In-Brief
- Special insolvency procedures now apply to businesses whose financial distress resulted from the Iranian aggression.
- The UAE declared a state of Financial Emergency on 1 June 2026, activating Chapter 5 of the Bankruptcy Law.
- Creditor-initiated bankruptcy proceedings are suspended during the Financial Emergency period.
- The procedure prioritizes business continuity through enhanced restructuring and settlement mechanisms.
On 1 June 2026, the UAE Cabinet issued Resolution No. 94 of 2026 declaring the Iranian aggression a state of Financial Emergency (“Cabinet Resolution 94/2026”), thereby activating Chapter 5 of Federal Decree-Law No. 51 of 2023 concerning Financial Restructuring and Bankruptcy (the “Bankruptcy Law”) in relation to Bankruptcy commencement applications.
In this article, we highlight what Financial Emergency entails and its effect on bankruptcy procedures.
What is a Financial Emergency?
A Financial Emergency is a statutory period declared by the Cabinet of Ministers in response to an unforeseen general event such as a pandemic, natural disaster, war that disrupts a debtor’s financial position and ability to pay debts as they fall due or causes a cessation of debt payments altogether.
Cabinet Resolution No. 94 of 2026 applies to financial hardship sustained by businesses as a result of the Iranian aggression that began on 28 February 2026. The end date of the current Financial Emergency period will be determined by a subsequent Cabinet decision to address lagging effects and obligations that may crystallize in the future.
This is not the UAE’s first Financial Emergency declaration. In January 2021, the Cabinet retroactively designated the COVID-19 period from 1 April 2020 to 31 July 2021 as a Financial Emergency, giving businesses latitude while preserving creditors’ rights.
When Chapter 5 Applies
Once a Financial Emergency period is declared, Chapter 5 of the Bankruptcy Law, titled “Proceedings for Preventive Settlement, or Bankruptcy Declaration During Financial Emergency”, applies to debtor commencement applications where the debtor’s financial hardship arose from the Financial Emergency.
Accordingly, debtors may still apply for Preventive Settlement, Financial Restructuring, or a Bankruptcy Declaration (Insolvent Liquidation) according to the ordinary Bankruptcy Law rules. Chapter 5 introduces procedural flexibility, including the possibility of commencing proceedings without appointing a trustee and allowing the debtor a collective negotiation period with creditors.
This option is not available to a debtor where their financial position is not directly related to a Financial Emergency. In these circumstances the ordinary Bankruptcy Law rules continue to apply.
Proceedings commenced before a Financial Emergency designation remain subject to the ordinary Bankruptcy Law rules. However, the Bankruptcy Court may extend statutory timeframes where necessary to address adverse effects arising from a Financial Emergency, provided that any extension does not exceed twice the ordinary statutory period.
Debtors’ Commencement Applications
Application & Requirements
Chapter 5 does not alter Article 22 application requirements under the Bankruptcy Law. However, a debtor seeking to rely on Chapter 5 must provide evidence that its distressed financial position or indebtedness arose or resulted from the Financial Emergency (in the current context, the Iranian aggression).
Process under Financial Emergency
The Bankruptcy Court may accept a debtor’s commencement application, determine the applicable proceedings, and proceed without appointing a trustee. The ordinary consequences of commencement, including any claims moratorium, treatment of contracts, and accrual of interest, continue to apply.
Further, the Bankruptcy Court may not impose precautionary measures over assets required for the debtor’s continued business operations, unless those assets are non-essential and unrelated to the business.
Settlement under Financial Emergency rules
Following commencement, the debtor may request a negotiation period of up to 40 days to seek a collective settlement with creditors. If granted, the debtor must notify creditors of the Bankruptcy Court’s decision and invite them to negotiate, specifying the date, location, and method of negotiation. The settlement period may not exceed 12 months from the commencement order, and negotiations and agreements may be recorded electronically.
Approval requires the support of two-thirds value of participating creditors and may bind non-participating creditors through a cram-down. The Bankruptcy Court may reject a negotiated agreement if it considers that it was not negotiated in good faith or would prejudice certain creditors.
A creditor may object to a settlement before the Bankruptcy Court within 15 days of decision, seeking reconsideration by the Bankruptcy Court. However, any rejection of a creditor’s objection is binding on all creditors.
New Funding
If the Bankruptcy Court accepts a debtor’s request to commence preventive settlement or restructuring proceedings, it may authorize the debtor in obtaining secured or unsecured new funding to support the rescue. Such finance may rank ahead of unsecured debt and be secured over the debtor’s unencumbered assets.
Where the existing pledge holder is a licensed finance institution, the Bankruptcy Court may also permit a new pledge over assets to the same value as the prior secured debt provided that any new pledge is capped at 30% of the value of the assets, and the new pledge is ranked at the same level or higher than the existing secured debt, particularly where the funding supports continued operations and debt servicing and repayment.
Creditors’ Commencement Applications by Creditors
During a Financial Emergency, creditors cannot apply to commence bankruptcy proceedings against a defaulting debtor. The Bankruptcy Court must postpone issuing a decision on creditor-filed applications until the Financial Emergency period ends, which will be determined by a subsequent Cabinet decision. Creditors may however participate in debtor-led proceedings to preserve their rights.
Separately, creditors are entitled to pursue unilateral claims and precautionary measures if the debtor has not sought or obtained a moratorium in accordance with Chapter 5 or the ordinary Bankruptcy Law process.
Financial Emergency Management obligations
During a Financial Emergency, the board of directors and managers of companies that have ceased paying debts should maintain records, accounts, and financial statements that reflect the Financial Emergency. They are also expected to act in good faith and prudently, in the best the interests of the company and its assets.
Conclusion
The declaration of a Financial Emergency represents a targeted legislative response to the economic consequences of the Iranian aggression.
While the ordinary provisions of the Bankruptcy Law continue to govern matters not expressly modified by Chapter 5, the special mechanism introduces important procedural adjustments and options designed to facilitate consensual restructurings, preserve viable businesses, and mitigate the immediate effects of financial distress.
While creditors are prohibited from filing bankruptcy applications against debtors during the period of Financial Emergency, it does not prevent unilateral claims or precautionary measures unless the debtor seeks protection in accordance with the Bankruptcy Law
Given the temporary nature of these measures and uncertainty surrounding the duration of the Financial Emergency, stakeholders should remain vigilant in determining their rights and obligations, and evaluate available options.
If you would like more information on this topic, or have any questions, please contact Dispute Resolution Partner Mohammed Al Dhaheri, Head of Restructuring & Insolvency Practice at m.aldhaheri@hadefpartners.com.