Bankruptcy law to bring FDI boost

Foreign investment and entrepreneurship should both receive a lift under a new bankruptcy law that is expected to be passed next year.

Lawyers say the new framework, based on French and German laws, will help to give businesses confidence to invest in the economy.

The law is regarded as a vital cornerstone in the UAE's efforts to drive growth by giving a fresh start to cash-strapped companies unable to pay their bills.

Under planning since 2009, hopes have been raised that the law may be closer to fruition after a senior Ministry of Finance official said this week it was studying the best ways to implement the draft legislation.

Younis Al Khouri, the undersecretary of the Ministry of Finance, said that the Ministerial Council for Services had authorised the study. He said the law could be passed next year.

"It will be a positive as it will make it a more debtor-friendly regime, help to attract foreign direct investment [FDI] and make companies a bit more secure in their position," said Susie Abdel-Nabi, a senior associate in dispute resolution at the law firm Clyde and Co in Dubai.

"The current laws as they stand are untried and untested because people are scared of following them as they are attached to subsequent criminal implications and sanctions if a trader is unable to pay his debts."

For many years indebted businesses have been forced to close and their owners have either fled the country or faces the prospect of a lengthy legal process to declare themselves bankrupt. The latter option has been chosen by few companies as bankruptcy has long carried a stigma in the region and can sometimes lead to the risk of criminal prosecution.

The new legislation will decriminalise bankruptcy while giving struggling companies three routes to help their business.

Companies unable to pay their bills but not technically insolvent will be able to apply for support under a new system called the financial recovery procedure. Overseen by a so-called financial restructuring commission, the confidential process offers an opportunity for debtors and creditors to work through their financial problems with a view to reaching an outcome agreeable to both sides.

For businesses in a more severe financial fix, existing rules surrounding protection from creditors will be enhanced to give companies more tools to make the process easier. Finally, companies facing insolvency will be able to apply for bankruptcy under a procedure designed to give equal say to debtors and creditor.

"Giving businesses more opportunities to save their business should help to encourage enterprise," said James Farn, a partner in banking and finance at Hadef and Partners in Abu Dhabi. "At the moment, there's a negative stigma attached to bankruptcy which can stifle entrepreneurship."

The new law should also help to improve creditors' opportunities to get their money back.

A survey published by the World Bank last October puts the UAE in 101st place globally when it comes to the ease of recovering debt in insolvency.

The UAE's recovery rate was 29.4 cents on the US dollar, the survey said.

Finally, the law will for the first time also set out a bankruptcy procedure for indebted individuals. But the law remains separate from government legislation to decriminalise bounced cheques.

The law will not apply to government entities or companies based within the Dubai International Financial Centre, which has its own legislation.