UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for March 7, 2010

UAE Bankruptcy: Not Frequently Asked Questions and Answers (NFAQ’s)

 

 


 1. What are the main shortfalls of the UAE’s existing bankruptcy laws?

It supposedly doesn’t cover companies issued by decree, however, this is not true.  Bankruptcy legislation in the UAE does cover all companies including companies issued by decree in the UAE.    One of the problems currently existing in the UAE is that foreign law firms don’t fully understand how UAE bankruptcy legislation operates and how bankruptcy legislation intertwines with the other laws of the UAE.  Furthermore, those declared bankrupt may not be able to leave the UAE during the bankruptcy proceedings…a frightening prospect for expatriates and which may deter UAE investment.

 

2. What did the Dubai World default show about the existing legislation?

That if a company is set up by decree, it may be able to circumvent the existing legislation in the UAE regarding bankruptcy, which is comprehensive and based on French Civil Code.  Although untested, parallel models are functioning effectively in Switzerland and France.  Why not give  the local courts a chance to test it out and allow judges to gain the experience needed to handle such complex issues?

Dubai World is a decree corporation, meaning it was established through a decree of the Ruler of Dubai.  The UAE bankruptcy legislation still covers such corporations, however, it was decided that the current UAE bankruptcy legislation was not sufficient to govern the bankruptcy of Dubai World.  Hence,  the Government Of Dubai issued the Decree No. 57 for 2009 Establishing A Tribunal to Decide the Disputes Related to the Settlement of the Financial Position of Dubai World and Its Subsidiaries, which provides a legal framework for the restructuring of the obligations of Dubai World and its subsidiaries in accordance with international best practices and DIFC law.

The Decree establishes a tribunal of three to five internationally recognized judges, which has the function of supervising the financial reorganization of Dubai World and its subsidiaries and which will be authorized to adjudicate disputes relating to restructuring of the debt of Dubai World and any of its subsidiaries.  In addition, the Decree permits the Chief Justice of the DIFC Courts to recommend to the Ruler of Dubai additional judges to be included in the Tribunal. 

Law to be applied:

DIFC Law No. 3 of 2009 Concerning the Law of Insolvency, according to the amendments stated in the Schedule to the Decree;

The Regulations Issued by the Board of Directors of the DIFC Concerning DIFCA Insolvency Regulation according to the amendments stated in the Schedule to the Decree;

DIFC Law No. 10 of 2004 Concerning the Court of DIFC, according to the amendments stated in the Schedule to the Decree;

Legislation in Force of the Emirates;

Commercial Custom;

Principles of Justice and rules of righteousness and equity. 

The government of Dubai decided to base the law of the Decree on the insolvency laws, rules and regulations of the DIFC because it determined that such laws, rules and regulations were comprehensive and reflected international standards. 

However, the government determined that the existing DIFC laws, rules, and regulations needed additional modifications to allow them to work effectively for the reorganization of  Dubai World.  According to Gulf News, the modifications included provisions to provide financing during the course of a reorganization, provisions enabling Dubai World and its subsidiaries to continue to benefit from existing contracts, and provisions enabling the formation of appropriate classes of creditors and provisions specifying the approvals required for a voluntary company arrangement.

The tribunal has jurisdiction to hear and decide any proceedings commenced against Dubai World, any of its subsidiaries or any person relating to the settlement of the financial obligations of Dubai World and/or any of its subsidiaries. 

The Decree will be available to Dubai World and any of its subsidiaries.  However, it is expected that only entities that require protection from creditors or require the assistance of the Tribunal to restructure their debts will actually file under the Decree. 

The Tribunal will issue its judgments by the majority votes of its Judges.  The judgments of the Tribunal are final, irrevocable and not subject to appeals.  All judgments may be executed and enforced by a competent court in the Emirate of Dubai and wherever else necessary. 

The Registrar of the DIFC Court will act as the registrar for the Tribunal.  The Registrar will maintain a publicly available register of all pleadings filed under the Decree.  (Gulf news, ‘Dubai Issues New Legal Framework to Deal with Dubai World Disputes, December 14, 2010.)

 

3. What are the pros and cons of the establishment of the Dubai World Tribunal?

The local law firms and judges of the UAE will not be able to  test their own bankruptcy regime and gain the required skills to handle bankruptcy issues of this size and scope for the future.

 

4. Should Dubai adopt DIFC bankruptcy legislation? What are the advantages and disadvantages of this?

No.  The Dubai bankruptcy provisions are sufficient to cover bankruptcy and are in fact written in a manner which works in conjunction with other existing laws in the UAE.  In addition to an entire chapter of the commercial code in the UAE being devoted to bankruptcy as well as provisions for bankruptcy in the Civil Code and Penal Procedure Law, the UAE has a solid legal system through which judgments are issued and enforced. 

For example, a person declared bankrupt in the UAE can have his or her assets attached and can be detained if there are reasons to believe that the bankrupt person is concealing his or her property.  Furthermore, the bankrupt person’s disposals prior to and following the bankruptcy declaration can be challenged by the group of creditors.  Other advantages include the ability to make deferred outstanding liabilities immediately payable and the ability to secure recovery of a portion of the outstanding debt instead of risking the loss of all recovery opportunities by allowing the debtor to dispose of his or her property unchecked. 

