UAE bankruptcy law could to come into effect by end of this year

The new bankruptcy law could come into effect by the end of the year, amid concerns that the court system may struggle to implement it effectively.

The bankruptcy law was published in the country’s official legal gazette on September 29, stating that it will come into effect three months later, according to a senior Abu Dhabi lawyer and a senior executive at the Ministry of Finance.

The state news agency Wam said on Monday evening that Sheikh Khalifa, the President, had issued Federal Law Decree No 9 for 2016 on bankruptcy, after the Cabinet approved the new law early last month.

A copy of the new law seen by The National says it was approved from September 20.

The new bankruptcy law provides, for the first time, a comprehensive legal framework to help distressed companies in the UAE avoid collapse.

While the commercial transactions law has more than 250 articles dealing with insolvency, such provisions offer few options to companies threatened with insolvency beyond liquidation, and are therefore hardly ever used.

The law will establish the Committee of Financial Restructuring (CFR).

This new regulatory body will oversee the procedures of financial restructuring outside the scope of the courts and have responsibility for the appointment of restructuring experts.

Under the terms of the new law, creditors will be able to initiate insolvency proceedings against companies or traders in cases where debts of Dh100,000 or more are unpaid for more than 30 days.

Insolvent companies will be able to avoid liquidation via four pathways set out in the law, namely financial reorganisation, a pre-emptive settlement, financial restructuring and the raising of new funds.

The law also contains provisions blocking creditors from applying criminal charges against executives of insolvent companies for bounced cheques, when the company is undergoing a court-mandated restructuring process.

The passage of the new law has been welcomed by the legal and financial communities.

“Having a proper bankruptcy framework in place is very important for corporate restructurings, as it provides a burning platform that can precipitate action if need be,” said Paul Leggett, a director of restructuring services at Deloitte Financial Advisory in Dubai.

“Having such a framework gives greater clarity about potential outcomes of distressed situations for both creditors and debtors, giving them options of how to proceed and allowing them to make rational decisions, which has been largely missing from the local restructuring process.” Such a law is likely to improve the perception of the UAE as a place to do international business, provided that it is implemented properly.

“At the high level a modern insolvency law is always a good thing, in that it helps investor confidence in that jurisdiction by reducing uncertainty about restructuring and bankruptcy,” said Rehan Akbar, an assistant vice president-analyst with ratings agency Moody’s in Dubai. “As always the devil is in the details of how it’s implemented on the ground.”

Key to the law’s success will be the capacity of the local courts system to process insolvency cases, with judges hitherto advising lawyers not to pursue court-driven insolvency cases due to the deficiencies of the current law.

“In a nutshell [the new law] says that companies and traders have to pay what they owe or face consequences, while also giving them options for rescue and restructure where there is a realistic and constructive plan in place,” said Essam Al Tamimi, senior partner at Al Tamimi and Company.

“However, it places a lot of responsibility on the shoulders of the local courts, who are charged with supervision and oversight of a lot of these restructuring and insolvency processes.

“It could put a huge load on the local justice system.”

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John Everington

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