Insolvency Law During Pandemic

Covid -19 pandemic has not only disturbed the financial conditions of an individual but has skeptically burdened companies around the world. The present article by Top Lawyers of Dubai is set to discuss the procedure of insolvency Procedure of companies during the global pandemic and how it has affected the companies registered within the country.

The Highlights

In general, the legal system of the UAE is inclusive of two laws that govern the situation of insolvency of a company. Both have an aim to provide assistance to the companies when they are confronting financial difficulties. The first option available at the disposal of the company is that they voluntarily declare the liquidation of their assets by passing a motion in its general meeting. This law is provided under the commercial companies law. On the other hand, the second way, which is usually aiding the first one is that the company seeks the help of the court.

This aid of the court is further divided into two, firstly, the company is aided by the court through the protective composition procedure. Under this, the court supervises a settlement between the principal debtor and the creditor. But this procedure is limited exclusively to the debtors who are not insolvent but are undergoing financial trauma. Another requisite for the debtors under this procedure is that the debtor must not cease to pay the creditor within the period of thirty days that have been provided by the court. Under this procedure, a company is made to check out the long-term benefit and the options available to them in the long run.

The second alternative under the court-aided process is the process of restructuring or liquidation of the company facing financial disturbance under the supervision of the court. This alternative is for those companies who do not possess the chance of rehabilitation. Through this process, they can easily and legally part their ways from any future legal proceedings against them along with the avoidance of all financial repercussions.

Laws pertaining to Insolvency due to the crisis of COVID-19

Under the commercial company laws, in the cases, where the losses of the company exceeds from 50% of its share capital, then in those cases, the director is required to inform the shareholders about the same, who can then consider the option of liquidation of the company. But in cases where the losses exceed by 75%, then the shareholders who are in possession of more than 25% of the shares can require the company to undergo dissolution. In case of failure to pay the debt, an obligation is created up on the director to file for bankruptcy within 30 days of such failure. Where the director fails to comply with this requisite, he may be charged personally for the same.

The companies in form of a partnership, if faces the situation of bankruptcy, then in that case, the partners will be declared insolvent and in the case where the company is an amalgamation of few other companies, then the court has the discretionary power to declare other company insolvent too.

The court also enjoys another discretionary power to hold the board of directors or the general managers of the company as liable if less than 20% of the debts are paid during the dissolution and may require them to pay the debt of the company either individually or jointly.

Usually, the bank asks the shareholders to pay the outstanding amount of their share capital but in the following cases the court may hold the directors personally responsible for the non-payment of the debt: Firstly, where the debtor undertakes a commercial action without even considering the risk attached with it; secondly, in order to transact with a third party, he does not look for adequate consideration and lastly, when he pays the debt of one of the creditors so as to initiate damage on some other creditors.

In very extreme cases, where it is proved that the board of directors has undertaken such activities which either resulted in the destruction of the books of the company with the malafide intentions of causing embezzlement or have concealed the assets, then the court can even decide to initiate a criminal proceeding against the directors and the managers.

Under the protective composition procedure, the court is said to arrange for the settlement between the creditors and the debtors. This allows to prove that the stigma associated with the companies having financial disturbances is not true and at the same time it also serves as the way to raise awareness amongst others that the procedure can bring them out from the situation where they have to ultimately opt for the insolvency. All they need to do is to follow the correct way of such a process.

The commencement of this process is indicated by the filing of the application to the court for the same. It should contain a valid reason for opting the restructuring of the company and not the liquidation. If according to the court the prerequisites which it has mentioned for the bankruptcy have been met, then in that case, a suspension will be imposed and the the creditors will thus be prevented from taking any further leagl action on the same.

The court will then appoint trustee under which the company will be controlled. This trustee will be rested with the power to undertake the management of the company with the purpose to keep a check on the commercial activities of the company and to preserve their assets. This process is then made public so that the creditors can participate in the process of restructuring through public voting. The trustee then prepares a detailed report stating if restructuring is possible or not. In case a restructuring plan is created and the court is convinced with the same, it is given to the creditors who are needed to comment upon the same. Following this, the court sets up a date of hearing where atleast two third creditors have to vote in favor of the restructuring plan and only then the company can undergo the process, failing it, they will have to undergo liquidation.