UAE Bankruptcy Law and Employee Rights: A Comprehensive Guide for Employees

Introduction

Whenever a company goes into bankruptcy and insolvency, it impacts not only the business but also its other stakeholders, such as creditors, employees, etc.  In the UAE, the 2016 Bankruptcy Law has been replaced by the 2024 Bankruptcy Law (Federal Bankruptcy Law No. 51 of 2023).

Bankruptcy status of any entity disrupts its relationships and functions, which leads to uncertainty for those who are part of the entity. For employees, the critical question remains: do they get paid if their employer files a bankruptcy?

The new law protects the employees' rights to get paid duly for their dues and places them in a preferential category. This has portrayed the UAE government's commitment to prioritising its employees’ financial entitlements and providing support mechanisms during transitional periods of the company.

UAE Bankruptcy Law vs. Free Zone Insolvency Frameworks for Employees

The UAE follows a dual bankruptcy framework that includes onshore legislation under the Bankruptcy Law 2024 and separate regimes for its free zones. The two main free zones, the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), operate under their own independent legal systems where onshore civil and commercial laws do not apply.

This distinction plays a crucial role in determining how employment rights are recognized and protected under each legal framework.

UAE Bankruptcy Law (Federal Decree-Law No. 51 of 2023)

The law gives priority to employee wages and end-of-service benefits. When a company goes into bankruptcy, these payments must be cleared before other unsecured debts. It ensures that employees receive what is owed to them for their work and service years.

Insolvency Law DIFC Law No. 1 of 2019 and Preferential Creditor Regulations (2008)

Under Regulation 4 of the Preferential Creditor Regulations, employee dues such as unpaid salaries for four months, end-of-service gratuity, pension contributions, payment in lieu of notice, and unused leave pay are treated as preferential debts. These are settled before other unsecured creditors in a DIFC insolvency.

ADGM Insolvency Regulations 2022 (Schedule 8)

Schedule 8 gives priority to non-discretionary salary, holiday pay, and pension contributions owed in the three months before insolvency. Employees are treated as preferential creditors and must be paid before other unsecured claims.

While each jurisdiction within the UAE provides its own legal mechanism for handling insolvency, this blog primarily focuses on the UAE Federal Bankruptcy Law, which governs most companies operating outside free zones.

Employee Rights Under the UAE Bankruptcy Law

When a company goes into bankruptcy, the employees of the same are impacted as it interrupts their bread and butter. The new UAE Bankruptcy Law grants employees the preferential rights to recover their outstanding wages, end-of-service benefits, and other employment entitlements ahead of other unsecured creditors, therefore protecting their interests. The law strengthens employee rights by securing and ensuring payment of the debts.

What Happens to Employees When an Employer Enters Bankruptcy in the UAE?

The initiation of bankruptcy proceedings does not automatically terminate employment contracts. Employment will only end if the bankruptcy court determines that the company cannot continue its operations.

If contracts are terminated, employees remain entitled to compensation and outstanding dues, unless the court decides otherwise in order to balance the interests of creditors with those of employees.

However, in the situation wherein the business entity continues, then the law obliges the trustee appointed to the debtor’s assets to pay wages and salaries regularly on the agreed date, provided that the debtor’s assets are sufficient. Also, the court may allow debtors to make the payments of employee wages and supplier debts that are necessary for the continuation of the debtor’s business and the preservation of its assets.

Employee Status as Creditors

Employees are recognized as preferential creditors under the UAE Bankruptcy Law. Their claims are ranked second in the order of preference, immediately after administrative and liquidation expenses. The employee claims covered include:

• Unpaid wages and salaries (capped at three months)
• End-of-service gratuities
• Other dues owed to employees, workers, and servants prior to the commencement of proceedings

Payment of Employee Wages under Preventive Settlement

During the preventive settlement, the law imposes a 3-month automatic moratorium on creditor claims from the date the proceedings open. This moratorium can be extended up to 6 months with the approval of the bankruptcy court.

However, in this situation, employees' claims are expressly excluded, which means that their wages, end-of-service benefits, and other employment-related claims must continue to be paid and settled during the preventive settlement period.

