An Overview of the Protective Composition Procedure under the UAE Bankruptcy Law

Under the UAE Bankruptcy Law, a Protective Composition Procedure is a procedure that enables an individual who falls within the definition of a “trader” under the Commercial Transactions Law or a company facing financial difficulties but not yet insolvent to make use of the court process to reach a settlement of its obligations. 

The Protective composition procedure under the UAE Bankruptcy Law assists any debtor in reaching settlements with its creditors. Under the UAE Bankruptcy Law, the debtor employs a plan referred to as the Protective Composition Plan, which is supervised by the court and with the assistance of the appointed composition of a trustee pursuant to the provisions of the Bankruptcy Law.[1].

Who can apply for Protective Composition Procedure under the UAE Bankruptcy Law 

Under the UAE Bankruptcy Law, only the debtors can apply to the court to commence the Protective Composition Procedure.

The UAE Bankruptcy Law provides that debtors facing financial difficulties who cannot fulfill their financial obligations and require assistance to reach settlements with their creditors can apply to the court for Protective Composition Procedure.[2] 

Condition precedent to the acceptance of debtor’s application by the court 

Under the UAE Bankruptcy Law, the court shall accept the debtor’s application for Protective Composition only if 

• the debtor has not failed to pay its debts within due and payable date for more than (30) thirty consecutive business days due to the debtor’s financial condition,  
• the debtor is not over-indebted.[3] 

Application of the Protective Composition by a debtor under the UAE Bankruptcy Law 

Under the UAE Bankruptcy Law, an application for Protective Composition filed by the debtor shall state the reasons for the application. The debtor is required to submit the following documents with the application.[4] 

• A memorandum containing brief information regarding the debtor’s financial status, assets, and reports on the debtor’s employees  
• A certified copy of the debtor’s license issued by the competent authority in the Emirate  
• Copy of the financial statements or accounting books of the debtor’s business for the financial year preceding the application filing.  
•  A report of the cash flow, profit, and loss projections of the debtor for (12) twelve months before the filing of the application  
• A statement detailing the names and addresses of all known creditors of the debtor, the amounts of their debts, and securities provided, if any.  
• A comprehensive report of the debtor’s movable and immovable assets and their value as at the date of the application. Suppose there is any security or third party’s right against the assets. In that case, the debtor is required to submit a statement indicating such securities or rights.  
• The Protective Composition Procedure’s proposal and the security for its implementation 
• The nomination of a trustee by the debtor to undertake the procedures pursuant to the provisions of the law 
• A copy of the resolution of a company’s competent authority approving the application for Protective Composition, copies of the incorporation documents, and any amendments as filed with the competent licensing authority in the Emirate if the debtor is a company.  
• A report issued by the competent Credit Bureau Authority in the State

Under the UAE Bankruptcy Law, if the debtor cannot submit any of the documents required to commence the Protective Composition Procedure, the debtor shall specify the reasons for the inability in the application. 

Under the UAE Bankruptcy Law, the applicant is required to deposit with the court’s treasury a sum of money or a bank guarantee as determined by the court. The said deposited sum is to cover all the costs and expenses of the procedure, including the fees and expenses of the trustee and any appointed expert.[5]

Determination of the Application for Protective Composition by the Court under the UAE Bankruptcy Law 

When determining the debtor’s application, the court shall verify that all necessary supporting documents that accompany the application and may grant an extension of time to the debtor to submit any additional details or documents in support of the application.  

The court may decide, either on its own or upon request of any interested party, to take any necessary actions to maintain or manage any of the debtor’s assets, such as sealing any place of business of the debtor pending resolution of the application. The court may order that such actions and further safekeeping measures continue following the approval of the application for Protective Composition. 

Under the UAE Bankruptcy Law, the court may appoint an expert from the list of experts in the panel of experts. If the court does not find an expert with the necessary expertise, the court may appoint an expert who is not on the list of the panel of experts.  

