A long-awaited out-of-court settlement in a bounced cheque criminal case against the founder of private equity firm Abraaj Group dislodges concerns of complications in the firm's provisional liquidation, and should comfort other creditors, analysts said.
"The settlement clears things up a lot, because whenever there is a criminal accusation in the background it complicates restructuring plans and the sale of parts of the business in question," said Richard Segal, senior analyst at Manulife Asset Management.
The embattled buyout firm – once the Middle East's largest with almost $14 billion (Dh51.42bn) of assets under management at its peak – has faced a liquidity crisis since some investors accused it in February of mismanaging funds. Abraaj is undergoing a court-supervised restructuring in the Cayman Islands to repay an estimated $1bn of debt.
Liquidators are trying to sell various parts of Abraaj's business, including the funds management and investment management units, and in June reached an agreement to sell the latter to Colony Capital based in the US. The sale is yet to complete.
In parallel, Abraaj founder Arif Naqvi faced two consecutive criminal cases over bounced cheques, filed by one of his personal creditors Hamad Jafar – another founding shareholder of Abraaj – in June. Issuing a cheque with insufficient funds can be a criminal offence in the UAE and can elicit a jail sentence or hefty fine.
The first case related to a cheque for Dh177 million, jointly signed by Mr Naqvi and Abraaj executive Rafique Lakhani, and used as partial security for around Dh1.1bn of loans made to Abraaj by Mr Jafar.
Although a court in Sharjah dismissed the first case based on notice of a provisional settlement between Mr Naqvi and Mr Jafar, the claimant filed a second case in July, this time for Dh798m.
After two court adjournments, lawyers issued statements this week saying the settlement had been reached and the case withdrawn.
"Under UAE Criminal Law charges based on bounced cheques get extinguished once parties reach a settlement," Habib Al Mulla, executive chairman of Baker McKenzie Habib Al Mulla said.
[ Abraaj founder reaches out-of-court settlement over bounced cheque case ]
[ Dubai Financial Services Authority to investigate Abraaj mismanagement claims ]
[ String of UAE firms disclose exposure to Abraaj Group ]
Mr Zafer Oghli, partner at Al Tamimi & Company, acting for Mr Jafar, said in a statement: “All criminal proceedings relating to this case have been discontinued.”
In both cases, the bounced cheque charges were brought against Mr Naqvi personally, not Abraaj Group, and no other creditor has publicly brought other charges against Abraaj or its founder. However, the practical and emotional significance of an "overhang" of a criminal case on the broader liquidation proceedings cannot be underestimated, said analysts.
“Clearly with this distraction gone, [Mr Naqvi] will have more mental space to deal with the restructuring – even if in theory he could still have influenced it before from behind the scenes,” Mr Segal said.
Having a personal case extinguished is positive, said Khalid Howladar, managing director and founder of Acreditus, “as an ongoing criminal case or conviction against the founder or shareholders would inhibit an efficient restructuring process if they were unable to participate due to court proceedings.
“The defendant would likely be focused on their personal court case versus on a distressed corporate restructuring. If convicted, there could be regulatory restrictions on the role they could take as managing director,” he said.
Mr Al Mulla said he had no information on what role in the restructuring Mr Naqvi could and could not have played had the criminal proceedings continued, and a spokesman for the joint provisional liquidators at Deloitte said news of the settlement “had no impact on the liquidation process”.
Mr Segal said that a background criminal accusation could prompt a prospective buyer of parts of Abraaj’s business to make additional requests or ask for terms unfavourable to the seller.
But he said the sales process appeared to be progressing well. “For the most part, interested parties have not dropped out, which is an encouraging sign and suggests they are being realistic about terms and pricing.”