Insights

Financial Reorganization and Bankruptcy Law

His Highness, the President of the State, issued Federal Decree-Law No. 51 of 2023 regarding Financial Reorganization and Bankruptcy, which came into effect on April 1, 2024. This law aims to provide an effective legal mechanism for addressing financial insolvency cases for companies and individuals, enabling them to restructure their businesses and meet their financial obligations.

According to the law, the beneficiary debtor is a natural person who has the status of a trader or has retired from trade for two years from the date of application, or a legal person meaning companies stipulated in the Commercial Companies Law and licensed civil companies of a professional nature.

Both the creditor and the debtor have the right to resort to what is known as "financial reorganization procedures" if the debtor is in one of the following situations:

1. Stopped paying a due debt after 10 days from the end of the period specified in the creditor's notice.
2. Suffers from a disruption in their financial position, making them unable to pay due debts.
3. Anticipates a deficit in their financial position that prevents them from fulfilling due debts within 3 months due to financial imbalance.

In any of these three cases, the debtor can benefit from what is known as "financial reorganization" by adopting one of the following procedures:

• First Procedure: Known as the preventive settlement plan, it is a procedure initiated at the debtor's request. This procedure allows the debtor to continue their commercial activity and fulfil their debts while continuing to manage their business and funds normally, after the esteemed bankruptcy court approves the preventive settlement plan. The court is the supervising authority for implementing this plan.
• Second Procedure: This is the restructuring plan, which are procedures taken based on a request from the debtor or a group of creditors to help the debtor pay their debts while continuing their commercial activity. In this procedure, the debtor's authority (whether a natural or legal person) may be restricted from managing their funds and business, after the bankruptcy court approves the plan. This plan is implemented under the court's supervision and with the assistance of a restructuring trustee.

As for "Bankruptcy," it is a different procedure aimed at settling the debtor's debts towards their creditors by liquidating their funds and business and distributing the resulting proceeds to the creditors. This procedure is initiated based on a request submitted by the creditor or debtor within 60 days from the date the debtor stopped paying their obligations.

Once this request is submitted, the debtor is prevented from disposing of their funds, and any action taken after the date of the request is considered void. However, the debtor remains able to manage their funds and business unless the bankruptcy court decides to appoint a temporary trustee to manage the debtor's funds and business.

The legislator granted both the creditor and debtor the right and interest to submit a request to open preventive settlement procedures, restructuring request, or bankruptcy declaration request. However, it should be noted that if the creditor wishes to submit the request, their debt must meet the following conditions at the date of submission:

• The debt must be unconditional and undisputed.
• The debt must be due.
• It should not be less than the amount specified in the executive regulations.
• The creditor must have previously sent a notice to the debtor requesting payment of the debt within 30 days from the date of notice.

If the debtor is a company, a request to open procedures regarding its debts may be submitted even if it is in liquidation or a judgment has been issued invalidating it and it continued as a de facto company. Upon acceptance of the request, the liquidation lawsuit and the lawsuit to place the company under judicial receivership are suspended until the request is decided, unless the bankruptcy court decides otherwise.

If the debtor submits the request and meets the requirements stipulated by the legislator in Article 22 of the law, and likewise for the creditor if they submit their request meeting the requirements in Article 24 of the same law, the bankruptcy administration notifies the other party of the request to give them the opportunity to respond.

Within 10 days from the end of the specified period for the parties' response, the bankruptcy court decides on the request by issuing its decision regarding the opening of the requested procedures. It also has the right to rule not to accept the request if the documents referred to in Articles 22 and 24 of the law are not submitted, or to reject the request if its conditions are not met.

If the court decides to accept the restructuring request or bankruptcy declaration, it appoints the trustee and determines their fees in the same decision. It should be noted that the law prohibits the trustee, monitor, creditors, or any party related to the procedures from disclosing any information related to the debtor's financial position, under penalty of legal accountability.

In the next article, we will explain everything related to the first type of requests, which is the request to open preventive settlement procedures.