 

Link to:

DIFC Insolvency Law: http://www.difc.ae/laws_regulations/laws/files/Insolvency_Law.pdf

Decree No. 57 of 2009 (Dubai World Tribunal and Bankruptcy Law): http://blogs.thenational.ae/economy_blog/Decree%20No.57%20for%202009.pdf

 

UAE Bankruptcy Series Part VII: Bankruptcy of Companies

 

 

A company can be declared bankrupt if it suspends payment of its commercial debts at their maturity dates.  Bankruptcy can be declared even if the company is in a state of liquidation.  However, if  a company has been liquidated,  no judgment declaring its bankruptcy may be issued.  Again a preventative composition cannot be granted to a company in a state of liquidation, however, it can be granted to a company prior to filing a bankruptcy.

Article 801 of the Law:

“In addition to the provisions stated in this chapter, the bankruptcy of companies shall be governed by the provisions prescribed in the following Articles:

  1. Except for joint-stock companies, any other trading company may be declared bankrupt if it suspends payment of its commercial debts at their maturity dates due to disruption of its financial activities.
  2. Bankruptcy of a company may be declared, even if it is in a state of liquidation.  However, if a company has been liquidated, no judgment declaring its bankruptcy may be issued.
  3. The foregoing provisions shall apply to companies that have been adjudicated void if they continue to exist de facto.”

 

In regards to a limited or limited liability company, once bankruptcy has been requested, any request for liquidation or placement of the company under receivership shall be suspended.  If a declaration of bankruptcy has been issued, then the company may not be liquidated or placed under receivership until the bankruptcy is completed. 

Article 803 of the Law:

“The following shall apply in respect of limited companies and limited liability companies:

  1. If the declaration of the bankruptcy of a company has been requested, a decision on such request pertaining to liquidation or placement of a company under receivership shall be suspended.
  2. If the declaration of the bankruptcy of a company has been adjudicated, it may not be liquidated or placed under receivership before the end of the bankruptcy.”

 

In order to file for a bankruptcy, the manager of the company must obtain permission from the majority of the partners in a joint liability and limited partnership, and in the case of other forms of companies, from the general assembly in an extraordinary meeting. 

Article 804 of the Law:

  1. “Neither the manager of the company nor the liquidator, as the case may be, shall apply for declaration of bankruptcy of the company, except after obtaining permission to this effect, from the majority of the partners in joint liability companies and limited partnership companies; and from the general assembly in an extraordinary meeting in other companies.
  2. The report referred to in Article 649 shall be submitted to a court having jurisdiction to declare bankruptcy.
  3. The report shall include the names of the current jointly liable partners, and the names of those who have withdrawn from the company after it has suspended payment showing the place of residence of each and  the date of declaration, in the commercial register, of his withdrawal from the company.”

 

A creditor of a company, who is also a partner of the company, may apply for declaration of the company’s bankruptcy.   However, partners who are not creditors shall not be permitted to file for the bankruptcy of the company.

Article 805 of the Law:

“A creditor of a company may apply for declaration of its bankruptcy, if he is a partner therein; however, partners who are not creditors shall not be permitted, in their individual capacity, to request declaration of bankruptcy of the company.”

The court can postpone the declaration of bankruptcy for the company for a period not exceeding one year. 

Article 806 of the Law:

“The court may of its own accord or at the request of the company postpone declaration of the bankruptcy of the company for a period not exceeding one year, if its financial position is likely to be enhanced, or if it is in the interest of the national economy in which case the court shall order whatever measures which it sees appropriate to be taken for the preservation of the assets of the company.”

Once the bankruptcy judgment of a company has been issued, all partners jointly liable shall be declared bankrupt including jointly liable partners  who have withdrawn from the company after the company has suspended payment.

Article 807 of the Law:

  1. “If the bankruptcy of a company has been declared, all partners jointly liable therein shall be declared bankrupt including declaration of  the bankruptcy of a jointly liable partner who has withdrawn from the company after it has suspended payment; provided that a period not exceeding a year must not have elapsed since the date of the declaration of his withdrawal from the company in the commercial register.
  2. The court shall pass one judgment declaring bankruptcy of the jointly liable partners, even if it does not have jurisdiction to declare the bankruptcy of such partners.
  3. The court shall for the purpose of the bankruptcy of the company and the bankruptcies of the jointly liable partners appoint a single judge.

However, each bankruptcy shall be independent from the other bankruptcies with regard to its management, verification of its debts and the manner of its conclusion.”

If the declaration of the bankruptcy of a company has been requested, the court may order the declaration of the bankruptcy of each person who has carried out  in his or her name, commercial business for his or her own benefit and has disposed of the company’s properties as if they were his or her own.

Article 808 of the Law:

“If the declaration of the bankruptcy of a company has been requested, the court may order the declaration of the bankruptcy of each person who has carried out , in its name, commercial business for his own benefit and has disposed of its properties as if they were his own.”

If the assets of the company are insufficient to honor at least 20% of its debts, the court may order the members of the board of directors or all of the directors jointly or severally to pay the debts of the company in whole or in part in the cases where their responsibility is proven in accordance with the provisions of the Trading Company Law.