Payment of Employee Wages under the Restructuring Process

In the restructuring process, the moratorium begins when the bankruptcy court decides to initiate restructuring and the process continues until the plan is ratified. Although the law allows for extension, employee lawsuits and payment obligations are not frozen under this moratorium either, therefore, the employees continue to get paid during restructuring phases. This is particularly designed to protect workers and maintain the operations, especially in large companies.

Kayrouz & Associates has specialised lawyers who are led by our Founder and Chief Legal Officer, Mr. Pierre Kayrouz, providing end-to-end legal support on restructuring, exit planning, and legal representation to debtors, creditors & regulated entities and protecting the interests of the stakeholders involved.

Who Is Responsible for Paying Employee Claims During Bankruptcy?

The responsibility for paying employee claims lies with the trustee who is appointed by the Bankruptcy Court to oversee the process. The trustee is expected to do certain duties such as;

1. Verifying and registering all employee claims such as salary, arrears, unpaid leave, gratuity, etc.
2. Prioritizing employee-related debts according to the law.
3. Distributing available funds from the debtor's estate to satisfy those claims.

If the company is going into liquidation, then it is the duty of the liquidator to oversee the winding-up process, wherein he is supposed to inform the employees about their rights and assist them with the claim process.

Where Do Employee Claims Stand in UAE Bankruptcy Proceedings?

Bankruptcy law draws a clear distinction between the secured creditors, preferred creditors, and the ordinary creditors. Further, the creditors whose debts are secured by movable or immovable property, e.g., a mortgage, take the first priority over all the other creditors, but that is only to the extent of their security. This means that a secured creditor is entitled to be paid first from the proceeds of the secured asset.

However, any excess from that sale must be returned to the trustee, and it becomes part of the general estate for other creditors. If the proceeds are insufficient to cover the secured debt, the remaining amount is treated as ordinary unsecured debt.

Then comes the preferred debts, which are paid before the ordinary unsecured creditors, and the employees fall under this protected category. Under the law, there are certain categories of preferred debts to be settled prior to the ordinary debts, and shall be repaid as follows:

1. Judicial and administrative costs
2. Court-ordered living expenses imposed under a judgment.
3. Government dues
4. Employee entitlements
5. Professional fees which are agreed upon with experts or consultants appointed by the debtor during proceedings (including legal fees).
6. Post-bankruptcy operational expenses which are to maintain the debtor’s business or assets after initiation of the proceedings.

UAE bankruptcy Law grants employees priority over general creditors, though after secured creditors and governmental claims, in this way, the law balances commercial predictability with social justice.

Frequently Asked Questions

Are allowances, commissions, and bonuses included as employee claims in Bankruptcy in UAE?

No. Employee claims do not cover any incidental allowances, post-employment bonuses, additional payments, or other monetary or in-kind benefits.

How long do employees have to submit claims after bankruptcy is announced?

Under the Bankruptcy Law 2024 employees (like all other creditors) must submit their claims within ten (10) days from the date they are notified by the Trustee after the bankruptcy proceedings are initiated.

Is there a cap on the amount of salary given priority?

Yes. The law limits employee claims to a maximum of three months of the employee’s basic salary. The Bankruptcy Court gives permission to the Trustee to pay salaries and wages that are due and payable to the debtor's employees, workers and servants for a period of less than thirty (30) days from any of the debtor's funds that are in the Trustee's possession.

How Kayrouz & Associates Can Help You Protect Your Employment Rights During a Company Bankruptcy?

When a company faces bankruptcy in Dubai, employees often struggle to understand how to file their claims and secure their pending salaries. Many also wonder if they will still receive their end-of-service gratuity, whether their years of service will be recognized, or if they could lose their job during the process.

At Kayrouz & Associates, we make sure your years of hard work are valued and that you receive what you are rightfully owed. Our lawyers help you file your claim and protect your rights under UAE labour and bankruptcy laws.

With over 24 years of experience in providing expert legal representation in company restructuring  we provide trusted bankruptcy legal services in the UAE, that includes:

1. Internal reorganisations and entity rationalisation
2. Voluntary liquidation and winding up
3. Ownership transition and succession planning
4. Shareholder buyouts and exit negotiations
5. Asset or share divestment strategies
6. Regulatory filings and compliance management
7. Drafting restructuring plans and board resolutions

Book a free consultation with our expert bankruptcy lawyers in UAE today!