Bankruptcy law is good for business

A proposed new bankruptcy law promises to bring some much-nneded reforms. The challenge now is to move from proposal to actual law.

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Bankruptcy, or more precisely insolvency, is a normal part of corporate life, though not an inevitable one. So it is good to know that a new draft law has been introduced, intended to make the process more efficient while reducing the associated social stigma and legal penalties. The next challenge is to consult the various stakeholders and get the new rules into effect.

Around the world, plenty of respectable companies have had to declare bankruptcy over the years, after changing conditions eroded markets or raised costs, or when bad decisions led to grim consequences.

Going bankrupt is in fact a key element of capitalism: competition means some firms prosper, some struggle along, and some go broke.

In most countries, however, insolvency is no longer the same as going out of business. A company awash in red ink can often survive by restructuring its debts - negotiating with creditors, perhaps selling off some equity and otherwise rebuilding its balance sheet. So-called rescue procedures of this type are a key part of the new proposed UAE law.

To be sure, some bankruptcies are caused by the criminal wrongdoing of corporate officers or employees. Such cases will continue to undergo industrious investigation followed by prosecution.

But where business people have operated in good faith, they should not be subject to harsh penalties, nor should they be treated as shameful. The National has reported that the draft law will move many such cases away from the slow-moving courts and into a new tribunal that will focus on commercial practicality. The question then, in each case, will be what compromises with creditors can keep a business going so as to salvage at least some of the original investment and employment.

The proposed law would not, unfortunately, change the existing penal code controls on cheques bounced by business owners or individuals. Parallel reforms on this subject should be another stage in the development of the law because the current penalties are counter productive.

Even without that the new draft law on bankruptcy will be widely welcomed. But commercial law always has plenty of fine print, and fine-tuning this draft law will be a matter for experts. They will, of course, want to get this right, but finally enacting these changes into law as soon as possibly promises to deliver a big boost to our private sector.