Article 809 of the Law:

“If it is discovered that the assets of the company are insufficient to honor at least 20% of its debts, the court declaring the bankruptcy may order the members of the board of directors or all of the directors jointly or severally to pay the debts of the company in whole or in part in the cases where their responsibility is proved in accordance with the provisions of the Trading Company Law.”

The representative of the bankrupt company  as so designated by the bankrupt company shall act on the company’s behalf.

Article 810 of the Law:

“The representative of a company whose bankruptcy has been declared shall act on its behalf in any matter where the law calls for the opinion of the bankrupt to be taken or his presence to be made.  The representative of the company shall appear before the judge of the bankruptcy or its trustee, whenever he is required to do so and shall give any information or clarifications required from him.”

With the permission of the judge, the trustee of the bankruptcy may order the partners to pay the balance of their shares even if their maturity has not yet fallen due. 

Article 811 of the Law:

“The trustee of the bankruptcy may after taking the permission of its judge, order the partners to pay the balance of their shares, even if their maturity has not fallen due.  The judge of the bankruptcy may order that such claim should be restricted to the amount required for the payment of the debts of the company.”

Debentures shall not be subject to the procedure of  debt verification and shall be accepted at their nominal value after deduction of whatever is paid from them by the company.

Article 812 of the Law:

“Debentures issued by the company according to the rules prescribed in the Trading Companies Law shall not be subject to the procedures of verification of the debts and shall be accepted at their nominal value after deduction of whatever is paid from them by the company.”

The proposals for composition shall be put forward with the consent of the majority of the partners in joint liability companies and limited partnership companies and with the consent of the general assembly at an extra-ordinary meeting for other companies. The representative of the company shall submit the composition proposals at the creditor’s assembly.

Article 813 of the Law:

  1. “The proposals for composition shall be put forward with the consent of the majority of the partners in joint liability companies and limited partnership companies; and with the consent of the general assembly at an extra-ordinary meeting for other companies.
  2. The representative of the company shall submit the composition proposals at the creditor’s assembly.”

 

If the composition concerns a company that has issued debentures in excess of twenty percent of its total debts, no composition may be granted to it unless its conditions are approved by the general assembly of the holders of such debentures; and such approval is essential, in all cases, where the composition contains terms inconsistent with the conditions according to which the debentures have been issued.

Article 814 of the Law:

  1. “If the composition concerns a company that has issued debentures in excess of twenty percent of its total debts, no composition may be granted to it, unless its conditions are approved by the general assembly of the holders of such debentures; and such approval is essential, in all cases, where the composition contains terms inconsistent with the conditions according to which the debentures have been issued.
  2. The decision of the general assembly of the holders of debentures shall be issued in accordance with the provisions prescribed in the Trading Companies Law.
  3. In cases where the approval of the general assembly of the holders of debentures is essential, the invitation of the creditors to a meeting for deliberation on the composition, shall be postponed until a decision by the assembly is issued.”

 

If the bankruptcy of the company results in a union and composition is made with one or more of the jointly liable partners, the properties of the company may not be allocated to fulfill the conditions of such a composition or to secure its implementation.  The partner who achieves the composition shall be discharged of the joint liability.  If the composition is made with a company and the bankruptcies of the partners result in compositions, each composition shall be considered independent from the others and its conditions shall only apply to the creditors of the relevant bankruptcy.

Article 815 of the Law:

  1. “If the bankruptcy of the company results in a union, and composition is made with one or more of the jointly liable partners, the properties of the company may not be allocated to fulfill the conditions of such a composition or to secure its implementation; however the partner who achieves the composition shall be discharged of the joint liability.
  2. If the composition is made with a company and the bankruptcies of the partners result in compositions, each composition shall be considered independent from the others and its conditions shall not apply except to the creditors of the relevant bankruptcy.”

 

The company shall not be dissolved if the bankruptcy results in a composition.  However, the court retains the power to dissolve the company if the assets remaining after liquidation of the composition are insufficient to carry on the business in a beneficial manner.

Article 816 of the Law:

“The company shall not be dissolved if its bankruptcy results in a union; however the court declaring the bankruptcy may decide dissolution of the company if it is found out that its assets remaining after liquidation of the union are insufficient to carry on its business in a beneficial manner.”

UAE Bankruptcy Series Part VI: Preventative Composition

 

 

The other form of composition is called preventative composition. Usually, the application for the preventative composition is submitted to the court before the petition of bankruptcy by the debtor, however, it is possible to submit the application after the filing for bankruptcy. 

The composition scheme has certain conditions which must be satisfied.  These conditions provide that the trader should have:

a.)  Commercial registration.

b.)  An uncertain financial position.

c.)  Acted in good faith.

A trader may apply for a preventative composition when he or she defaults on payment of debts or within twenty days following  suspension  of payment even if he or she applies for bankruptcy.  Except for joint stock companies, preventative composition may be granted to companies which meet the conditions provided for in Article 831 of the Law.  However, such composition may not be granted to a company in a state of liquidation.

