Covid 19 has drastically changed how people live and work all over the world. Businesses were the most affected by the pandemic, evidenced by the thousands of businesses that had to shut their doors. In the UAE, the threat the pandemic poses on the economy was so great new Laws on Bankruptcy had to be introduced.

In the past, companies were forced to file for bankruptcy when insolvent regardless of the reason. The worst part is, during that time, the companies were prohibited from trading which could lead to a fine. According to the new bankruptcy law however, businesses are allowed to defer paying creditors for an additional 12 months. Once agreed to the Creditors are not allowed to interfere with the revenue used to run the business of the Debtor during this time.

Additionally, according to the new law, businesses that are facing financial difficulties paying creditors are offered two paths in solving their money issues, namely PCP (Preventive Composition Procedure) or via Bankruptcy (which includes Insolvent Liquidation or a formal rescue procedure.)

PCP and Bankruptcy: What do they mean in the new UAE bankruptcy law?

Businesses in bad debt but are not insolvent ready can apply for a PCP. The main aim of PCP is to help debtors reach a legal agreement with creditors on when and how the repayment will be done. The whole procedure is supervised by the court. In simple terms, the PCP is a legal framework that helps debtors liquidate by making a formal agreement with the creditor.

It is also important to know that PCP can only be applied for by the debtor, no other third party or creditor. To be viable for PCP, the debtor must not have defaulted from repayment for more than 30 consecutive days. Once you have entered a PCP agreement, the debtor is no longer able to enter into another Preventive Composition Procedure until the current procedure is cleared.

Bankruptcy prior to the modification meant something totally different. With Bankruptcy, a business stands the risk of liquidation if the available assets are not able to take care of the outstanding debt. During this time the creditor was entitled to file for bankruptcy once the debtor passes the Insolvency test.

The Insolvency test is done in two ways:

• The Traditional Cash Flow Test – The business has defaulted from repaying debts for more than 30 days or
• The Balance Sheet Test – The value of available assets are evaluated to see if they can pay off all the outstanding debts.

The impact of the new UAE bankruptcy law during the Covid 19 pandemic

With the Covid-19 crisis threatening businesses across various industries, investors are more cautious than ever over losing their money. However, the new law has seen investment activities in the UAE shoot up significantly. This is because the law helps boosts investors’ confidence as it allows for plenty of time for a business to be profitable again.

Businesses that have found themselves in bad debt because of the corona virus also get the chance to source alternative sources of funding. It is also good to note that the new law is not only applicable to the current pandemic but is also meant to protect investments from unexpected problems brought about due to natural disasters.

Businesses that are in debt but are still not ready to undergo insolvency also get a second chance at regaining their financial stability. This means the number of businesses closing down in the UAE are set to reduce significantly. Businesses that had already closed down but have access to finance such as loans are also expected to open their doors once again.

It is helpful to know that the UAE bankruptcy laws only applies to places that do not fall within free zone areas like the Dubai International Finance Centre and Abu Dhabi Global market as they have their own bankruptcy laws.

We are on hand to help you with any Bankruptcy issues.

A professional lawyer like HHS Lawyers that has decades of experience with Bankruptcy and other such financial issues. As such, any of our well-versed experts in UAE Bankruptcy Law would be more than happy to assist you with the process from start to finish.