by the creditor with the largest claim, unless a majority of creditors agree on a different representative.

Approval of the settlement proposal requires consent from a required majority of the creditors (Article 72). The required majority consists of (Article 1):

• Creditors representing more than half of the total debt attending the meeting.
• At least two-thirds of the debt represented at the meeting must vote in favour.

Only ordinary creditors with finally approved debts can vote on the proposal, unless the court allows those with temporarily approved debts to participate under specific conditions. Secured creditors can vote if the proposal affects their secured rights, but otherwise can only vote if they give up their security, which will be reinstated if the proposal is invalidated (Article 70).

Changes to the voting threshold are significant; where the 2016 law required a majority of approved creditors which made up 2/3^rd of the approved debt, this often created practical challenges. For example, small trade creditors holding minimal claims could block restructuring plans supported by the vast majority in value. Many debtors also found it difficult to secure engagement from numerous minor creditors on complex proposals.

The 2024 Bankruptcy Law simplifies this process by removing the “majority in number” requirement so that approval now hinges solely on support from creditors representing two-thirds in value of debts present at the meeting. A quorum, set at more than half of the total debt, ensures adequate representation while preventing disproportionate veto power from small claims (THE UAE’S NEW BANKRUPTCY LAW: KEY IMPACTS ON RESTRUCTURINGS | Clifford Chance).

If a proposal is rejected, the Bankruptcy Court may, at the request of the debtor, the Bankruptcy Unit, the relevant regulatory authority, or the creditors, decide to start bankruptcy proceedings if this is considered to be in the best interests of both the debtor and the creditors (Article 74).

Once the proposal is accepted by the creditors, the Court will endorse the proposal, subject to it meeting certain statutory conditions, such as majority approval, fairness and equality (Article 75).

If ratified, the proposal will apply to all included creditors, including those who voted against the proposal or did not attend the vote (Article 78). The proposal will then be implemented in accordance with terms agreed upon and ratified by the court (Article 79).

Although the process may seem complex, a law firm in Dubai with insolvency expertise can help align debtor and creditor interests during the preventive settlement phase.

Checklist – Starting the Preventive Settlement

• Assess viability of business and ability to continue operations.
• Gather financial data, creditor lists, and draft settlement proposals.
• Submit application to the Bankruptcy Department under court supervision.
• Prepare to provide creditors with full information and respond to inquiries.
• Plan to negotiate in good faith and meet statutory requirements.

Key Takeaways

• Preventive Settlement is proactive and court-guided, favoring business continuity.
• Early negotiation with creditors increases chances of business rescue.
• No trustee is imposed at first, giving the debtor more control.

Checklist – Achieving Creditor Approval

• Accurately calculate the total debt and majority thresholds.
• Ensure broad creditor attendance at meetings.
• Communicate settlement proposal details well in advance.
• Address creditor concerns to maximize approval votes.

Key Takeaways

• Creditor approval follows rigorous, transparent standards.
• Proactive communication increases the likelihood of creditor approval.
• Both attendance and voting thresholds must be met for approval.

Restructuring Plan (Company Cram-Down Rule) (UAE: New Insolvency Law explained)

Building on the previous law, debtors also have the option to propose an alternative plan to repayment, rather than having to resort directly to bankruptcy and liquidation proceedings. A debtor, its creditors, or the regulatory authority may apply to initiate restructuring proceedings if the debtor’s business is viable and:

• The debtor has stopped paying debts,
• The debtor is in a financial deficit,
• A prior plan was rejected by creditors or not ratified by the court (for other debts) at least three months ago,
• Previous proceedings were terminated (for other debts) at least three months ago, or
• The debtor was previously declared bankrupt but has since been rehabilitated.

Applications cannot be filed if the debts are still under existing bankruptcy proceedings, unless supported by evidence that the debtor’s business is now viable. However, these restrictions do not apply if the application includes evidence that the required creditor majority has already approved the plan (Article 87).

Once proceedings begin, the debtor continues running its business and managing assets under the Trustee’s supervision, provided this does not harm creditor interests. The Trustee can:

• Request information or documents from the debtor and other relevant parties.
• Take steps to monitor financial activities and ensure proper asset management.

Certain actions by the debtor will require the Trustee’s prior approval, as outlined in the Executive Regulations (Article 89).