Article 831 of the Law:

  1. “Any trader whose financial state has become disrupted to an extent that may lead to his suspension of payment, or within the twenty days following such suspension, may apply for a preventative composition.
  2. A trader who suspends payment of his debts even if he applies for declaration of his bankruptcy may apply for preventative composition if he meets the conditions stated in the preceding paragraph.
  3. Except for joint stock companies, preventative composition may be granted to any company which meets the conditions provided for in the two preceding paragraphs.  However, such composition may not be granted to a company in a state of liquidation.”

 

A trader must meet certain criteria in order to submit a successful application for preventative composition.

Article 833 of the Law:

  1. “Application for preventative bankruptcy shall not be accepted unless the applicant has continuously practiced trade during the year that preceded the submission of the application and that during such period he has complied with the provisions pertaining to the commercial register and commercial books.
  2. The director of the company shall not be permitted to apply for composition except after obtaining permission to this effect from the majority of partners in joint liability companies and limited partnership companies and from the general assembly in an extra -ordinary meeting in other companies.”

 

The trader’s inheritors may apply for a preventative composition under the following terms:

Article 834 of the Law:

“Those to whom commercial house outlet of a deceased devolves either by succession or by a will may apply for preventative composition within the three months following his death, if they carry on his business provided that the trader was entitled before his death for such composition, however, if any of them has objected to the said application for composition the court shall hear his statements and shall decide on the application in accordance with the best interest of the concerned parties.”

The debtor may not re-apply for a preventative composition during the implementation of a preventative composition.

Article 835 of the Law:

“During implementation of a preventative composition, the debtor may not re-apply for composition.”

The decision regarding bankruptcy shall not be made until after the judgment rejecting the preventative composition is passed.

Article 836 of the Law:

“No decision shall be made in respect of any application for declaration of the bankruptcy of a debtor except after a definitive judgment rejecting the preventative composition application is passed.”

The application for the preventative composition shall be submitted to the court having jurisdiction to declare bankruptcy.  The proposed settlement shall contain at least  50% of the debt and the payment period shall not take more than three years from the date on which the composition is approved by the court.  The application shall contain the following information:

Article 837 of the Law:

1. “The application for preventative composition shall be submitted to a court having the jurisdiction to declare bankruptcy.  The reasons for the disruption of the business, the proposals for the preventative composition and the guarantees for its implementation must be stated in the application provided that the proposed settlement shall not be less than 50% of the debt and the payment period shall not exceed three years from the date on which the composition was ratified.

2. The following shall be attached to the preventive composition application:

  1. Documents supporting the details contained therein.
  2. A certificate from the Commercial Register’s office, showing compliance with the regulations of the register during the year preceding the application for the preventive composition.
  3. A certificate from the Chamber of Commerce indicating that the business was regularly being practiced during the year preceding the application for the composition.
  4. The obligatory commercial books.
  5. A copy of the last balance sheet and the profit and loss account.
  6. A comprehensive statement of the personal expenses in the year preceding the application for the composition.
  7. A detailed statement showing movable and immoveable properties and their approximate value at the time of applying for the composition.
  8. A list showing names and addresses of creditors and debtors as well as the amounts of their rights or liabilities, and the insurances given as security for them.
  9. A declaration by the debtor that he has never been convicted in any of the crimes provided for in Article 839/2 and that he has not previously obtained a preventative composition which is still being implemented.

 

3. If the application is by a company, it should be accompanied by a copy of the Articles of Partnership and memorandum of incorporation duly attested by the department of the commercial register together with documents showing the capacity of the applicant and a copy of the decision issued by the partners or by the general assembly requesting composition as well as a list showing the names and addresses of the joint partners.

4. The documents must be dated and signed by the composition applicant.  However, if it is not possible to submit some of the said documents or to complete their particulars, the reasons for such failure must be shown in the application. 

5. The clerical section of the court shall make minutes confirming their receiving of the above-mentioned documents.” 

During the composition proceedings, the court shall order the necessary measures to preserve and manage the debtor’s property until a decision is made on the preventative composition application.  The Court may also appoint an expert for the purpose of assessing the financial situation of the debtor. 

Article 838 of the Law:

“The Court looking into the composition application shall order the necessary measures to be taken to preserve the debtor’s properties or maintain their management until a decision is made on the application.  It may also delegate an expert to examine the financial position of the debtor and the reasons for its disruption and to submit a report thereon.  The court shall urgently decide on the composition application without litigation.”

If the court decides to accept the composition application, it orders the opening of the proceedings and appoints a judge to supervise the composition along with trustee(s) to commence and follow up the composition procedures.  The court will then order the debtor to submit an amount of money decided by the court.

 Article 841 of the Law:

  1. “If the court decides to accept the composition application, it shall order the opening of the proceedings; and the court shall, in its decision appoint one of its judges to supervise the composition further to one or more trustees to commence and follow up the composition procedures; and the court’s decision shall not be subject to challenge in any manner whatsoever.
  2. The debtors shall deposit with the treasury of the court, a sum of money to be determined by the court to as trust to meet the expenses of the proceedings; and the court shall order the cancellation or suspension of the composition if the debtor fails to deposit the trust within the period designated by it.”

 Article 843 of the Law:

“The trustee of the composition shall be appointed according to Article 668 and the restrictions provided for in Article 669 shall apply to him.”

Within five days from the date on which the trustee has been informed of his or her appointment, the trustee shall register the decision for the opening of the composition into the commercial register and publish a summary thereof with an invitation to creditors in two daily newspapers.

