Areas of Practice

Common Misconceptions: “Liabilities are Extinguished via Bankruptcy” 

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The UAE business landscape has increasingly been hearing of corporate giants being subjected to bankruptcy (see Arabtec). Word then spread that all creditor lawsuits were being suspended simply because bankruptcy proceedings had started, and that all creditors were now to stand in line to collect whatever they can from the remains of assets that are liquidated under the Bankruptcy Court’s supervision. This suspension of lawsuits is aimed primarily at consolidating all claims before one court, so no creditor out of the class manages to enforce on an asset all to themselves and that no other creditors were knowledgeable of.

Simultaneously however, distressed debtors fighting lawsuits and freezing orders left and right are being led to wonder whether they should opt into bankruptcy to benefit from this ‘immunity’ from enforcement proceedings.

Some distressed debtors have even been struck with a more radical impression, which is that no matter how many debts an enterprise accumulates over the years, they can always pull the bankruptcy card to save themselves from having to pay those debts off.

The best way to put an end to this common misunderstanding of the insolvency rules is to cite Article 138 of the Federal Bankruptcy Code which expressly states that, even after all the debtor’s existing assets are liquidated whereby each creditor collects their pro rata share, “…each creditor whose debt was accepted but was not settled in whole, may enforce on the debtor’s assets to collect the rest of his debt.”

As such, and unless a debtor plans on permanently being defunct until eternity, any assets acquired thereafter will continue to be seized and auctioned off until the last Fils is paid. This is a harsh reality to individuals who plan to seek a bankruptcy declaration while believing that it would allow them to start a new business from a clean slate thereafter. This is also of particular importance when it comes to enterprises that have future cashflows coming from long-term agreements, under which their rights mature and materialize many years down the line, such as long-term IP-licensors, property/machinery lessors, private equity firms and even contractors whose back-to-back dues have not yet become due.

This is a bitter but necessary truth pill to swallow for distressed debtors who before they go nuclear (see red bankruptcy button), should make sure an insolvency practitioner gives them the full picture.

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Ali Dakhlallah

Associate

ali.dakhlallah@habibalmulla.com

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