UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for March 3, 2010

UAE Bankruptcy Series Part II: Introduction to Bankruptcy in the UAE

 

The following UAE laws contain provisions relating to bankruptcy:

1. Federal Law No. 18 Concerning Commercial Transactions and its Amendments (Articles 654 – 900). (the “Law”)

2. UAE Penal Code Federal Law No. 3 of 1987. (“Penal Procedure”)

3. UAE Civil Procedure Law as Amended by Federal Law No. 30 of 2005. (“CPL”)

Bankruptcy applies only to traders (individual or company that carries out commercial activities as set out in the Commercial Companies Law, Federal Law No. 8 of 1984). The Law states that any trader may upon his or her own request or by the request of any of his or creditors be declared bankrupt through bankruptcy proceedings. In the UAE, the Court

 http://www.dubaicourts.gov.ae/portal/page?_pageid=53,72555,53_72559&_dad=portal&_schema=PORTAL

may also take the initiative to issue a bankruptcy declaration on its own initiative or at the request of the Public Prosecution.

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Article 647 of the Law states:

1. “Bankruptcy of a trader shall be declared at his request or at the request of any one of his creditors.

2. A court may, of its own accord or at the request of the public prosecutor, decide upon bankruptcy of a trader.” A bankruptcy declaration/judgment can only be issued if the trader is defaulting on his or her debts. According to the Law, a trader is only regarded bankrupt after declared so by a competent civil court.”

Article 645 of the Law states:

“Any trader who is not able to pay his commercial debts on the due dates by reason of his financial instability may be declared as bankrupt. Any trader who uses illegal means for paying his debts shall be regarded as unable to pay those debts. A trader shall be declared bankrupt only after adjudication by the competent court.”

Article 646 of the Law states:

1) “Bankruptcy of a trader may be declared after his death, abandonment of trade or loss of capacity if it occurs while he is in a state of suspension of payment. The petition for bankruptcy shall be submitted within one year from the date of death or from the date of the trader’s name being deleted from the commercial register, in case of abandoning his business or from the date of loss of his legal capacity.

2) In case of a trader’s death, the notice of claim for declaration of bankruptcy shall be made at his last domicile, without the need to designate the heirs.

3) The heirs of the trader may petition for the declaration of bankruptcy after his death, subject to observation of the period stated in paragraph (1); and if some of the heirs object to the declaration of bankruptcy, the court shall hear their arguments and shall decide on the petition in the interest of those concerned.”

The Law states that the court where the principal office of the trader is located or where he or she has stopped paying his debts will have jurisdiction.

Article 35 of the CPL states:

1-“Commercial bankruptcy actions shall be within the jurisdiction of the court in which circuit the bankrupt’s place of business lies, however, if his place of business are numerous, the court of jurisdiction shall be the court in which circuit the headquarters of his business are situated.

2- If the merchant quits his business, the action shall be brought before the court, within which jurisdiction the defendant’s domicile lie.

3-However, the actions arising from the bankruptcy shall be brought before the court which has declared the bankruptcy.”

If thirty (30) days lapse from the date when the trader ceased paying his or her debts, then he or she is obliged to apply for a declaration of bankruptcy, otherwise he or she commits an act of bankruptcy default, which is a criminal offence under the Penal Procedure.

Article 649 of the Law states:

1- “A trader may request declaration of his bankruptcy, if his financial position becomes unstable and he suspends payment of his debts; and such a request shall become obligatory if (30) days lapse after his suspension of payment, otherwise he shall be considered as committing the crime of bankruptcy by default. The request shall be made through a report provided by him to the court, stating the reasons for his suspension of payment; and the following documents shall be attached to the report:

a) Main commercial books.

b) A duplicate of the last balance sheet audited according to the principles of proper accounting and profit and loss account.

c) A statement on total personal expenses for the last two years prior to submission of the request for declaration of bankruptcy, or for the period of his engagement in trading if it is lesser.

d) A detailed statement on real estate and moveables owned by him and their approximate value at the date of suspension of payment.

e) A statement showing names and addresses of creditors and debtors as well as the amount of their dues or debts and the securities given in guarantee thereof.

f) A statement on protests made against the trader during the last two years prior to the filing of the request for declaration of bankruptcy.

