The UAE Bankruptcy Law has introduced much-needed transparency in respect of the UAE insolvency regime. The law strives to set a more modern framework for corporations restructuring their insolvency status.

This article addresses the potential impact of the Bankruptcy Law on continued employment – in other words, what does this mean for employers’ obligations under UAE employment law?

It looks at payment obligations and the centrality of employees as creditors when an employer becomes bankrupt. The article also examines the employment-related provisions of the Bankruptcy Law in the onshore UAE and the separate, dedicated insolvency regimes of the DIFC and ADGM, including a comparative review across these jurisdictions.

Employment Considerations Under the DIFC Insolvency Regime

Unlike other countries, the DIFC has an independent Insolvency Law (DIFC Law No. 3 of 2009) and DIFC Insolvency Regulations. The Regulations made pursuant to Article 140 of the DIFC Companies Law No. 2 of 2009 (as amended) and Article 93 of the DIFC Insolvency Law, set out clear guidance on the way insolvency cases are handled. Moreover, the DIFC Preferential Creditor Regulations set out employees’ rights as preferred creditors.

The DIFC Insolvency Regulations assume the distribution of assets within that order: winding-up expenses, preferred creditors, then all other unsecured or secured creditors. This framework ensures both transparency in the process and reinforces the special position of employees under UAE employment law, who on the aggregate remain priority creditors in insolvency scenarios.

Under the DIFC Preferential Creditor Regulations, payments owed to employees are classified as preferential debts. These include:

• Contributions the company owes to a pension scheme on behalf of its employees or any end-of-service gratuities.
• Employee remuneration for up to four months of work.
• Payments owed to employees in lieu of notice.
• Compensation for accrued but unused annual leave.

By prioritizing these payments, the DIFC framework aligns with UAE law for employees, ensuring workers receive the financial entitlements they are owed during insolvency proceedings.

Employment Implications Under the ADGM Insolvency Framework

The ADGM has promulgated its own Insolvency Regulations (ADGM Insolvency Regulations 2015) governing the distribution of assets. These include payment of the winding-up expenses, all preferential debts, and payments of either unsecured or secured debts.

ADGM Insolvency Regulations define preferential debts as amounts due by the company to any present or past employees. These debts are repayable in the form of non-discretionary salary, including any agreed holiday pay, or as member contributions into arrangements established for a pension scheme. They relate to the period of up to three months preceding the relevant date. For these purposes, the relevant date means:

These provisions align with UAE labour regulations, prioritizing employee rights during insolvency proceedings.

New Bankruptcy Law: Applicable onshore and in All Free Zones (Excluding DIFC and ADGM) under UAE employment law

When a company is declared bankrupt, the courts order the liquidation of its assets and the payment of its debts according to the order of preferential debts set out in Article 189 of the Bankruptcy Law. 

From an employment perspective, the Bankruptcy Law protects employees by ranking payments owed to them second in the order of preferential debts. The priority is given to expenses related to the winding-up process, as well as any fees for experts and trustees.

Article 189 (B) of the Bankruptcy Law stipulates that “end-of-service gratuity, unpaid wages, and regularly paid salaries” owed to employees shall be settled if it does not exceed “a maximum of three months’ salary.” This figure does not include allowances, bonuses, other contingent payments, or other benefits, whether in cash or in kind. 

However, the term “salary” is not defined and it is uncertain whether it means a maximum of three months’ total remuneration or just basic salary. As allowances and bonuses are specifically excluded from Article 189, it is probable that the three-month limit refers only to basic salary and not total remuneration in accordance with UAE employment law.

Conclusion

the UAE’s Bankruptcy Law strengthens employee rights by designating employee payments as preferential debts and replacing an outdated insolvency framework with a modern oneFairness priority. The DIFC and ADGM insolvency regimes additionally provide greater protection for employees, requiring that end-of-service gratuities and unpaid wages be dealt with as priorities for payment.

It is a needed touchstone in preventing consumer abuses, but it calls for more thought and discussion over the ambiguity in the definition of “salary.” In summary, the law enhances employee protections under UAE employment law and gives workers priority in insolvency proceedings.

Having said that, Contact Khairallah Advocates & Legal Consultants and benefit from our free 30-min legal consultation.

*Disclaimer: our blogs, law updates and FAQ’s are freely distributed for educational purposes and to showcase recent updates and regulations in the UAE’s framework.

If you have any questions and need assistance, contact us at our number or book an appointment online.