Scheme of Arrangement in UAE

A scheme of arrangement in UAE is a court-supervised mechanism that allows a financially distressed company to restructure its debts by reaching a binding agreement with its creditors, without necessarily entering full liquidation. The UAE';s insolvency framework has undergone significant reform in recent years, creating a more creditor- and debtor-friendly environment aligned with international best practice. This guide explains how the scheme works, which laws govern it, what the procedure involves, and what creditors and debtors should expect at each stage.

A scheme of arrangement is a statutory compromise between a company and its creditors or shareholders, sanctioned by a court and binding on all parties once approved. It is distinct from informal workouts or voluntary agreements because it carries legal force: a dissenting minority cannot block implementation once the required majority has voted in favour and the court has sanctioned the scheme.

In the UAE, the concept operates across two parallel legal systems. Onshore UAE - meaning the mainland jurisdiction governed by federal law - provides for restructuring and composition procedures under Federal Decree-Law No. 9 of 2016 on Bankruptcy (the Bankruptcy Law), as amended. The financial free zones - the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) - operate their own insolvency regimes modelled on English law, which include scheme-like mechanisms that closely resemble the English Companies Act scheme of arrangement.

Understanding which regime applies to a given company is the first practical step. A company incorporated onshore under the UAE Commercial Companies Law falls under the federal Bankruptcy Law. A company incorporated in the DIFC falls under DIFC Insolvency Law No. 1 of 2019. A company incorporated in the ADGM falls under the ADGM Insolvency Regulations. Each regime has its own court, procedural rules, and voting thresholds.

The federal Bankruptcy Law introduced a preventive composition procedure that functions as the closest onshore equivalent to a scheme of arrangement. Under this law, a debtor that is unable to meet its debts as they fall due, or that foresees such inability within the next year, may apply to the competent court - the Court of First Instance in the relevant emirate - for a composition with creditors.

The procedure begins with the debtor filing a petition supported by audited financial statements, a list of creditors with amounts owed, a description of assets, and a proposed restructuring plan. The court appoints a trustee to oversee the process and notify creditors. Creditors then have an opportunity to review the plan, raise objections, and vote. The law requires approval by a majority of creditors representing at least two-thirds of the total debt value. Once approved by the required majority and ratified by the court, the composition plan binds all unsecured creditors, including those who voted against it.

A non-obvious requirement under the onshore framework is that the debtor must not have been convicted of certain financial crimes and must not have previously been declared bankrupt within a specified period. Foreign founders and investors sometimes overlook this eligibility screen, which can delay or block a filing. The court also retains broad discretion to reject a plan it considers unfair to creditors, even if the voting threshold is met.

Key competent authorities in the onshore process include:

• The Court of First Instance in the relevant emirate, which supervises the entire procedure.
• The appointed trustee, who acts as an independent officer managing communications between debtor and creditors.
• The Public Prosecution, which may be notified in cases involving suspected fraud.

Timelines under the onshore framework are not fixed by statute at every stage, but in practice the initial court review of a petition typically takes several weeks, and the full composition process from filing to court ratification commonly runs between three and nine months, depending on the complexity of the debt structure and the number of creditors involved.

The DIFC operates as a common law jurisdiction with its own courts, the DIFC Courts, which have jurisdiction over companies incorporated in the DIFC and, in certain circumstances, over parties that have contractually submitted to DIFC jurisdiction. The DIFC Insolvency Law No. 1 of 2019 and the accompanying DIFC Insolvency Regulations provide for a company voluntary arrangement and a scheme of arrangement that closely track the English model.

Under the DIFC framework, a scheme of arrangement is proposed by the company or its creditors and requires the sanction of the DIFC Court. The procedure involves convening separate meetings of creditor classes, each of which votes on the proposed scheme. The voting threshold requires approval by a majority in number of creditors present and voting in each class, representing at least seventy-five percent in value of the claims in that class. This dual test - headcount and value - is a direct import from English law and differs from the onshore federal approach.

Class composition is one of the most technically demanding aspects of a DIFC scheme. Creditors must be grouped into classes according to the similarity of their legal rights against the company. Secured creditors, unsecured creditors, and subordinated creditors typically form separate classes. If the class composition is challenged and the court finds it incorrect, the entire scheme may be set aside. In practice, legal advisers spend considerable time at the outset analysing creditor rights to ensure the class structure will withstand scrutiny.