2-The documents shall be dated and signed by the trader; and if submission of some of such documents or completion of their details becomes impossible, the report shall include the reasons; and the court’s clerical staff shall draw up minutes of the same.”

After the bankruptcy application is submitted, the court preserves and protects the debtor’s assets through various measures. After satisfying all the necessary procedures, the court then passes a bankruptcy judgment.

Article 652 of the Law states:

1- “A court looking into a declaration of bankruptcy may order that necessary measures be taken in order to safeguard the debtor’s properties or administer them until a decision on declaration of bankruptcy is made.

2- The court may deputize an expert to investigate a debtor’s financial position and the reasons for his suspension of payment and to submit a report thereon.”

The creditor can also apply to the Court to pass a bankruptcy judgment as long as the creditors have evidence that the trader has suspended payment of a commercial debt.

Article 650 of the Law states:

1- “Any creditor with a commercial or civil debt that has become due, may request issue of a judgment declaring bankruptcy of the trader who is indebted to him, provided that the creditors shall provide evidence that the debtor has suspended payment of his commercial debt.

2- Any creditor, with a deferred or conditional commercial or civil debt, may request declaration of bankruptcy if his debtor has no known place of residence in the State or if he resorts to fleeing or closing his trade outlet or if he commences winding up his business or acts harmfully against his creditors, provided that evidence is given by the creditor that the debtor has suspended payment of his due commercial debt.”

The Law gives jurisdiction to UAE courts to hear bankruptcy cases for or against foreign traders who have branches, local agencies, or other establishments in the UAE. This may be a worry to foreign traders who in turn may try to seek the establishment of a foreign bankruptcy code in the UAE with the objective of shifting the legal work to a multinational law firm and a separate court outside of the UAE legal jurisdiction with its own rules and regulations based on the common law or the legal system of their home country.

Article 653 of the Law States:

1- “The civil court in whose circuit of jurisdiction a debtor’s commercial house is located shall be the competent court to declare the bankruptcy; and if the commercial houses are several, the jurisdiction shall be conferred on the court of the head office. If the trader relinquishes his business, the jurisdiction shall be conferred on the court of his place of residence in the state; and if he has no place of residence, the jurisdiction shall be held by the court of the place where he has suspended payment.

2- Without prejudice to what is stipulated by international treaties applicable in the state, bankruptcy of a trader who has a branch, agency or office in the state may be declared, even if no judgment on his bankruptcy has been issued in a foreign country, in which case the court having competence to declare the bankruptcy shall be the court in whose circuit of jurisdiction such branch, agency or office exists.”

The CPL also gives the UAE courts jurisdiction in respect of actions against foreigners relating to bankruptcy proceedings in the UAE. In these circumstances, the competent court is the court where the branch office or agency of the foreign company is located.

Article 35 of the CPL states:

1-“Commercial bankruptcy actions shall be within the jurisdiction of the court in which the circuit the bankrupt’s place of business lies, however, if his place of business are numerous, the court of jurisdiction shall be the court in which the circuit the headquarters of his or her business is situated.

2- If the merchant quits his business, the action shall be brought before the court, within which jurisdiction the defendants domicile lie.

3-However the actions arising from bankruptcy shall be brought before the court which has declared the bankruptcy.” The court which declares bankruptcy shall be venue through which petitions or claims related to the bankruptcy shall be heard.”

Article 654 of the Law states:

1-“A court which declares bankruptcy shall have competence to hear all petitions and claims arising from such bankruptcy.

2-A claim shall be considered to have arisen from bankruptcy, if it is pertaining to the administration of the bankruptcy or if a decision thereon requires application of the provisions of bankruptcy. Cases arising from debts owed to the bankruptcy by a third party or debts owed by it to a third party shall not be considered as part of the factors of the administration of the bankruptcy whenever such claims are likely to arise without bankruptcy.”

After a judgment of bankruptcy is issued by the court, the court orders a date for suspension of payment, orders the sealing of the debtor’s trading premises, and appoints a trustee to manage the bankruptcy assets.

