Home » News Articles » Requirements That Must Be Met In Order For The Court To Approve A Bankruptcy Preventive Composition Plan

Requirements That Must Be Met In Order For The Court To Approve A Bankruptcy Preventive Composition Plan

In terms of bankruptcy, the Federal Law No. 9 of 2016 (the “Bankruptcy Law”) makes provision for 2 Court- driven procedures, namely:

  • Preventive Composition; and
  • Bankruptcy.

In this article we discuss the Preventive Composition Plan and its requirements.

Preventive Composition Plan

This process loosely follows the French Safeguard model whereby a debtor who is experiencing financial difficulties but is not yet insolvent, or a debtor who is in a state of over indebtedness or has not paid his debts for a period of less than 30 consecutive business days may propose a compromise to his creditors.

Application to Court

An application may be made by the debtor or by means of a Court order. However, in cases where the debtor has entered into the same procedure within the last year, or already entered into proceedings for bankruptcy, he will not be able to apply for the preventive composition procedure.

The application must include a comprehensive overview of the debtor’s financial situation, which includes details relating to:

  • Debtor’s personal information,
  • Assets,
  • Employees (Full-time and Part-time),
  • Creditors and Debtors,
  • Copies of Financial Records and Statements,
  • Proposals for preventive composition plan and the suggested trustee to carry out the procedure,

In addition to the aforesaid, the application for preventive composition must be approved by the shareholders, and therefore the necessary shareholders’ resolution evidencing such approval must also be submitted together with the application.

The Court will then proceed to appoint an expert to prepare a report setting out the debtor’s financial situation. The purpose of this report is to determine whether the necessary requirements have been met, for example, whether the debtor has adequate funds to settle the costs of the composition application etc.

Court-Appointed Trustee

If the application is successful, the Court will place the debtor under the supervision of a trustee, who will in turn publish the decision in two widely distributed local newspapers and invite creditors to submit their claims within 20 business days.

An important aspect to bear in mind at this stage is that the appointment of the trustee will have the consequence of placing an automatic moratorium on all bankruptcy proceedings, other claims, enforcement and criminal actions against the debtor.

Furthermore, in the event that there are creditors which hold security over specific assets, these secured creditors will have to approach the Court before they may proceed with any claims against the trustee in relation to the specific secured assets.

Draft Preventive Composition Plan

The debtor will now have a period of 45 business days from the date of publication to provide the Court with its draft preventive composition plan. This draft plan must set out the following:

  • Detailed outline of the debtor’s settlement proposals; and
  • The prospects of success of the said proposals;
  • Timeline for implementation of the proposals, which may not be longer than 3 years (however, this period may be extended for a further 3 years with the approval of the majority of the creditors).

Court Review and Creditors Vote

Once the Court has reviewed the draft plan and verified that it takes into account the interests of all the parties concerned, the accepted unsecured creditors (secured creditors will only be permitted to vote if they have surrendered their rights in respect of the secured assets) will be requested to vote for or against its approval.

The plan must be approved by a majority of the accepted creditors holding a minimum of two-thirds of the value of the total outstanding debt. Although the rule of thumb is that only creditors whose debts have been accepted by the Courts may vote in respect of the draft plan, the Court may permit certain creditors whose debts are temporarily accepted to vote.

If this majority is not achieved initially, the voting meeting will be postponed for a period of 7 business days for reconsideration. However, if the majority remains unfulfilled after the expiry of the 7-day extension, it will be deemed to be a rejection of the draft plan.

It is important to note that if the relevant majority is achieved, all the unsecured creditors will be bound by the result irrespective of whether they took part in the voting process or not. Secured creditors will only be bound if they have resigned their rights as mentioned previously, and if they voted in favour of the draft plan.

However, if after the review thereof, the Court is not satisfied with the draft plan it may decide to return it to the Debtor to make certain amendments thereto, or it may elect to reject the plan outright and make an order to initiate bankruptcy proceedings.

In the event that the Court requests amendments to the draft plan, such amendments must be made and the draft plan must be resubmitted to the Court within 10 business days.

The debtor, or one of the accepted creditors, has the right to file an appeal against the Court’s decision and the Court shall subsequently decide upon the appeal within 10 business days.

The decision issued by the Court may be further appealed before the competent Court of Appeal within 5 business days from the date of the Court’s decision. This decision will then be considered to be final and no further appeals will be entertained.

Final Approval of the Draft Composition Plan and its Implementation

After the plan has been approved by the majority of the creditors, the Trustee must present it to the Court within 3 business days for it to issue its final decision whether or not to approve the draft plan. It is also at this stage that those creditors who voted against the draft plan will have the opportunity to voice their objections to the Court in this regard. The Court will adjudicate upon the objection before it within 5 business days of receipt of the objection and its decision will be final.

During the implementation of the plan, the debtor will continue to run the day-to-day business of the company, but under the supervision of the trustee. In this regard, the trustee will have wide ranging powers to act in respect of all the actions required to achieve the purpose of the preventive composition procedure.

The trustee will also be obligated to monitor the progress of the plan and submit a progress report to the Court and the creditors every 3 months.

In addition to the aforesaid, the trustee may, subject to the approval of the Court, introduce amendments to the plan during its implementation.  When considering the trustee’s request for an amendment, the Court must first notify all the interested parties within 5 business days from the date of the trustee’s request. The interested parties will have a period of 10 business days from the date of the notification within which to comment on the proposed amendments, which comments the Court will take into consideration when deciding whether to accept or reject the amendment. For more detail consult Bankruptcy lawyers UAE.

Termination or Invalidation of Approved Preventive Composition Plan

Generally, the approved composition plan will come to an end once the debtor has honoured all of its obligations in terms thereof.

However, should the debtor fail to comply with the terms of the approved composition plan it may lead to its invalidation and an order by the Court to initiate bankruptcy proceedings and liquidate the debtor’s assets. Furthermore, the composition plan may be nullified if it is found that fraud was committed by the debtor.

If the debtor is unable to implement the terms of the plan or if the debtor passes away before implementation and it becomes evident that it is impossible for the debtor’s heirs to implement the plan, or for any other reason, any creditor may request the Court to terminate the composition plan.

The creditors are not obliged to return what was received before the decision to nullify or cancel the plan, and these amounts shall be deducted from the value of their debts.


Sponsored Articles


Do you have a news tip? Call us at (661) 298-1220, or send an email to newstip@hometownstation.com. Don’t miss a thing. Get breaking KHTS Santa Clarita News Alerts delivered right to your inbox. Report a typo or error, email Corrections@hometownstation.com

KHTS FM 98.1 and AM 1220 is Santa Clarita’s only local radio station. KHTS mixes in a combination of news, traffic, sports, and features along with your favorite adult contemporary hits. Santa Clarita news and features are delivered throughout the day over our airwaves, on our website and through a variety of social media platforms. Our KHTS national award-winning daily news briefs are now read daily by 34,000+ residents. A vibrant member of the Santa Clarita community, the KHTS broadcast signal reaches all of the Santa Clarita Valley and parts of the high desert communities located in the Antelope Valley. The station streams its talk shows over the web, reaching a potentially worldwide audience. Follow @KHTSRadio on Facebook, Twitter, and Instagram.

KHTS AM 1220 & FM 98.1 - Santa Clarita Radio - Santa Clarita News

Requirements That Must Be Met In Order For The Court To Approve A Bankruptcy Preventive Composition Plan

Leave a Reply

Your email address will not be published. Required fields are marked *

*

This site uses Akismet to reduce spam. Learn how your comment data is processed.

About KHTS Articles