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Freshfields Risk & Compliance

| 6 minutes read

Recent changes to UAE bankruptcy law: the impact on the construction industry

Following the substantial impact of the COVID-19 pandemic on global trade and business operations in the UAE, the Government of the UAE has taken measures to protect businesses facing financial difficulty. Among these measures has been a mechanism that provides relief to businesses in financial distress because of the pandemic within the framework of the UAE Federal Bankruptcy Law No. 9 of 2016 (the Bankruptcy Law).

The UAE Government added provisions to the Bankruptcy Law under Chapter 15 bis of Section IV, applicable during an 'Emergency Financial Crisis'. These modifications provide notable relief to construction contractors who have been among the hardest hit by the pandemic.

In this blog post, we discuss the key takeaways of these amendments. Contractors in financial distress may want to consider the options available to them while the Emergency Financial Crisis is in place.


On 27 September 2020, the Government of the UAE promulgated Federal Decree Law No. 21 of 2020 amending the Bankruptcy Law (the Amendments).

The Amendments added a chapter dealing with the declaration of an “Emergency Financial Crisis” in the UAE and the consequences of such a declaration on bankruptcy-related proceedings under the Bankruptcy Law (Chapter 15 bis “Bankruptcy Proceedings during an Emergency Financial Crisis", under Section IV of the Bankruptcy Law).

Chapter 15 bis releases debtors from certain obligations under the Bankruptcy Law that would otherwise apply to any debtor deemed to be insolvent under the Bankruptcy Law and its insolvency is due to an “Emergency Financial Crisis”. Under the Bankruptcy Law, a debtor is deemed insolvent if (a) it cannot pay its debts when they fall due for over 30 consecutive business days; or (b) its assets become less than its liabilities (the Bankruptcy Test).

Declaring an Emergency Financial Crisis

The Amendments provide certain protections to debtors during an “Emergency Financial Crisis”, defined as “a general situation that affects trade or investment in the country, such as a pandemic, natural or environmental disaster, war or otherwise”.

The UAE Cabinet of Ministers has the power to declare the existence and duration of an Emergency Financial Crisis upon the recommendation of the Minister of Finance (the Cabinet also has the power to extend any of the time limits or dates set out in Chapter 15 bis). The Cabinet’s declaration is therefore necessary for debtors to invoke the protections under Chapter 15 bis.  

On 10 January 2021, the UAE Cabinet declared an Emergency Financial Crisis for the period of 1 April 2020 to 31 July 2021, thus triggering the application of Chapter 15 bis.

Bankruptcy Proceedings during an Emergency Financial Crisis

 The Bankruptcy Law requires any person or company that meets the Bankruptcy Test to initiate bankruptcy proceedings. However, the Amendments protect debtors from certain legal actions during an Emergency Financial Crisis. Specifically, they impose a moratorium on:

(a) the debtor’s obligation to commence bankruptcy proceedings, provided that the debtor’s cash flow or balance sheet losses are attributable to the Emergency Financial Crisis; and
(b) applications filed by creditors (or groups of creditors) to place debtors into bankruptcy during an Emergency Financial Crisis. This moratorium applies regardless of the cause for the debtor’s default – ie, unlike bankruptcy proceedings brought by debtors, courts must refuse to hear bankruptcy proceedings initiated by creditors without the need for evidence by the debtor that its default has been caused by the Emergency Financial Crisis.

These measures aim to limit a flurry of bankruptcy proceedings initiated by debtors and creditors during an Emergency Financial Crisis and provide a more stable environment for the UAE economy during financially turbulent periods. 

Notwithstanding the additional protections provided by Chapter 15 bis, a debtor could still file for bankruptcy proceedings during an Emergency Financial Crisis if it seeks to compromise claims with creditors through a restructuring in bankruptcy or if it believes there is no reasonable prospect of recovering the business and that it is in the best interests of all stakeholders to file for liquidation. The court may admit the debtor’s application provided the debtor shows that its cash flow or balance sheet losses are caused by the Emergency Financial Crisis. In that instance, the court enjoys more flexibility in administering the bankruptcy proceedings, including: 

(a) to proceed with the application without appointing an expert or trustee; and
(b) to grant the debtor, upon its request, an extension not exceeding 40 business days to negotiate a settlement with its creditors (however, the debtor must offer to settle its debts over a period not exceeding 12 months, and a settlement must be approved by creditors representing at least two-thirds of the debt to bind all other creditors).