Article 844 of the Law:

  1. The court shall inform the composition trustee of the decision issued for his appointment, at a time not later than the day following the issuing of the decision.
  2. Within five days from the date on which the appointment has been informed to him, the trustee shall register the decision issued for the opening the composition proceedings in the commercial register, and shall publish a summary thereof, accompanied by an invitation to the creditors to a meeting in two daily newspapers to be nominated by the supervising judge.
  3. The trustee shall within the period shown in the preceding paragraph convene the meeting by a notification to the creditors whose addresses are known and he shall attach the proposals of the composition thereto.”

 

Upon issuance of the decision of the opening of the composition proceedings, the trustee shall immediately commence inventory proceedings.

Article 845 of the Law:

  1. “The supervising judge shall upon issue of the decision opening the composition proceedings, lose the debtor’s books and append his signature upon them.
  2. Upon receiving a notification of the appointment the trustee shall immediately commence the inventory proceedings in the presence of the debtor and the court clerk.”

 

After the opening of the composition proceedings, the debtor continues to manage his or her own property under the supervision of the trustee and can carry out all routine actions required by his or her commercial business.  However, the debtor will be restricted from doing certain things  without the permission of the judge such as entering into another composition, making a mortgage, or performing a title conveyancing act that is not required by his or her routine commercial work.

Article 846 of the Law:

“After the issuing of the decision opening the composition proceedings, the debtors shall continue to manage his properties under the supervision of the composition trustee and shall carry out all routine actions required by his commercial business.  However, donations made by the debtor after issuance of the said decision shall not apply to the creditors.

  1. After the issuing of the decision, the debtor shall not be permitted to borrow or enter into a composition or make a mortgage or perform a title conveying act not required by his routine commercial works except after obtaining permission from the supervising judge; and any action to the contrary shall not be accepted as evidence against the creditors.”

 

Upon the issuing of the decision opening the composition proceedings, claims and executor procedures against the debtor will be suspended but claims filed by the debtor and the executor procedures undertaken by the debtor shall remain operative.

Article 847 of the Law:

  1. “Upon the issuing of the decision opening the composition proceedings, claims and executor procedures against the debtors shall be suspended.  Such suspension shall not be beneficial to debtors who are jointly liable with the debtor or his guarantors in the debt.  But claims filed by the debtor and the executor procedures undertaken by him shall remain operative and the trustee shall be admitted therein.
  2. Mortgages and rights of lien imposed on the properties of the debtor and registered after the issue of the decision opening the composition proceedings may not be used as argument against the creditors.”

 Article 848 of the Law:

“Issuance of the decision opening the composition proceedings shall not involve maturity of debts owed by the debtor or suspension of their interest.”

The court can cancel the composition proceedings if it has found that the debtor has concealed or destroyed part of his or her properties, if he or she has acted in bad faith causing harm to the creditors, or if he or she has acted in manner in Article 645 of the Law.

Article 849 of the Law:

“If a debtor after submitting an application for composition has concealed or destroyed part of his properties or if he has acted in bad faith causing harm to the creditors or if he has acted in the manners shown in Article 645 the court may of its own accord order cancellation of the composition proceedings.”

For debtors inside the country, they shall submit to the trustee of the composition the documents of their debts accompanied by a statement showing such debts and their securities within ten days from the publishing of an abstract of the decision opening the composition proceedings or from the date of receiving a letter of notification.  Debtors residing outside the UAE shall have thirty days to do so.

Article 850 of the Law:

  1. “All creditors even if their debts are not mature or guaranteed by special securities or established by definitive judgments shall within ten days from the date of publishing an abstract of the decision opening the composition proceedings or from the date of receiving a letter of notification, submit to the trustee of the composition the documents of their debts accompanied by a statement showing such debts and their securities, if any, and their amounts evaluated in the national currency on the basis of decision.  The statement and the documents may be sent to the trustee.
  2. The period shown in the preceding clause shall be thirty days in respect of creditors staying outside the country.”

 

Next the trustee shall make a list of the creditors who have requested to participate in the composition proceedings along with a statement of each debt with supporting documents attached.  The trustee shall also include the insurances guaranteeing it along with his or her opinion regarding acceptance or rejection.  During this process, the trustee may request that the creditor submit further information regarding the debt.

Article 851 of the Law:

  1. “After the expiry of the period provided for in the preceding Article, the trustee of the composition shall make a list of the creditors who have requested to participate in the composition proceedings; and a statement showing the amount of each debt separately together with the supporting documents and the insurances guaranteeing it, if any, further to his opinion regarding its acceptance or rejection.
  2. The trustee may request the creditor to submit notes on the debt or to complete its documents or amend its amount or nature.”

 

The trustee will then deposit a list of the debts with the court within thirty days from the date of issuance of the judgment opening the composition proceedings.  Within three days after the depositing of the list of debts with the court, the trustee must publish a statement of this occurrence in a local newspaper.  The trustee will then send a copy of such list to the debtor and creditors. 