Once the required majority in each class approves the scheme, the DIFC Court holds a sanction hearing. The court will consider whether the scheme is fair and reasonable, whether the class meetings were properly convened, and whether the scheme falls within the scope of the statute. If satisfied, the court issues a sanction order, and the scheme becomes binding on all creditors in the relevant classes, including dissenters.

A practical scenario: a DIFC-incorporated holding company with a syndicated loan facility involving multiple international banks proposes a debt-for-equity conversion. The company';s advisers structure the creditor classes to separate senior secured lenders from trade creditors. After the required majority in each class approves the scheme at the creditor meetings, the DIFC Court sanctions it. The conversion becomes binding on all lenders, including those who voted against, and the company avoids liquidation.

The Abu Dhabi Global Market, established on Al Maryah Island in Abu Dhabi, operates under its own legal framework administered by the ADGM Courts. The ADGM Insolvency Regulations, modelled on English insolvency law, provide for administration, company voluntary arrangements, and scheme-like procedures. The ADGM Courts have jurisdiction over ADGM-incorporated entities and, in certain cases, over parties that have agreed to submit to ADGM jurisdiction.

The ADGM framework allows a company in financial difficulty to enter administration, during which an administrator takes control of the company and pursues one of the statutory objectives: rescuing the company as a going concern, achieving a better outcome for creditors than liquidation would produce, or realising assets for secured creditors. Administration provides an automatic moratorium on creditor action, which gives the company breathing space to negotiate a restructuring plan.

Within an ADGM administration, the administrator may propose a restructuring plan to creditors. Creditors vote in classes, and the thresholds mirror those applicable in the DIFC. The ADGM Courts can also cross-recognise insolvency proceedings from other jurisdictions under the ADGM Insolvency Regulations, which is particularly relevant for multinational groups with entities in multiple jurisdictions.

A common mistake made by foreign investors is assuming that a scheme sanctioned in the DIFC or ADGM will automatically be recognised and enforced across the UAE mainland. Recognition of free zone court orders on the mainland is governed by separate protocols and is not guaranteed in all cases. Parties should seek specific advice on enforcement before relying on a free zone scheme to bind mainland creditors or attach mainland assets.

Whether the applicable framework is the onshore Bankruptcy Law, the DIFC regime, or the ADGM regime, the broad procedural sequence follows a recognisable pattern. Understanding each stage helps debtors and creditors plan their involvement and manage costs.

The process typically begins with a financial assessment and legal structuring phase. The debtor, usually with the assistance of financial advisers and legal counsel, prepares a detailed analysis of its liabilities, assets, and cash flow. This analysis forms the basis of the proposed restructuring plan and the creditor class structure. In practice, this phase takes several weeks to several months depending on the complexity of the balance sheet.

The next stage involves filing the petition or application with the relevant court. For onshore proceedings, this means the Court of First Instance. For DIFC proceedings, this means the DIFC Courts. For ADGM proceedings, this means the ADGM Courts. The filing must be accompanied by the required supporting documents, which typically include audited accounts, a creditor schedule, and the proposed plan or scheme document.

Following the filing, the court considers whether to grant permission to convene creditor meetings. In the DIFC and ADGM, this is a formal convening hearing at which the court reviews the proposed class structure and the adequacy of the explanatory statement to be sent to creditors. The explanatory statement is a critical document: it must give creditors sufficient information to make an informed decision on how to vote. An inadequate explanatory statement is a common ground for challenging a scheme.

Creditor meetings are then convened, notices are issued, and creditors vote. The voting period and notice requirements vary by regime but typically involve a minimum notice period of several weeks. After the vote, if the required majority is achieved, the debtor applies to the court for sanction. The sanction hearing is the final judicial checkpoint before the scheme becomes binding.

Once sanctioned, the scheme is implemented according to its terms. This may involve debt write-downs, debt-for-equity conversions, extended repayment schedules, or a combination of these. The trustee or administrator monitors compliance. If a party fails to comply with the scheme terms, the court retains jurisdiction to enforce compliance.

If you are navigating a restructuring process and need to assess which framework applies to your company';s situation, contact info@vlolawfirm.com. We can help structure the setup correctly the first time.

The cost of a scheme of arrangement in UAE varies significantly depending on the regime, the complexity of the debt structure, and the number of creditors involved. Professional fees - covering legal advisers, financial advisers, and the appointed trustee or administrator - typically represent the largest cost component. For a mid-sized restructuring, professional fees usually start from the low tens of thousands of USD and can reach into the hundreds of thousands for complex multinational restructurings.

