Currently, few options exist for struggling businesses to manage difficulties that threaten operations. The law marks a new era for the UAE business community, but whether the new bankruptcy provisions will improve confidence and performance remains to be seen.
For years, the international business community has urged the UAE to adopt a bankruptcy law to allow troubled companies to restructure during economic downturns. This year, the UAE obliged when UAE President Sheikh Khalifa bin Zayed Al Nahyan issued Decree No. 9 of 2016, officially approving bankruptcy protection provisions for UAE mainland and free zone companies (except the Dubai International Financial Centre and Abu Dhabi Global Market free zones). Expected to take effect in early 2017, the law marks a new era for the UAE business community, but whether the new bankruptcy provisions will improve confidence and performance remains to be seen.
Currently, few options exist for struggling businesses to manage difficulties that threaten operations. If negotiations with creditors break down, business owners and managers face criminal liability for the company’s bounced cheques and unpaid debt. Over the years, many business owners have chosen to flee the UAE, leaving behind over $1.36 billion in bad debts. Industry insiders and the UAE Banks Federation have long claimed that the UAE’s lack of formal bankruptcy law impedes business development, especially amongst SMEs that weather the worst of any economic downturn. “We commend and welcome the legislation of the bankruptcy law, which the government has recognised as a pre-requisite to the country’s future economic development and as an essential tool to maintain the well-being of the economy,” says AbdulAziz Al Ghurair, chairman of the UAE Banks Federation and Mashreq Bank.
The new law offers struggling businesses the opportunity to restructure or reorganise financially, pre-emptively settle with creditors, or raise new capital through court- mandated proceedings. The new Committee of Financial Restructuring will oversee applicants, appoint experts, and safeguard the rights of debtors and creditors as companies work through the bankruptcy process. The law will also shield owners and executives from criminal liability, including jail time for the company’s debts. However, companies that default on their debts and deliberately avoid filing for bankruptcy risk a fine of up to $272,260 and a prison sentence of up to five years for the owners and executives.
With the UAE government keen to develop the SME sector, the bankruptcy law should reassure the international business community of the country’s commitment to diversifying the economy. However, it will take some time before a real sense of confidence about bankruptcy can develop. “The law is very well drafted and very comprehensive, with well- structured provisions equivalent to Chapter 11 [in the US] that will protect insolvent companies from going bankrupt. The main concern is the practicalities,” says Essam Al Tamimi, senior partner at Al Tamimi & Company.
As the first system of its kind in the GCC, the UAE is sailing in uncharted waters. The law itself will depend heavily on US, UK, France, Germany and other international bankruptcy systems, and will need to be adjusted to meet unique local requirements. The UAE legal community must also rise to the challenge of advising debtors and creditors who find themselves before the Committee of Financial Restructuring. The current lack of advocates and legal consultants with bankruptcy practice or experience means that it could be a very sharp learning curve for both companies and their representatives. Public prosecution, the police, each emirate’s Department of Economic Development and judges will also require extensive expert training to prepare for these new proceedings. Few bankruptcy experts practice in the UAE, calling into question how the government plans to prepare for this seismic shift in the country’s legal landscape.
The new bankruptcy law has also renewed calls for a personal insolvency law that would allow individuals to restructure their personal financial affairs. Such a system is unlikely to emerge in the near future because of concerns raised over bankruptcy abuse and reporting to the applicant’s home jurisdiction. Additionally, though defaulted personal debt does negatively impact the UAE economy overall, it pales in comparison to the SME market, which produces 60% of the UAE’s non-oil GDP. SME defaults also hinder the banks’ appetite for risk and constrain the ability to arrange financing, which further depresses the SME market.
The UAE’s new bankruptcy law should provide an initial boost to the UAE market as a sign of growth and maturity. Though investors can breathe a little easier knowing they now enjoy some protection from criminal liability, implementing this new system will prove challenging.