Article 852 of the Law:

  1. “The trustee of the composition shall deposit a list of the debts with the court.  Such deposit shall be made within thirty days, at most, from the date of issue of the decision opening the composition proceedings; and when necessary, the period may be extended by a decision from the supervising judge.
  2. The composition trustee shall within the three days following the lodgment publish a statement of such occurrence in a local daily newspaper determined by the supervising judge.  The trustee shall send to the debtor and to each creditor a copy of the debts list and a statement of the amounts which he considers acceptable from each debt.
  3. Whoever has interests shall be entitled to examine the list deposited with the court.” 

 

The debtor and creditors may object to the debts listed in the list of debts within a period of ten days from publication in the newspaper. 

Article 853 of the Law:

“The debtor and every creditor whose name is shown in the list of the debts, may object to the debts listed therein, within a period of ten days from the date the occurrence of the lodgment has been published in the newspapers.  The objection shall be submitted to the supervising judge and may be sent by a registered letter, cable, fax, telex, or by other modern technical means of communications; however, no time in respect of distance shall be added to the said period.”

After the ten day expiry period, the judge shall make a final list of the undisputed debts.  The judge shall decide on the disputed debts within thirty days from the end of the expiry of the objection period. 

Article 854 of the Law:

  1. “After expiry of the period provided for in the preceding Article, the supervising judge shall make a final list of the undisputed debts, and shall mark the statement pertaining to a debt to indicate its acceptance and the amount accepted there from.
  2. The supervising judge may consider the debt as objected to, even if no objection in respect thereof has been submitted.
  3. The supervising judge shall decide on the dispute debts within thirty days from the date of expiry of the objection period.
  4. The supervising judge shall notify the concerned parties of the time fixed for the session at least three days before it is held and shall also notify them of the decision issued with regard to the objection immediately upon its issue.”

 

The judge’s decision regarding the disputed debts can be contested before the court to which the application for the composition has been submitted. 

Article 855 of the Law:

  1. “The decision issued by the supervising judge regarding acceptance or rejection of the debt, may be contested before the court to which the application for composition has been submitted.
  2. No suspension of the composition proceedings shall evolve as a result of the challenge, unless the court gives orders to this effect.
  3. Before a decision is made on the challenge, the court may order acceptance of the debt temporarily in an amount to be estimated by it.
  4. No debt may be accepted temporarily, if a criminal action has been filed regarding it.
  5. If the objection to the debt is related to its insurances, it shall be accepted provisionally as an ordinary debt.”

 

The trustee must lodge a report on the financial status of the debtor at least five days before the time fixed for the meeting of creditors along with a list of the creditors entitled to participate in the composition proceedings.  The report shall contain the opinion of the trustee on the structure of the debtor’s composition.  

Article 858 of the Law:

  1. “The composition trustee shall lodge with the court, at least five days before the time fixed for the meeting of the creditors a report on the financial state of the debtor and reasons of its disruption further to a list showing names of the creditors who are entitled to participate in the composition proceedings.
  2. The report must contain the opinion of the trustee on the conditions proposed by the debtor for the composition.”

 

The composition must be approved by a majority  (two-thirds) of the creditors whose debts have been accepted by the court. 

Article 861 of the Law:

  1. “Composition shall not occur except by the approval of the majority of the creditors whose debts have been finally or temporarily accepted, provided that they are holders of two thirds of such debts.  However the creditors who have not participated in voting shall not be counted in the said majorities nor shall their debts be counted.
  2. If the composition is pertaining to a company that has issued debentures, the terms provided for in article 814 must be observed.”

 

The composition shall become effective upon the issuance of the judgment approving it, which is not subject to challenge.  In the decision, the court may appoint from among the creditors one or more controllers to supervise the execution of the composition.

Article 864 of the Law:

  1. “Minutes of the composition session shall be drawn up and it shall be signed by the supervising judge, the trustee, the debtor, and the creditors who are present.
  2. Whoever has interest may within five days from the date of signing the composition minutes inform the supervising judge in writing of whatever remarks he might have in connection with the composition.
  3. The supervising judge shall refer the matter to the court within three days from the lapse of the said time limit, in order to issue a decision cancelling or ratifying the composition.
  4. The decision cancelling the composition shall be causative; and such decision shall be challengeable.
  5. The composition shall become effective as soon as the decision approving it has been issued and it shall not be subject to challenge.  In the said decision, the court may appoint, from among the creditors, one or more controllers to supervise the manner in which the terms and conditions of the composition are being executed and to inform the court of any violations to such conditions by the debtor.”

 

The approval of the composition shall be declared in the same manner as the bankruptcy judgment and the abstract of this approval shall be published in the Commercial Register.  The controller(s) shall register a summary of the decision with each registration department in whose jurisdiction the real estate of the bankrupt exists within ten days from the date of the issuance of the decision approving the composition.

Article 866 of the Law:

  1. “The decision issued in ratification of the composition shall be declared in the same manner in which a bankruptcy judgment is declared and the abstract to be published in place of residence, number of his entry in the Commercial Register, date of the ratification decision and a summary of the most important conditions of the composition.
  2. The controller who supervises the execution of the composition conditions shall, in his capacity as representative of the creditors; and within ten days from the date of issue of the decision approving the composition, enter a summary of this decision with each registration department in whose jurisdiction the real estate of the bankrupt exists.  Such registration shall involve creation of mortgage on the said real estate to secure the interests of the creditors to whom the composition shall apply, unless otherwise provided for in the composition.  The supervising controller shall request termination of the mortgage after implementation of the conditions of the composition.”

