Debt can weigh heavily on businesses and individuals alike. But when managed properly, it doesn’t have to lead to the end of the road. In the UAE, the Bankruptcy Law (Federal Decree Law No. 9 of 2016) provides clear and practical mechanisms for resolving insolvency—not just through liquidation, but through structured debt settlement procedures.
Debt settlement, when approached strategically, can offer a way for debtors to meet obligations while protecting their reputation, assets, and commercial viability. This guide walks you through how to approach debt settlements under UAE bankruptcy law—whether you’re a business, a sole proprietor, or an individual facing mounting liabilities.
Understanding Preventive Composition
One of the most proactive tools available under UAE law is the preventive composition procedure. This is designed for debtors who are not yet insolvent but foresee financial challenges ahead.
Key Criteria:
- The debtor must not have ceased payment for more than 30 consecutive business days.
- The debtor must submit an application to the competent court.
- The goal is to negotiate a restructuring plan with creditors.
Once accepted, the court appoints a trustee to oversee the process. During this period, the debtor benefits from legal protection against lawsuits and enforcement actions.
Filing for Bankruptcy and Negotiating Settlements
If preventive composition isn’t viable—perhaps because the debtor is already in default—the alternative is to initiate bankruptcy proceedings. But even within this framework, debt settlement is still an option.
The debtor, or a creditor, may file for bankruptcy if:
- Debts have remained unpaid for more than 30 business days.
- The liabilities exceed the debtor’s assets.
After the court accepts the petition, a trustee is appointed to evaluate the financial condition and develop a restructuring or liquidation plan.
A settlement may be proposed as part of a restructuring plan and submitted to creditors for approval. The key is transparency and a plan that offers reasonable repayment terms without prejudice to any class of creditors.
The Role of the Trustee
In both preventive composition and bankruptcy procedures, a court-appointed trustee plays a central role in:
- Assessing the debtor’s financial health
- Reviewing proposed settlement plans
- Coordinating creditor meetings and voting
- Ensuring fair distribution of payments
The trustee serves as a neutral third party to monitor compliance and prevent fraudulent behavior.
Benefits of Settling Debts Under Bankruptcy Law
1. Legal Protection
During the settlement process, debtors receive temporary relief from enforcement actions, helping them focus on recovery rather than legal battles.
2. Continuity of Business
Unlike liquidation, settlements allow companies to continue operating while resolving debt. This preserves jobs, contracts, and customer confidence.
3. Reputation Management
A well-managed settlement avoids the reputational damage that often accompanies bankruptcy or court-ordered liquidation.
4. Creditor Cooperation
Creditors are often more willing to accept structured settlements that offer higher returns than uncertain liquidation proceedings.
Settlement Approval Process
To finalize a debt settlement within the UAE bankruptcy framework:
- Prepare a Restructuring Plan: Include proposed payment schedules, sources of funding, and a realistic business recovery strategy.
- Trustee Review: The plan is submitted to the trustee, who verifies financial data and evaluates feasibility.
- Creditor Voting: Creditors vote on the plan. Approval requires a majority of creditors by number and two-thirds by value.
- Court Ratification: If approved, the plan is submitted to the court for final endorsement and becomes legally binding on all parties.
Special Considerations for SMEs and Individuals
For SMEs:
Smaller companies may find debt settlements especially helpful as they offer a chance to stabilize operations without resorting to liquidation. Many SMEs face short-term liquidity issues, not structural insolvency, and can recover with time and planning.
For Individuals:
The UAE also introduced a separate Insolvency Law for Individuals (Federal Decree-Law No. 19 of 2019). It allows individuals to apply for court-supervised debt settlement plans similar to those available for companies, offering a lifeline for residents struggling with personal loans, credit cards, or rental arrears.
Risks and Pitfalls to Avoid
While debt settlement offers many advantages, poor execution can lead to complications:
- Inaccurate financial disclosures can lead to rejection of the plan or criminal penalties.
- Delaying the process can increase liabilities and reduce the likelihood of successful resolution.
- Lack of creditor communication may foster mistrust or opposition to the plan.
- Ignoring trustee recommendations can result in court disapproval.
Working with legal and financial advisors early in the process is key to building a credible settlement plan.
Alternatives If Settlement Fails
If creditors reject the settlement proposal or the debtor fails to meet the terms, the court may order:
- Transition to full bankruptcy
- Liquidation of assets
- Disqualification of management (in corporate cases)
In such cases, recovery for creditors is often lower than under a well-negotiated settlement, highlighting the value of compromise.
DIFC and ADGM Frameworks
Companies registered in the Dubai International Financial Centre (DIFC) or Abu Dhabi Global Market (ADGM) are subject to separate, common-law-based bankruptcy regimes. These frameworks offer additional clarity and flexibility, particularly for international companies and investors.
Debt settlements in these jurisdictions follow procedures similar to UK or U.S. restructuring models, often with easier access to professional mediation and cross-border enforcement mechanisms.
Conclusion: Resolve, Don’t React
Debt settlements under UAE Bankruptcy Law offer an effective path for debtors and creditors to resolve financial issues with structure and fairness. The process is not about admitting defeat—it’s about taking proactive steps to preserve value, reduce risk, and regain financial control.
Whether you’re a struggling business owner or an individual facing overwhelming obligations, understanding your rights and options under the law can help turn crisis into opportunity.