The court shall decide on the application for Protective Composition Procedure before it, within a period not exceeding five (5) business days from either the date of the submission of the application or from the date the expert submits the report whichever is applicable. If the court approves the application, the court gives an order to commence the Protection Composition Procedure.[6] 

Under the UAE Bankruptcy Law, the court shall dismiss the application for Protective Composition Procedure[7] if the court finds some circumstances such as  

• the debtor is already subject to Protective Composition, bankruptcy, or liquidation of the assets in the State 
• If the debtor fails to submit the required documents and details with the application 
• If it is established that the debtor acted in bad faith or the application is an abuse of the court process 
• If there is an existing judgment convicting the debtor of a crime of forgery, fraud, breach of trust, embezzlement, etc. except if the applicant has been rehabilitated  
• If the debtor fails to pay the required deposit etc.

Role of the appointed Experts in Protective Composition Procedure under the UAE Bankruptcy Law 

Under the UAE Bankruptcy Law, the expert appointed by the court is to prepare a report on the financial position of the applicant[8]. The expert shall also write an assessment on whether the applicant meets the conditions required to accept the application for Protective Composition and whether the applicant’s assets are adequate or inadequate to implement the Protective Composition Procedure 

 The court determines the expert’s duties and remuneration under the law. The court shall also determine the period required for submission of the expert report. Under the UAE Bankruptcy Law, the period for submitting the expert’s report shall not exceed twenty (20) Business Days from the date the expert is notified of the appointment.  

The implication of the issuance of an order to commence Protective Composition on the Debtor’s Obligation 

Under the UAE Bank Bankruptcy Law, as soon as the debtor brings an application to the court to commence the Protective Composition Procedure, the application shall suspend the enforceability of the debtor’s obligations throughout the procedure. The suspension of the debtor’s obligations starts from the date the debtor applies until the court issues an order either accepting or rejecting the commencement of the Protective Composition Procedure.  

Under the Bankruptcy Law, from the date the court issues a decision to open the protective composition procedure, the debtor is prohibited from engaging in the following acts.[9]

• Paying any claims on the debtor before the issuance of the decision
• Selling or disposing of any of the debtor assets or borrowing any amount except with the consent of the court or the trustee
• Disposing of parts or all company’s shares, ownership change in the case the debtor is an entity

Under the UAE Bankruptcy Law, the order of the court to open a Protective Composition Procedure shall not terminate any subsisting contract between the debtor and any contracting party. Under the law, any contracting party to an agreement with the debtor shall fulfill the contractual obligation under the said agreement, notwithstanding the opening of a Protective Composition Procedure. Under the UAE Bankruptcy Law, if the debtor is unable to meet its contractual obligation under a contract, a contracting party may apply to the court for an order of non-execution provided that the contracting party obtains the non-execution order before the issuance of an order to open Protective Composition Procedure.

Under the UAE Bankruptcy Law,[10] suppose it becomes necessary for the debtor to undertake its business or in the interest of the creditors. In that case, the court may, at the request of the trustee, give a decision that any valid subsisting contract to which the debtor is a party be rescinded if no serious harm would be caused to the contracting party.

Upon the issuance of an order to commence Protective Composition Procedure, a partner of the debtor in the case of a partnership business may request that the partnership’s assets be divided even if there is an agreement prohibiting such division.[11] 

Are you finding it difficult to settle your debts obligations, and do you desire to file an application for Protective Composition Procedure under the UAE Bankruptcy Law experts will assist you. 

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[1] Article 5 Federal Decree No. 9 of 2019

[2] Article 6 Federal Decree No. 9 of 2019

[3] Article 6(2) Federal Decree No.9 of 2019

[4] Article 9 Federal Decree No.9 of 2019

[5] Article 12 Federal Decree No.9 of 2019

[6] Article 14 Federal Decree No. 9 of 2019

[7] Article 15 Federal Decree No. 9 of 2019

[8] Article 13 Federal Decree No. 9 of 2016

[9] Article 31 Federal Decree No. 9 of 2016

[10] Article 34 Federal Decree No. 9 of 2016

[11] Article 34 (3) Federal Decree No. 9 of 2016