 

The composition applies to all creditors whose debts are considered ordinary under the bankruptcy provisions even if they did not participate in the composition proceedings or agree to the composition.

Article 867 of the Law:

“The composition shall apply to all creditors whose debts are considered ordinary according to the bankruptcy provisions, even if they have not participated in its proceedings or agreed to them.”

Debtors acting in conjunction with the debtor or with his or her guarantors in the debt shall not benefit from the composition.  However, if the composition is made with a company, the partners who have a liability against all of their properties for its debts shall benefit from the  conditions of the composition unless the composition stipulates otherwise.  The composition shall not apply to maintenance debts nor to debts arising after the issuance of the judgment opening the composition proceedings.

Article 868 of the Law:

  1. “Debtors acting jointly with the debtor or with his guarantors in the debt shall not benefit from the composition.  However if the composition is made with a company, the partners who have a liability against all of their properties for its debts shall benefit from its conditions unless the composition stipulates otherwise.
  2. The composition shall not apply to maintenance debts nor to debts arising after the issue of the decision opening the composition proceedings.” 

 

Within fifteen days from the date of completion of the execution of the composition conditions, the controller can close the composition by requesting the court to issue a judgment declaring the composition closed.

Article 871 of the Law:

“The controller supervising the execution of the composition conditions shall within fifteen days from the date of completing the execution of the composition conditions, request the court to issue a decision in respect of the closure of the proceedings, and such application shall be declared in the manner provided for in Article 844.” 

The decision closing the proceeding shall be issued within thirty days from the date of publication in the local newspapers and the decision shall then be registered in the Commercial Register.

Article 872 of the Law:

“The decision closing the proceeding shall be issued within thirty days from the date of publication in the newspapers and the said decision shall be entered in the Commercial Register, according to the provisions pertaining to such register.”

If the debtor does not fulfill the conditions of the composition, application may be made for dissolution of the composition.  Also dissolution may be requested if the debtor dies and it becomes clear that he or she was not expecting implementation of the composition conditions.

Article 875 of the Law:

“If the debtor fails to fulfill the conditions of the composition, application may be made for its dissolution.  Also dissolution may be requested if the debtor dies and it becomes clear that he was not expecting implementation of the composition conditions.”

The dissolution of the composition shall not result in the discharge of the guarantor who has warranted the fulfillment of its conditions.

Article 876 of the Law:

“The dissolution of the composition shall not result in the discharge of the guarantor who has warranted the fulfillment of its conditions; and he shall be summoned to attend the session in which the appeal for dissolution shall be looked into.”

UAE Bankruptcy Series Part V: Judicial Composition

 

 

A composition scheme is a method used to sidestep bankruptcy proceedings and settle the debts according to a mutually agreed payment plan or settlement.  In the UAE, two types of composition exist, the judicial composition which can be instituted after adjudication proceedings and a preventative composition which must be submitted to the court prior to the adjudication proceedings.  In a judicial composition scheme, the debtor surrenders his or her property in order to sell them and distribute their value among the creditors according to a payment plan . The composition must be approved by a majority of the creditors, two-thirds holding the debt accepted by the court, and must be approved by the bankruptcy judge to take effect.  The trustee then terminates the bankruptcy. 

According to Al Tamimi, three conditions need to be satisfied in order for a judicial composition to be valid:

  1. The majority approval of the creditors; absence of a fraudulent act of  bankruptcy on the part of the debtor; and the court’s approval.
  2. If approved by the court, the court may then make an order annulling the bankruptcy and re-vesting the property of the bankrupt.  The creditors shall resume their rights to pursue claims or executions against the debtor.
  3. Ultimate objective is to effect all creditors, including those who refuse to accept it.  This is without prejudice to the right of interested parties to apply for a nullification of a judicial composition on the basis for example that a default has been made in payment of any installment due under the judicial composition or that the scheme cannot proceed without injustice or undue delay or that the approval of the court was obtained by fraud or collusion.  

 

Article 785 of the Law states:

  1. “A composition may be made on the basis that the debtor shall surrender his property in whole or in part in order to sell them and distribute their value among the creditors;
  2. The conditions, effects, nullity and dissolution of this composition shall be subject to the provisions of the judicial composition; however, the debtor shall be prohibited from managing or disposing of the properties surrendered by him.
  3. Such properties shall be sold and their value shall be distributed in the same manner followed in the sale and distribution of properties in the case of a union.”

 

The judge invites the creditors whose debts have been accepted to attend the deliberations regarding the composition.  The trustee must publish this invitation in a local newspaper.

Article 764 of the Law states:

  1. “The judge of the bankruptcy shall invite the creditors whose debts have been finally or provisionally accepted to attend the deliberation regarding the composition.
  2. The invitation to the composition meeting shall be sent in case no objection to the debts has been received during the seven days following preparation of the list of debts referred to in Article 757.  However, in case objection does occur, the invitation shall be sent within fifteen days following expiry of the period fixed for contestation before the judge of the bankruptcy against the last decision issued by him in respect of acceptance or rejection of the debts.
  3. The trustee of the bankruptcy shall within the period provided for in the preceding paragraph publish the invitation for attending the deliberations on the composition in a daily newspaper nominated by the judge of the bankruptcy.”

