Expert urges shake-up of insolvency laws

Regulations in the region need updating as the financial crisis pushes more companies to the brink of bankruptcy.

Insolvencies are increasing in the UAE and local laws need to be updated to accommodate this.

As the financial crisis pushes more companies to the brink of bankruptcy, the region's insolvency laws need to be modernised and harmonised, says a report due out today. The report compiled by Hawkamah, a non-profit organisation based in Dubai that promotes higher standards of corporate governance in the region, urges more robust and better-integrated legal systems as the financial crisis enters a new phase in which more insolvencies are possible. .

"The purpose is to improve insolvency regimes and creditor rights in order to mitigate the results of the financial crisis and be better prepared the next time there is a crisis," Nasser Saidi, the executive director of Hawkamah and the chief economist at the Dubai International Financial Centre, said yesterday. In the report, Hawkamah surveyed regulators and policymakers in 11 countries across the region, enlisting the help of experts from the World Bank, the Organisation for Economic Co-operation and Development and INSOL, a global insolvency body.

The survey gave the UAE a score of 74 points out of a maximum 155 on a scale measuring the strength of insolvency regimes. Other countries in the region scored higher; Qatar posted a score of 84, while Saudi Arabia had a score of 85. Kuwait and Oman scored above 100. The Dubai International Financial Centre received a score of 126. It was given its own score because it is a free zone with its own insolvency laws. The average for developed countries was 124.

The scores, Dr Saidi said, highlighted the need for improvement in the laws covering insolvency and creditor rights in the region. While the focus tended to be on helping companies start up, he said, equal attention needed to be given to the exit of companies from the system. "Any market-based system as it evolves faces shocks to the system, not because companies make mistakes but because economic circumstances change," he said. "If you were in the silkworm industry when nylon was invented, you were in the wrong business."

Insolvency laws are on the books in the UAE, but are largely untested by the judicial system. Both the UAE's Commercial Companies Law and the Commercial Transactions Law give extensive coverage to how courts should treat insolvent companies. Under the commercial code, for example, companies must declare bankruptcy within a month of ceasing to pay debts. If they do not, management and directors can be held criminally liable for bankruptcy by negligence.

In addition, the laws prescribe penalties for directors who falsify accounts, embezzle money, conceal assets or lie to a court about the financial position of their companies in the event of an insolvency. During a bankruptcy, the UAE's legal framework also provides for court-approved arrangements between creditors and ailing companies, allowing companies to negotiate workouts and prevent outright failure. If a firm needs to be wound down, the Companies Law provides the groundwork for liquidation.

One major legal ambiguity in the bankruptcy laws lies in the responsibilities of company directors whose firms are of doubtful solvency. This has led lawyers to advise managers to tread carefully to avoid being targeted in insolvency cases. In part because of these ambiguities, few companies that run into trouble in the UAE go to the courts for a settlement. There have been two cases of announced insolvencies in the UAE during the financial crisis: Al Barakah, a property developer in Ajman, said it was insolvent in January, and Khoie Properties, a developer from Ras al Khaimah, announced its insolvency in March. Neither company appears to have gone to the judicial system for a resolution.