Court filing fees and official charges are set by each court';s fee schedule and are generally modest relative to professional fees. The DIFC Courts and ADGM Courts publish their fee schedules, and parties should obtain current figures directly from the relevant court registry. Onshore court fees follow the federal court fee structure applicable in the relevant emirate.

Timelines are a frequent source of underestimation. Many debtors approach a scheme expecting a process of two to three months and find that, from initial filing to court sanction, six to twelve months is more realistic for a contested or complex scheme. Factors that extend timelines include disputes over creditor class composition, challenges to the explanatory statement, creditor objections at the sanction hearing, and the court';s own scheduling constraints.

A practical scenario illustrating cost and timing: an onshore UAE company with trade creditors and a bank loan seeks a composition under the federal Bankruptcy Law. The debtor engages legal counsel and a financial adviser. The petition is filed, a trustee is appointed, and creditor meetings are convened. The entire process from filing to court ratification takes approximately seven months. Professional fees total in the mid-six figures in AED. The composition plan provides for a fifty percent haircut on unsecured trade debt and an extended repayment schedule for the bank loan.

Hidden costs that surface later include the ongoing costs of trustee or administrator supervision during the implementation phase, costs of any litigation brought by dissenting creditors, and the cost of obtaining recognition of the scheme in other jurisdictions where the debtor has assets or creditors. Many underestimate the cross-border recognition issue, particularly for groups with assets in common law jurisdictions that may or may not recognise UAE court orders under their own rules.

Practical tips for debtors:

• Engage advisers early, before the financial position becomes critical, to preserve more restructuring options.
• Ensure audited accounts are current and accurate before filing, as courts and creditors will scrutinise them closely.
• Analyse creditor class composition carefully at the outset to reduce the risk of a successful challenge at the sanction hearing.
• Consider whether a moratorium or interim relief is available and necessary to prevent creditor enforcement during the process.
• Assess cross-border recognition requirements if the group has assets or creditors outside the UAE.

What is the difference between the onshore UAE composition procedure and a DIFC scheme of arrangement?

The onshore composition procedure under the federal Bankruptcy Law is a civil law-based mechanism administered by the UAE Courts of First Instance. It requires approval by a majority of creditors representing at least two-thirds of the total debt value, and the court ratifies the plan once that threshold is met. The DIFC scheme of arrangement is a common law mechanism administered by the DIFC Courts, requiring approval by a majority in number and seventy-five percent in value within each creditor class. The DIFC process involves a formal convening hearing, an explanatory statement, and a sanction hearing, making it procedurally closer to an English scheme. The choice between the two depends primarily on where the company is incorporated and where its creditors are located, as well as the governing law of the relevant debt instruments.

How long does a scheme of arrangement typically take in the UAE, and what does it cost?

From initial filing to court sanction, a straightforward scheme in either the onshore or free zone framework typically takes between four and nine months. Complex schemes involving many creditor classes, contested class composition, or cross-border elements can take twelve months or longer. Professional fees are the dominant cost and vary widely: simpler cases may be handled for fees starting in the low tens of thousands of USD, while large or contested restructurings can cost significantly more. Court fees are generally a smaller component. Debtors should also budget for post-sanction implementation costs, including trustee or administrator supervision and any cross-border recognition proceedings.

Can a scheme of arrangement sanctioned in the DIFC or ADGM bind creditors located outside the UAE?

A scheme sanctioned by the DIFC Courts or ADGM Courts is binding on all creditors within the scope of the scheme, regardless of where they are located, provided the court has jurisdiction over the company. However, whether that scheme will be recognised and enforced in a foreign jurisdiction depends on the law of that jurisdiction. Some common law countries may recognise DIFC or ADGM court orders under their own cross-border insolvency rules or under principles of comity, but this is not automatic. Parties should obtain jurisdiction-specific advice on recognition before relying on a free zone scheme to bind or affect assets or creditors in other countries. The ADGM Insolvency Regulations also contain provisions for cross-border recognition of foreign insolvency proceedings, which can be relevant for multinational groups.

The scheme of arrangement in UAE offers a structured, court-supervised path for financially distressed companies to reach binding agreements with creditors and avoid liquidation. The framework differs across the onshore federal system, the DIFC, and the ADGM, and selecting the right regime is a foundational decision that shapes the entire process. Timelines, costs, and procedural requirements vary, and cross-border recognition remains a practical concern for groups with international operations.

VLO Law Firms advises international clients on bankruptcy and restructuring matters in the UAE. We can assist with assessing the applicable insolvency regime, structuring creditor classes, preparing court filings, and managing the scheme process from petition to sanction. To request a consultation, contact: info@vlolawfirm.com