 

In order to be made, the composition must have the approval of a majority of the creditors holding at least two-thirds of the bankrupt’s debts, which have been accepted by the bankruptcy judge.

Article 767 of the Law states:

  1. “The composition shall not be made, except with the approval of a number of creditors representing a numerical majority and holding two thirds of the debts that have been finally or provisionally accepted.
  2. The creditor who absents himself from the composition meeting shall be considered an objector to it.”

 

A composition scheme is akin to an extended payment plan  or settlement agreed upon by the parties to the composition deliberations and approved by the bankruptcy judge.  The composition becomes effective upon the issuance of the decision approving it.

Article 773 of the Law states:

  1. “A composition may grant a debtor extended periods for payment of the debts, and may include a waiver to a debtor over a part of the debt; however, the debtor shall remain liable for the part included in the waiver, as a natural debt.
  2. Composition may be made on condition of payment if the debtor becomes solvent within five years from the date of occurrence of the composition and the debtor shall not be considered as solvent unless the value of his assets exceeds the debts due from him.
  3. Creditors may request provision of one or more guarantors to secure implementation of the composition conditions.”

 Article 774 of the Law states:

  1. “The judge of the bankruptcy shall submit the minutes of the composition to the court that has declared the bankruptcy for its approval and anyone who was a party to the said composition may also request its ratification.
  2. Whoever has interest shall inform the judge of the bankruptcy in writing of his comments on the composition within five days from the date of signing the composition minutes.
  3. The court shall within three days from expiry of the period mentioned in the preceding paragraph make a decision nullifying or approving the composition.
  4. The decision nullifying the composition must be causative and such decision shall be challengeable.
  5. The composition shall become effective upon the issuing of a decision approving it, and the controller of the bankruptcy shall supervise the enforcement of its conditions; and if the bankruptcy has no controller, the court shall appoint a controller to supervise the enforcement of the composition conditions.”

 

The composition applies to the Group of Creditors even if one or several of these creditors did not agree to or partake in the composition proceedings.  However, the composition does not apply to creditors having liens and pledges if they have not relinquished them nor to ordinary creditors whose debts arose during the time of bankruptcy.

Article 775 of the Law states:

  1. “The composition shall apply to the creditors who constitute the group of creditors, even with regards to these who have not taken part in its proceedings or have not agreed to it.
  2. The composition shall not apply to creditors having liens and pledges if they have not relinquished them, nor shall it apply to ordinary creditors whose debts arise during the period of bankruptcy.”

 

Once the composition is approved by the court’s decision, all effects of the bankruptcy shall cease.  The trustee then must carry out certain responsibilities to close the bankruptcy.

Article 777 of the Law states:

  1. “Except for deprivation of rights provided for under special laws, all effects of the bankruptcy shall cease upon the issue of the court’s decision approving the composition; and this shall have no effect on the right to prosecute.
  2. The trustee of the bankruptcy shall submit to the bankrupt a closing account; and such account shall be discussed in the presence of the judge of the bankruptcy.
  3. The task of the trustee of the bankruptcy shall terminate and the bankrupt shall receive from him his properties, books and papers against a receipt and the trustee shall not be responsible for the said things if the bankrupt fails to receive them within one year from the date of approval of the closing account.
  4. The judge of the bankruptcy shall make minutes of all of the foregoing; and if a dispute arises, the judge of the bankruptcy shall refer it to the court to decide on it.”

 

If the trustee fails to terminate the bankruptcy according to the Law, the composition may be dissolved. 

Article 780 of the Law states:

  1. “If a bankrupt fails to execute the conditions of a composition, an appeal for its dissolution may be made to the court which has approved it.
  2. The dissolution of a composition, shall not implicate discharge of the guarantor who has warranted the performance of its conditions, and he must be served with a summons to attend the session where the appeal for dissolution shall be heard.”

 

Creditors can request transactions made during the period of the Composition be rendered invalid according to the Civil Transactions Law.  These types of claims are limited to two years from the date of the dissolution of the composition.

Article 783 of the Law states:

“Transactions made by the debtor, after the issue of the decision approving the composition and before its nullification or dissolution shall be effective against the creditors and they shall not be permitted to request them to be rendered non effective except in accordance with the provisions prescribed in the Civil Transactions Law concerning claims for invalidation of transactions, and such claim shall not come for hearing after the lapse of two years from the date of nullification of dissolution of the composition.”

After dissolution or termination of the composition, the creditor’s debts shall be returned to them in full.  However, if this is not the case, they shall re-join the Group of Creditors with regard to their original debts in full if they did not receive anything from the composition or pro-rata in relation to the amounts received from the composition structure.

Article 784 of the Law states:

  1. “After the composition is rendered null and void or dissolute, the creditor’s debts shall be returned to them in full, with respect to the bankrupt only.
  2. Such creditors shall join the group of creditors with regard to their original debts in full if they have not received anything from the amount that has been decided for them in the composition, otherwise their original debts shall be reduced pro-rata to what they have received from the said amount.”

 

 

 

 

 

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance