Towards the end of last year, it was announced that the UAE’s long anticipated insolvency reform bill was reaching its final stages prior to implementation.
The legal framework was drawn up following the establishment of the Dubai World Tribunal that resulted from the emirate’s inability to pay creditors in November 2009. The case cast a spotlight on the UAE, specifically its lack of an official insolvency bill to help either local business or international investors should they find themselves in the sort of financial difficulty many commercial enterprises experience at some point.
After almost a year of intense discussion between representatives of all seven individual emirates, the end of 2013 saw the UAE move a step closer to implementing an insolvency bill when a revised draft of the proposed legislation was referred to the Ministry of Justice. However, that bill is still awaiting official approval and, it remains unclear when, or even if, the new law will be enacted.
The implementation of this important legislation is vital for the continued economic prosperity of the region, which has already seen certain international investors, including Sir Richard Branson founder of the Virgin Group, refuse to proceed with specific business deals because of the ambiguous bankruptcy laws currently in place.
The emirates must therefore, now prioritise the introduction of legislation in order to protect its potential new business ventures and encourage further entrepreneurship.
Instituting the insolvency regulation bill has become the UAE’s flagship legislation and represents an important cornerstone in improving the country’s competitiveness on an international scale. The UAE ranks 23rd in the World Bank’s Doing Business Report for 2014 but languishes in 101st place internationally and fifth among the six GCC states in terms of insolvency resolution.
Insolvency laws were first introduced in the country in 1993 but have not been properly utilized or adhered to because of persistent uncertainties over application of the law in a series of highly complex cases.
The key concept must now be to provide a method by which companies can begin trading profitably or be liquidated in a controlled manner, without provoking any of the stigma currently attached to the process in many parts of the Middle East.
Under the proposed new measures, any decisions made would be reached through negotiated agreement with creditors or by way of a formally administrated process. This will benefit the country by allowing capital to be more efficiently redistributed, while at the same time enabling corporations to resolve their financial difficulties in a more structured way.
The absence of an efficient and well-defined insolvency regime can only be harmful to the levels of confidence in the local economy and the UAE’s international economic reputation.
The new legislation, is believed to contain three main components that address Financial Deregulation, Preventative Composition of Bankruptcy, and Bankruptcy. Financial deregulation outlines the processes under which an out of court agreement could be achieved between the debtor and its creditors.
Preventative composition of bankruptcy is the restructuring process overseen by the court and an independent supervisor. The procedure shares common traits with the proven Company Voluntary Agreement (CVA) used in the UK and allows the debtor to keep control of the business with the protection of the court for a period of time while solutions are sought.
Finally, bankruptcy covers a process available to insolvent businesses that ensures they are controlled by a bankruptcy supervisor rather than the debtor.
Through this process, the ailing business would either be restructured or face liquidation of its assets. In Europe, such restructuring is often beneficial and viewed as a normal part of the business life cycle. It is without stigma and is not necessarily seen as being the ‘fault’ of management.
In summary, legislation needs to provide a high degree of unbiased assurance for all the parties involved. It must provide foreign investors and stakeholders with clear guidelines, avoiding protracted court disputes and providing business with clear guidelines towards reaching sensible solutions. Once all these aspects are met UAE insolvency reform will be well under way and have exceptionally beneficial effects on the region.