If the court admits the debtor’s bankruptcy application during an Emergency Financial Crisis, it cannot take precautionary measures against the debtor’s assets essential to its business during the Emergency Financial Crisis.

Pending Bankruptcy Proceedings 

If the court admitted an application brought by a debtor or creditor under Sections III (“Preventative Composition”) or IV (“Bankruptcy Proceedings”) of the Bankruptcy Law before an Emergency Financial Crisis was declared, the court may extend the time limits under the Bankruptcy Law to counter the effects of the Emergency Financial Crisis on the business operations of the debtor. The court also has the power to amend the debtor’s contractual obligations. 

Additional Financing 

The Amendments maintain the pre-existing rule that a debtor that has entered bankruptcy proceedings may seek leave of the court to obtain new secured or unsecured financing (commonly called “DIP Financing”). The reference to this rule in the Amendments is welcome to dispel any doubts over the availability of DIP Financing during an Emergency Financial Crisis. The Amendments also provide that:

(a) the new financing approved by the court will have priority over ordinary (unsecured) debts existing during commencement of the Bankruptcy Proceedings;
(b)the new financing can be secured by the debtor’s unencumbered assets;
(c) the debtor’s assets already subject to security can still be used as security for the new financing in these instances:

- if the value of the assets exceeds that of the original secured debt. However, the new security over these assets will be lower in ranking, unless the higher-ranking creditors agree for the new security to be of equal or higher ranking; and

- if the lender of the new money is a licensed financial institution, it may obtain security over such assets even if the value of the assets is equal to that of the existing secured debt, provided the new security does not exceed 30% of the value of the pre-encumbered assets. The court may allow the security for the new financing to be of equal or higher ranking than the security for existing debts over the same assets, especially if the purpose of such new financing is to fund the purchase of materials or services necessary for continuity of the debtor’s business operations to enable the repayment of its existing due debts.

Liability of Company Managers and Directors 

The Amendments impose certain restrictions and obligations on the managers and directors of debtor companies during an Emergency Financial Crisis. Specifically, the Amendments provide that, during an Emergency Financial Crisis, managers and directors of a debtor deemed to be insolvent: 

(a) cannot pay any allowances, bonuses or other one-time or contingent payments to employees – instead, managers and directors can only authorise the payment of salaries and wages, which are paid periodically to employees;
(b) must update the company’s accounts and records to reflect the losses incurred during an Emergency Financial Crisis; and
(c)must discharge their duties prudently, in good faith and exert best efforts to serve the interests of the company and protect its assets.

These provisions balance the interests of creditors, by requiring managers and directors to act prudently and in good faith during an Emergency Financial Crisis, and the interests of employees, by assuring senior management that the payment of salaries and wages does not expose them to liability for disposing of company assets while insolvent. 


The Amendments provide much needed relief to an industry that was already in decline before the pandemic. With falling oil prices, contract awards were reportedly down almost 40% in 2020. Despite the exemption of construction projects from certain restrictions during the lockdown, construction contractors were significantly impacted by the economic downturn caused by the pandemic. With many projects on hold, prospects for contractors in 2020 and early 2021 have not been very promising. The liquidation filing by one of the UAE’s largest contractors a few months before the Emergency Financial Crisis was declared added to the concerns over the financial wherewithal of many other players in the construction market. 

The Amendments may shield contractors that have suffered because of the pandemic from having to declare bankruptcy and provide a useful set of restructuring tools to contractors that may be looking to achieve a compromise with their existing creditors or need to raise new secured finance to weather the storm and eventually turn their business around. 

Unless extended further, the Emergency Financial Crisis expires in less than one month as of the time of writing. With signs of a new wave of the pandemic hitting many corners of the world, it is yet to be seen whether the UAE will extend the duration of the Emergency Financial Crisis.


middle east, construction and engineering, global projects disputes, gpdp, covid-19