 Article 655 of the Law states:

1 – “The court shall in a judgment of bankruptcy fix a provisional date for suspension of payment and shall order the sealing of the debtor’s trading premises and appoint a trustee for the bankruptcy.

 2-The court shall send to the public prosecutor a transcript of the judgment declaring bankruptcy immediately after issue thereof; and also to the bankruptcy trustee, ministry of economy and commerce, association of chambers of commerce and industry, office of the concerned commercial register and the central bank in the State.”

The trustee then publishes information regarding the bankruptcy judgment in one or more daily newspapers within fifteen days from the date of issuance of the judgment. Such publication acts as an invitation to creditors to enter their debts into the bankruptcy. Within thirty days from the date of issuance of the judgment, the trustee enters a summary of the judgment under the name of the creditors at the office of the real estate registry.

Article 661  of the Law states:

1- “The bankruptcy trustee shall publish an extract of the judgment declaring bankruptcy, in one or more daily newspapers specified by the court; and such publication shall be made within 15 days from the date of issue of the judgment. The said extract shall include the bankrupt’s name and place of residence, his entry number in the commercial register, the court which issued the judgment, the date on which it is given, the provisional date for suspension of payment, name of the bankruptcy judge, name and address of the receiver. Publication shall also include an invitation to creditors to enter their debts in the bankruptcy. Apart from such data, an abstract for amendment of the date of suspension of payment shall also include the new date specified by the court which will be published in the same manner.

2- The trustee of the bankruptcy shall enter a summary of the judgment under the name of creditors at the office of the real estate registry within thirty days from the date of issue of the judgment.” A court must resolve objections and disputes filed by interested parties during the proceedings and before delivering its judgment on the bankruptcy.”

Article 662 of the Law states:

1- “An interested third party may challenge the judgment of declaration of bankruptcy by an objection before the court which has issued the said judgment within ten days from the date of the last publication of the judgment summary in the newspapers. Without prejudice to the provisions of article 659, the period for objection by a third party against all judgments issued in the claims arising from the bankruptcy shall be ten days from the date of issue of the judgment unless its publication is obligatory in which case the period shall commence as from the date of publication.

 2- The judgment issued on the objection shall be challengeable by appeal.” If the court rejects the creditor’s objection and passes its judgment, the creditor still has the right to appeal against the ruling within 10 days from the date of the publication of the judgment.”

The procedure of the CPL shall apply to such appeal.

Article 663 of the Law states:

“In appealing against a judgment issued on cases of bankruptcy, the procedures and periods shown in the civil procedures code shall be followed. The judgment will be nullified if the debtor becomes capable of honoring all the debts due upon him or her.”

Article 664 of the Law states:

 “If before the judgment of bankruptcy is decisively rendered, the debtor becomes capable of honoring all debts due upon him, the court must nullify the judgment, provided that the debtor shall bear all expenses of the case.”

Judgments issued in claims of bankruptcy shall be submitted to urgent execution and without bail unless otherwise provided for.

Article 665 of the Law states:

 “Cases of bankruptcy shall come for hearing summarily; and upon urgency, a petition may be submitted to the court containing confirmation to the suspension of payment, and reasons of the urgency; after summoning the litigants to attend even after one hour and a notification given to the debtor at his last place of residence, shall be sufficient.”

Fabricating bankruptcy carries penalties in the UAE.

Article 666 of the Law states:

1- “If a debtor requests the declaration of bankruptcy and the court adjudicates rejection of the application, it may sentence him to a fine of not less than 5,000.oo and not more than 10,000 AED if it is found that he has intentionally fabricated the bankruptcy.

2- If a creditor requests declaration of bankruptcy and the court rejects the request it shall impose upon him the fine provided for in the preceding paragraph and shall order publishing of the judgment at his expense in the newspapers specified thereby if it finds that he has intended to destroy the commercial reputation of the debtor, without prejudice, however, to the right of the debtor in claiming compensation.”

Mechanisms are in place to cover the bankruptcy in the event that no funds are found available to meet the declaration of bankruptcy at the time the judgment is issued.