The Bankruptcy Court may, of its own reason or upon a justified request, remove the debtor and its management from control of the business and transfer management to the Trustee, who will assume their full powers unless the court limits them (Article 90).

Once proceedings are initiated, all claims will be suspended from the day after the decision until the restructuring plan is ratified (Article 92). The suspension period will end when (Article 93):

• The court approves the plan.
• The court issues a decision to terminate the proceedings

If the Court makes a decision to initiate proceedings, the debtor, supervised by the Trustee, must prepare and submit a plan within three months, with possible extensions up to a maximum of six months if approved by the required majority (Article 109).

The Trustee is required to provide monthly updates to the Bankruptcy Department and Unit regarding the progress of the plan, thus these proceedings will be closely monitored by authorities (Article 109).

This mechanism encourages out-of-court restructuring and amicable settlements, reducing the need for formal bankruptcy proceedings. However, this approach requires cooperation between debtors and creditors, which may not always be feasible in contentious situations. The ‘company cram-down’ tool aims to balance this issue, as described below.

A key development in this area is that even if a plan is completely rejected by creditors, the Bankruptcy Court has the power to approve it at the debtor’s request if creditors would receive at least as much as in bankruptcy, after consulting the Trustee and hearing creditor objections (company cram-down tool). This has the potential to provide debtors with strong leverage when it comes to restructuring negotiations and aims to prevent unnecessary holdouts against such proposals(THE UAE’S NEW BANKRUPTCY LAW: KEY IMPACTS ON RESTRUCTURINGS | Clifford Chance). Alternatively, the court may end the proceedings or, upon request, initiate bankruptcy proceedings in line with the law’s application requirements (Article 114).

Checklist – If the Proposal is Rejected

• Consult with an experienced lawyer in Dubai on potential next steps.
• Assess if restructuring (rather than bankruptcy) remains feasible.
• Prepare alternative plans or documentation for a new application.
• Engage creditors and regulatory bodies for support of new initiatives.
• Attend meetings and negotiations to ensure favourable terms to avoid being forced to accept an unfavourable plan under cram-down rules.

Key Takeaways

• Rejection of a Preventative Settlement Plan is not the end; restructuring or bankruptcy may follow.
• Courts aim to safeguard collective interests.
• Viable businesses can pursue further rescue mechanisms.

Checklist – Preparing for a Restructuring Plan

• Conduct a thorough financial assessment to confirm viability and restructuring feasibility.
• Engage legal and financial advisors early to draft a comprehensive restructuring proposal.
• Prepare detailed disclosure materials including financials, creditor lists, and restructuring terms.
• File an application with the Bankruptcy Court to commence restructuring proceedings.
• Communicate transparently and regularly with creditors to reach a consensus.
• Plan for timely creditor meetings to obtain necessary approvals.
• Explore new financing options to support the business during restructuring.
• Ensure management complies with fiduciary duties and legal obligations.

Key Takeaways

• Restructuring helps viable businesses avoid liquidation by restructuring debts under court supervision.
• A moratorium on creditor actions preserves business value during the process.
• Approval by the majority of creditors is critical for plan implementation.
• New financing can be secured to support turnaround efforts.
• Directors and managers face heightened accountability during restructuring.

Conclusions

The UAE’s financial restructuring and bankruptcy law represents a strategic evolution towards a business-friendly, predictable, and transparent insolvency framework. It supports economic sustainability by prioritizing restructuring and preserving business operations where possible and strengthening creditor protections with clear legal remedies and trustee oversight.

Legal professionals and stakeholders navigating UAE insolvency must thoroughly understand these provisions and their practical impacts to effectively manage financial distress situations.

For companies and individuals facing financial challenges in the UAE, consulting with specialized lawyers in UAE legal counsel experienced in the new bankruptcy regime is vital to leveraging the law’s restructuring opportunities and mitigating risks. This detailed understanding of the law’s key articles and mechanisms reflects the UAE’s commitment to maintaining a robust commercial ecosystem aligned with global best practices.

For those navigating the process, specialist legal guidance can make the difference between a managed restructuring and a costly liquidation. ELP’s team advises clients through each stage of the UAE’s bankruptcy procedures, helping protect value and preserve commercial relationships. Contact Economic Law Partners today for a consultation to learn how our bankruptcy lawyerswe can assist you with insolvency risk management, restructuring strategies, and dispute prevention under the new UAE bankruptcy framework.