Introduction
A recent judgment from the Dubai Court of Cassation provides significant clarification on the distinction between financial restructuring procedures and bankruptcy proceedings under UAE law. The ruling, issued on May 22, 2025, addresses important questions regarding corporate representation during financial distress and the proper application of the UAE’s bankruptcy framework.
Case Background
The case involved a public joint-stock company that had initiated financial restructuring proceedings after experiencing financial difficulties. The company had previously applied for financial restructuring to the Financial Restructuring Committee, which appointed a restructuring trustee.
Following this, the company filed a lawsuit against former board members alleging mismanagement related to an acquisition transaction that allegedly overvalued the target company’s assets, causing substantial financial damage exceeding AED 560 million.
The primary legal dispute centered on whether the company had proper legal standing to initiate litigation while undergoing financial restructuring proceedings.
Key Legal Issues
The Court of Cassation addressed several critical legal questions:
- Who has the legal authority to represent a company undergoing financial restructuring?
- What is the distinction between bankruptcy proceedings and financial restructuring under UAE law?
- What are the effects of financial restructuring on a company’s ability to pursue litigation?
Court’s Analysis
Distinction Between Bankruptcy and Financial Restructuring
The Court clarified the fundamental difference between bankruptcy proceedings and financial restructuring under UAE law. Specifically, the Court referenced Article 170(1) and 170(2) of Federal Decree-Law No. 9 of 2016 concerning Bankruptcy, as amended, which establishes specific procedures for companies facing temporary financial crises.
The Court emphasized that financial restructuring is designed to allow debtors temporarily unable to meet their obligations due to an economic crisis to negotiate with creditors and continue their commercial activities. This contrasts with bankruptcy proceedings, which might ultimately lead to liquidation.
Corporate Representation During Restructuring
A critical aspect of the judgment was the Court’s determination that the appointment of a restructuring trustee does not automatically strip a company’s management or board of directors of their authority to represent the company in litigation. The Court noted that, unlike in bankruptcy proceedings, where a bankruptcy trustee takes control, financial restructuring allows the debtor to maintain control of its operations under the supervision of the restructuring trustee.
The Court found that the lower court erred in its interpretation by conflating the rules governing bankruptcy proceedings with those governing financial restructuring.
Legal Framework Referenced
The judgment extensively referenced:
- Federal Decree-Law No. 9 of 2016 concerning Bankruptcy, particularly Articles 68, 69, 82, and the provisions of Chapter 15 concerning “Bankruptcy Proceedings in Financial Crisis”
- Articles 170(1), 170(2), and 170(3) of the Bankruptcy Law detailing specific procedures for financial restructuring
- Law No. 51 of 2023 concerning financial reorganization
Court’s Decision
The Court of Cassation overturned the lower court’s decision, which had dismissed the case for lack of proper legal standing. The case was remanded back to the Court of Appeal for reconsideration, with instructions to properly apply the distinction between bankruptcy and financial restructuring provisions.
Practical Implications for UAE Businesses
This judgment has several important implications for businesses operating in the UAE:
1. Continued Management Authority: Companies undergoing financial restructuring maintain their management authority and can pursue legal actions to protect company interests, unlike in bankruptcy proceedings.
2. Procedural Clarity: The judgment provides clarity on the procedural aspects of financial restructuring, including the 12-month period allowed for implementing restructuring plans.
3. Protection During Financial Crisis: The ruling reinforces the purpose of financial restructuring legislation as a protective mechanism allowing businesses to continue operations while resolving temporary financial difficulties.
4. Litigation Rights Preserved: Companies in financial restructuring retain their right to pursue claims against third parties, including former management, for alleged wrongdoing.
Conclusion
This landmark decision by the Dubai Court of Cassation provides valuable clarification on the UAE’s financial restructuring regime. It emphasizes the distinction between bankruptcy proceedings and financial restructuring, reinforcing that the latter is designed to help viable businesses overcome temporary financial challenges while maintaining operational control.
The decision aligns with the UAE’s broader economic vision of supporting business continuity and providing effective mechanisms for corporate recovery during challenging financial periods.
