Existing Employment Contracts under Financial Restructure and Bankruptcy Federal Decree-Law No. 51

Existing Employment Contracts under Financial Restructure and Bankruptcy Federal Decree-Law No. 51

The United Arab Emirates legislators have enacted Federal Decree Law No. 51 of 2023 on Financial Restructuring and Bankruptcy (the “New Bankruptcy Law”).

It is worth noting that the New Bankruptcy Law established special courts to adjudicate bankruptcy applications which will be referred to as the bankruptcy courts (“Bankruptcy Courts”).

The New Bankruptcy Law addresses many important issues that a debtor might encounter if it is to initiate bankruptcy proceedings or if bankruptcy proceedings have been initiated against it. One of such important issues is the employment contracts.

The New Bankruptcy Law provided for that if a decision is issued to initiate bankruptcy proceedings for an employer, the contracts of the debtor’s employees may not be terminated unless it is decided that the debtor’s business shall not be continued.

The New Bankruptcy Law also talked about the status of termination. The employee may, in the event of termination of his employment contract, claim for compensation, unless the Bankruptcy Court decides otherwise, for protecting the interest of the debtor and creditors, yet at the same time considering the interest of the employee.

If it is decided to continue the debtor’s business, the trustee, who is a natural or a legal person appointed by the Bankruptcy Courts to carry out bankruptcy proceedings in accordance with the powers conferred upon him under the New Bankruptcy Law (“Trustee”), shall pay wages and salaries regularly on the agreed upon date if the debtor’s assets are sufficient for that.

The New Bankruptcy Law pointed out that the Trustee shall, not later than 10 days following the issuance of a decision to initiate bankruptcy proceedings, and despite the presence of any other debt, use whatever amounts in his possession to pay the wages and salaries which are considered due and payable before the issuance of the decision to initiate the proceedings.

According to the New Bankruptcy Law, if the Trustee does not have the amounts sufficient to pay those debts, the wages and salaries shall be paid from the first amounts he receives, even if other debts precede the same in the rank of preferential debts. It is worth noting that the payments to be made to those employees are raked as preferential debts.

In conclusion, the New Bankruptcy Law replaced Federal Decree Law No. 9 of 2016 on Bankruptcy and has come into force from May 1, 2024.