The impact of the recent changes to UAE bankruptcy law on the construction industry

Liquidity issues within the construction industry have only been exacerbated by the COVID-19 pandemic. Faced with the high-profile collapse of major contractors in the region, the UAE has taken strides to improve upon its existing Bankruptcy Law (Law 9 of 2016) to ensure that it remains capable of facing the very modern challenges presented by the current climate. This includes the introduction of provisions which give debtors limited reprieve in circumstances of “Emergency Financial Crisis” under Law 9 of 2019 amending the Bankruptcy Law. 

The most recent amendment to the Bankruptcy Law came in the form of federal Law 35 of 2021 and became effective on 1 November 2021. This amendment seeks to clarify when a debtor’s directors and managers can be held personally liable for the company’s debts if they cannot be repaid.

In an amendment to Article 144 of the Bankruptcy Law, the amendment states that where a bankrupt company’s assets are insufficient to settle at least 20% of its debts, the Court can order any of the board of directors or the managers to pay the balance of the debts when “it is proven that any of them committed any of the acts mentioned in paragraphs (a), (b) and (c) of Article (147) hereof ...”

Article 147 referred to in the amendment provides as follows:
"If declaration of bankruptcy is judged, the Court may order the directors of board, managers or those in charge of liquidation in liquidation procedures taken beyond the scope of this Decree Law, to pay an amount to repay the debts of the debtor, if any of them evidently commits any of the following acts, within the two years following the date of initiating the procedures, according to this Section:

A) Adopts commercial methods without considering its risks, such as disposition of commodities in prices less than its market value to receive monies to avoid or delay initiating the bankruptcy procedures.

B) Engages in transactions with third party to dispose of properties without consideration or against insufficient amount and without certain benefit or not proportionate to the properties of the debtor.

C) Discharges the debts of any creditor to harm other creditors, during the period of being in default of payment or in the condition of account receivable."

It is noted that the amendment particularly states that a decision to impose personal liability is subject to an appeal (which will not impair the bankruptcy) and, because of the reference to Article 147, still appears to impose time limitations.

The amendment to Article 201 goes further by specifying potential imprisonment and fines for certain activities:

“The members of the board of directors, the managers and the liquidators of the company declared bankrupt under a final judgment shall be punished by imprisonment of no more than two (2) years and/or a fine of no more than AED 100,000 (one hundred thousand dirhams) if they commit any of the following acts: 

1. Deliberately failing to keep commercial books sufficiently reflecting the actual financial position of the company or failing to carry out the inventory required by law, with the intent to harm the company or its creditor.

2. Deliberately withholding the information required by the trustee appointed pursuant to the provisions of Chapter Four of this Decree-law or by the Court, or deliberately providing him with false information.

3. Disposing of the company’s assets after the Cessation of Payments, with the intent to conceal those assets from the creditors.

4. Paying the debt of a Creditor after Cessation of Payments to cause damage to the other creditors or accepting securities or special benefits for a creditor which are more favorable than for the other creditors, even if the same was with the intent of concluding the Protective Composition or restructuring.

5. Disposing, in bad faith, of the company’s assets for lower than their market value or use methods or means that would cause harm to the creditors’ interests with the intent to receive funds in order to avoid or delay the Cessation of Payments or a declaration of bankruptcy or termination of the Protective Composition Procedure or restructuring.

6. Spending gross amounts on gambling or speculative ventures that are outside the scope of the company’s business.

7. Entering into gross undertakings in favor of a third party, without consideration, compared to the company's financial status as at the time of entering into such undertakings.

The penalty provided for in this Article shall not apply to a person whose participation in the acts prohibited hereunder is not established, or whose reservations on the company decision to perform the said acts are established.”

Commentary

The Bankruptcy Law (as most recently amended) remains a welcome and productive addition to the UAE legal landscape. The new amendment assists in clarifying the instances in where members and directors can be held personally liable for the debts of a bankrupt company, and also provides a number of potential defences. 

There still remains much work to be done by all actors in the construction ecosystem to rebalance the wider commercial and economic interests in construction projects, however. Many contracts will impose their own terms in respect of termination for technical insolvency, and anecdotal evidence suggests that bond calls are increasing.  This means that the options for declaring bankruptcy and seeking restructuring under the law may be bypassed by employers who see termination and a liquidation of an on-demand bond as a quick means of receiving cash and continuing the project. The scope for wider personal liability of directors and members may also be of concern to small to medium-sized contractors who may already have provided personal guarantees for the company and witnessed reduced income during the pandemic.