This article was written by John Lee, Norton Rose Fulbright (Middle East) LLP.

Employees’ rights in bankruptcy in the UAE On the face of it, employees’ rights in the UAE seem to be well protected by the bankruptcy laws. Under Article 713(1) of Federal Law No. 18 of 1993 (Commercial Transactions Law), the wages and salaries of workers that have become due 30 days prior to the adjudication of bankruptcy may be paid on a super-priority level (“regardless of any other debt”) by the bankruptcy trustee. However, there is some uncertainty as to whether employees would be paid before secured creditors as the bankruptcy laws remain largely untested in the UAE courts.

Despite this, the reality of a company going under is very different.

The effectiveness of the bankruptcy process in the UAE, when independently compared to other countries, is regarded as poor. It certainly lags behind the UAE’s rapid economic development in recent years. Although the UAE ranks 23rd in the World Bank’s Doing Business report for 2014, it only ranks 101st in terms of resolving insolvency. The average process takes 3.2 years and the recovery rate is only 29.4%. This is compared to 1 year and 88.6% for the UKand 1.5 years and 81.5% for the USA. (Doing Business 2014 – Understanding Regulations for Small and Medium-Size Enterprises)

A key reported factor is the continued criminalisation of dishonoured cheques. Management are less willing to keep the company afloat as a going concern and see it through an orderly resolution process in the face of the threat of imprisonment. This was seen as one of the factors that led to the collapse of the Hastie Group in the UAE. The executives left for the group’s headquarters in Australia, leaving the UAE operations in disarray. (The real victims of bankruptcy when companies go under in the UAE)

Related to this, failing companies have in the past distributed funds to affiliates abroad, sacrificing the UAE company at the expense of its creditors and employees. Although a clawback mechanism exists in theory, this is for the most part untested, and given the inevitable delay and costs involved in chasing assets abroad, there is little appetite to pursue this route. The lack of faith in the existing bankruptcy system is further illustrated by the handling of Dubai World’s debt problems in 2009. They were not regarded as being sufficiently sophisticated to deal with the complex financial difficulties suffered by Dubai World. In this case, the Dubai Government resorted to establishing a special regime applicable only to creditors of Dubai World which was administered by the Dubai World Tribunal. (Dubai World Tribunal)

In summary, the lack of protection for employees in their employer’s bankruptcy is more due to the inefficient functioning of the bankruptcy regime as a whole, as opposed to the lack of any specific provisions applicable to them. It is hoped that the eagerly and long awaited new UAE bankruptcy law will go some way to address this issue. It is expected to introduce a clearer and more streamlined formal bankruptcy procedure, as well as introducing new concepts such as “financial reregulation” (court agreement amongst creditors) and “preventative composition” (similar to US Chapter 11 and Company Voluntary Arrangement in the UK). It is now in the final legislative stages but it will be some time yet before one can assess its impact on the bankruptcy process in the UAE and the protection of employees’ interests.

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