Financial distress is a stage any company may go through, but reaching it does not necessarily mean the end of the business. The UAE legislator has regulated this matter through the Financial Restructuring and Bankruptcy Law, in force since 1 May 2024, which replaced the former bankruptcy law and gave the distressed company three graduated paths: preventive settlement to preserve the business while repaying debts, then restructuring through an approved plan, and finally declaration of bankruptcy and liquidation of assets if no other option remains — all under the supervision of the specialised Bankruptcy Court. In this article we explain when a company should resort to each path, how the procedures work in practice, who the law applies to, the financial thresholds for filing, and the responsibility of company management.

When Should Companies Resort to Bankruptcy and Financial Restructuring in the UAE, and How Do the Procedures Work?

1. What Are Financial Restructuring and Bankruptcy, and Which Law Governs Them?

Financial restructuring and bankruptcy form an integrated legal framework aimed at addressing corporate distress and protecting creditors’ rights at the same time, so that distress is not merely a one-way road to liquidation. In the UAE, this framework is governed by the Financial Restructuring and Bankruptcy Law, issued by a Federal Decree-Law, which entered into force on 1 May 2024, replacing the repealed former bankruptcy law, together with its Executive Regulation issued by the Cabinet.

The law sets out a number of objectives to be observed when applying and interpreting it, most notably preserving the vitality of the national economy and the rights of creditors, and helping the debtor settle its debts while avoiding liquidation and bankruptcy wherever possible.

2. Who Does the Law Apply To, and Who Is Excluded?

This law does not apply to natural persons who are not traders; such persons are subject to the separate Insolvency Law. The Financial Restructuring and Bankruptcy Law applies to specific categories of companies and entities of a commercial and professional nature.

3. What Are the Three Paths Offered by the Law, and When Do You Use Each?

Under the law, the treatment of distress escalates from the least to the most severe in effect, so that the company begins with the path that preserves its activity and only moves to liquidation when no alternative remains.

4. When Should a Company Resort to Preventive Settlement, and How Does It Work?

Preventive settlement is the most suitable path for a company whose business is still viable but which faces a temporary difficulty in meeting its obligations. The application is filed by the debtor itself, who continues to manage its business and assets normally without being divested of that control, while the Bankruptcy Court ratifies the settlement proposal and supervises its implementation.

This stage is distinguished by giving the debtor room to negotiate with creditors within an organised judicial framework, as creditors are barred during this period from pursuing individual, separate enforcement against the debtor’s assets until the court completes its task — preventing any disparity of preference among them.

5. When Should You Resort to Restructuring, and What Restrictions Apply to the Debtor Afterwards?

Restructuring is used when the business needs a deeper adjustment to its debt structure or operations. It is requested upon the application of the debtor, the creditors or the regulator, and is based on a restructuring plan that is approved and implemented under the supervision of a trustee. Where necessary, the debtor, its board of directors or its managers may be divested of control over the assets and the business.

After the restructuring procedures are opened, the debtor is required to obtain the trustee’s written or electronic approval before undertaking certain actions, most notably:

6. When Is Bankruptcy Declared, and How Are Liquidation and Distribution Carried Out?

Bankruptcy is declared when the business cannot be rescued through settlement or restructuring, the objective then being a collective settlement of the debtor’s debts by liquidating its assets and business and distributing the proceeds to creditors.

The debtor’s application to open bankruptcy-declaration procedures results in its being divested of the power to dispose of its assets from the moment the application is filed. Upon the decision to open the procedures, the Bankruptcy Court designates an officer of the Bankruptcy Department to affix seals — within ten days — on the debtor’s premises, offices, warehouses, books and movables, in preparation for liquidation. The debtor’s assets may not be sold by auction except with the Bankruptcy Court’s approval of the liquidation and distribution plan.

The proceeds of liquidation are distributed according to a priority order that gives precedence to debts secured by collateral, then ordinary unsecured debts, and finally shareholders’ rights if a surplus remains.

7. What Are the Financial Thresholds for Filing, and Who Decides These Matters?

The Executive Regulation of the law set a minimum value of debt that allows a creditor or the regulator to request the opening of restructuring or bankruptcy-declaration procedures, in order to ensure the seriousness of applications.

These matters are decided by a specialised judiciary; the law established the Bankruptcy Court at both the federal and local levels, supervising preventive settlement, restructuring and bankruptcy. It is assisted by an organisational unit called the “Bankruptcy Department,” headed by a judge of no less than appellate rank, which receives and registers applications, issues notifications and verifies the completeness of documents. The framework is also linked to the work of the Financial Reorganization Committee.

8. What Is the Liability of Managers, and Can Financing Be Obtained During the Procedures?

The law strengthened the accountability of the management of a distressed company, including holding managers liable for any mismanagement or practices that led to the distress, so as to protect creditors’ rights and enhance governance. It also imposed penalties for forms of bankruptcy associated with fraud or negligence, as set out in the provisions of the law.

In return, the law took the continuity of the business into account, allowing a debtor subject to preventive settlement or restructuring to obtain new financing during the period of the procedures, under specific conditions and guarantees, to help it overcome the crisis instead of sliding into liquidation.

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This content is published for legal culture and community awareness. It does not constitute legal advice for a specific case and is no substitute for consulting a specialist. The outcome of each case differs according to its facts, documents and the legislation in force at the time it is considered. This article is a translation; in the event of any discrepancy, the Arabic text is the authoritative reference.

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