Article 667 of the Law states:

 “If at the time of declaration of the bankruptcy, no funds are found available to meet the expenses of declaration of the bankruptcy or the declaration and publishing thereof or the challenging thereof or the sealing of the bankrupt’s properties or the lifting thereof or protection of bankrupt’s properties, the said expenses shall be paid from the public treasury under the orders of the bankruptcy judge; and the public treasury shall recover the amounts paid by preference over all creditors from the first funds received into the bankruptcy.”

The Receiver: At the time of issuing the bankruptcy judgment, the court appoints a receiver or trustee to take charge of the bankruptcy property. The trustee meets certain criteria as stated in the Law.

Article 668 of the Law states:

1- “The court shall in the judgment of declaration of bankruptcy or in a subsequent judgment appoint a paid agent called the trustee of the bankruptcy to administer the bankruptcy.

2- At all times the bankruptcy judge may of his own accord or at the request of the bankrupt or the controller, order that one or more trustees be added provided that their number shall not exceed three.”

Article 669 of the Law states:

1- “Whoever is a creditor, a spouse, an in law or a kinsman of the bankrupt to a fourth degree or whoever during the last two years prior to the declaration of bankruptcy has been his partner, employee, accountant, or agent shall not be appointed as a trustee in the bankruptcy.

2- Furthermore, whoever has been convicted in an offence or a misdemeanor of robbery, embezzlement, breach of trust, fraud, bankruptcy by default or false testimony shall not be appointed as a bankruptcy trustee.”

The Receiver or trustee of the bankruptcy has the following powers in administering the bankruptcy assets:

Article 670 of the Law states:

1- “The trustee of the bankruptcy shall administer and keep the property of the bankruptcy and litigation shall be solely conferred upon him after the issue of the judgment of declaration of the bankruptcy whether the debts involve commercial or civil claims.

2- The trustee of the bankruptcy shall make daily record of all matters related to the administration of the bankruptcy in a special book whose pages shall be without numbers and the bankruptcy judge shall sign thereon and mark the last entry of the book.

3- The court, the bankruptcy judge and the controller may have access to the said book at anytime; and the bankrupt may also have access thereto; with permission from the judge of bankruptcy.” The fees of the Receiver are set by the Court.”

Article 674 of the Law states:

1- “The fees and expenses of the trustee of the bankruptcy shall be estimated in accordance with a decision by the bankruptcy judge, after submission by the trustee of the bankruptcy of a report on his administration.

2- The bankruptcy judge may order payment of certain amounts to the trustee of the bankruptcy prior to the submission of the report mentioned in the preceding paragraph and this shall be charged against his fees.

3- Every interested party may file a challenge with the court against the decision issued by the bankruptcy judge on the estimation of the fees and expenses of the trustee of the bankruptcy.” The bankruptcy judge has the ultimate authority for the administration of the bankruptcy. The receiver is merely the trustee of the bankruptcy assets”.

Article 675 of the Law states:

1- “Further to the powers conferred upon him by this law, a bankruptcy judge shall assume control over the administration and proceedings of the bankruptcy and shall take necessary measures to safeguard the properties thereof.

2- He shall invite creditors to meet in the cases indicated in the law, and shall preside over the meetings.

3- He may at any time summon the bankrupt or his heirs, agents, employees or any other person to hear their statements on matters related to the bankruptcy.

4- He shall submit to the court a quarterly report on the position of the bankruptcy and on each dispute related thereto on which the court has competence to decide.”

Effects of Bankruptcy on the Debtor:

The judge in charge of the bankruptcy proceeding may at his or her own accord or upon the request of the public prosecutor or the receiver, arrest the bankrupt if it is shown that he or she concealed his or her money, property, documents or books or that he or she failed to comply with any order of the court. The judge can also issue and remove interim orders in order to preserve and protect the creditor’s and or debtor’s interest.

Article 682 of the Law states:

1- “The bankruptcy judge may of his own accord or at the request of the public prosecutor or a trustee of the bankruptcy, decide detention of the bankrupt or place him under supervision at anytime if he intentionally conceals his property or books or if he refrains from executing the decisions of the bankruptcy judge, and may order that necessary precautionary measures be taken to safeguard the interests of the creditors, and the public prosecution shall implement such decision immediately upon issue.

2- The bankrupt may challenge the decision issued according to the preceding paragraph; however such challenge shall not imply a stay of execution thereof;

3- The bankruptcy judge may at anytime decide to lift off the supervision, attachment, or precautionary measures from the bankrupt.”

The bankrupt is always under the court’s supervision and he or she cannot leave the UAE without the approval of the bankruptcy judge. This may perhaps be a burden to an international bankrupt operating in the UAE.

Article 684 of the Law states:

“No bankrupt may remain absent from his place of residence without notifying the trustee of the bankruptcy in writing of his whereabouts nor shall he change it or leave the country except with permission from the bankruptcy judge. The bankrupt cannot vote, be a candidate in or participate in the elections for the federal national council, municipality or chambers of commerce, the central bank board or professional societies or councils. He or she is also disqualified from being a manager or board member of any company and from working as a commercial agent, exporter, importer, broker or an auctioneer. In addition, the bankrupt cannot work as an agent to manage the money or property of others with the exception of the ability of administering the property of his or her minors.”

Article 683 of the Law states:

1- “Whoever is declared bankrupt shall not have the right to elect or be elected or be appointed in the national council, municipal council, chamber of commerce and industry or professional associations nor shall he be a manager or director of a company nor engage in the business of commercial agency, import, export, brokerage in respect of selling or purchasing securities or sale or auction sale;

2- Likewise whoever is declared bankrupt shall not act on behalf of another party in managing his property; however, a court of jurisdiction may permit him to manage the property of his minor children if no damage shall be inflicted upon them there from.”

The bankrupt is deprived immediately after the bankruptcy judgment from managing his or her own money or property.

Article 685 of the Law states:

1- “Upon issue of the bankruptcy declaration judgment, the bankrupt shall be prevented from managing and disposing of his properties, and any actions performed by him on the day of issuing the bankruptcy judgment shall be deemed to have occurred after the issuing thereof.

2- If the action is one that shall neither be valid nor executed against a third party except by registration or other procedures, it shall not apply to the group of creditors unless such action has been made prior to the issuing of the bankruptcy judgment.”

However, the bankrupt is still allowed to carry out the necessary measures to safeguard his or her interests.

Article 686 of the Law states:

“Prevention of the bankrupt from managing and disposing of his properties shall not preclude his carrying out of the necessary measures to safeguard his interests.”

Article 689 of the Law states:

1- “Prevention of the bankrupt from management and disposal shall include all properties owned by the bankrupt on the day of issue of the judgment on declaration of the bankruptcy and the properties whose title passes to him while he is in the state of bankruptcy.

2- However prevention from management and disposal, shall not include the following:

a) Properties that may not be legally sequestrated and the aid prescribed for him.

 b) Properties owned by someone other than the bankrupt.

c) Dues related to the personal status of the bankrupt.

d) Compensations that accrue to a beneficiary under a valid insurance contract entered into by the bankrupt before the issue of the judgment of declaration of the bankruptcy; however the beneficiary shall be under obligation to reimburse the bankruptcy for insurance premiums that have been paid by the bankrupt, as of the date prescribed by the court for suspension of payment unless otherwise provided for by law.

e) The prevention of a bankrupt from the management and disposal referred to in clause 1 shall not include dues relating to the bankrupt as a person or in his capacity as head of a family or dues involving pure moral benefit. Also prevention shall not include profits that a bankrupt may earn by his activity or industry to such extent that the judge considers appropriate for the bankrupt to meet his need for supporting himself and his family.”

After the bankruptcy judgment has been passed, the bankrupt must cease paying his or her debts and he or she shall not receive his or her dues. However, the bankrupt may be paid the value of commercial paper at its maturity date without objection of the trustee.

Article 687 of the Law states:

1- “After passing a judgment on declaration of bankruptcy, a bankrupt shall neither be permitted to honor his debts nor receive his dues. 2- However, if the bankrupt is a bearer of commercial paper he may be paid its value at its maturity date unless the trustee of the bankruptcy objects to the honoring of the article 543.”

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance