Revamped default law could spur economy

More companies are expected to launch once the UAE finalises its new bankruptcy law. But how much of a relief it will be for business owners will depend on its details.

The new law needs to distinguish between company cheques and personal cheques,” says Abdul Baset Al Janahi, the chief executive of Dubai SME. Jeffrey E Biteng / The National

Once finalised, a proposed new bankruptcy law will boost the UAE economy and have major implications across a spectrum of sectors, entrepreneurs and officials say.

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"If there were changes to the bankruptcy laws, small business owners would have more confidence in starting up and that would stimulate the economy," said Stuart Curtis, the managing director for the Links Group of Companies, which helps businesses set up in the UAE.

But how much of a welcome relief the law will be for business owners all depends on its details.

A bankruptcy law exists, but legal experts say there is no real precedence of a company ever having been able to use it effectively. The new law is still "a draft and at its early stages", says a legal expert within the Ministry of Economy.

Currently, the consequences for not paying back debts can be severe. Business owners, as well as individuals who do not run a venture, can face penalties such as travel bans or jail for paying with cheques that bounce. Some have even fled the country to avoid being imprisoned over debts that they could not afford to repay.

"When it comes to the new law, all companies and entrepreneurs will benefit from greater clarity on how criminal liability can arise in a bankruptcy," said Adam Goldberg, an associate with Latham & Watkins law firm in Dubai.

Yet observers are watching closely to see whether the new bankruptcy law will actually include certain protections specifically aimed at owners of businesses that may be beyond restructuring help and become bankrupt.

"I think the new law needs to distinguish between company cheques and personal cheques," said Abdul Baset Al Janahi, the chief executive of Dubai SME, an agency under the emirate's Department of Economic Development.

Currently, banks take personal guarantees for small businesses, a practise which Mr Al Janahi says needs to stop. "Banks should evaluate SMEs (small to medium-sized enterprises) on the business, not on the person," he says.

Experts say the new law could improve the lending procedures that businesses go through to acquire credit from banks and prevent them from overextending in the first place, then filing for bankruptcy.

Companies that do encounter financial difficulty these days, and which suspend making payments of their debts, can enter into an arrangement with creditors. But they currently have just 20 days to file such an arrangement with the court, and it should include a plan to pay back half of their debts within three years.

"It's been quite hard for any entities, whether the actual entity that's borrowed money or the financier, from a commercial perspective, to consider bankruptcy as a viable option," says Jody Waugh, a partner in the banking and finance division at the law firm Al Tamimi & Co.

The new bankruptcy law is expected to have the biggest impact on ventures owned by expatriates, and should allow them to take more risks in expanding their presence in the UAE, experts say.

Hans Schwab, who is in the process of trying to commercialise a handful of business ideas from Abu Dhabi, is a serial entrepreneur and former executive board member of the World Economic Forum. He argues "there has to be a balance between the protection of the creditors and the entrepreneur".

One of his past ventures failed in Switzerland in 2005, after a major investor in his aviation company went bankrupt. Unable to pay his company's debt obligations, Mr Schwab filed for bankruptcy then started again.

"This is a global issue: when you are starting a business, a business is about risk," says James Caan, the chairman of 90 North Real Estate Partners, an advisory firm that is opening an office in Dubai.

"It comes down to intention," adds Mr Caan, who is arguably best known for pouring more than £1 million (Dh5.7m) into 14 companies while he appeared on the television show Dragons' Den. "Are you intending to actually misrepresent, or is it just a flaw that the business plan may not have worked, or maybe the market changed?" he said.

The new law could also spur more homegrown start-ups launched by Emiratis, some experts say.

"I think for us, as Emiratis, it is definitely another way of looking at business," said Azza Al Qubaisi, who runs the Arjmst jewellery company and is the vice chairperson of the Abu Dhabi Business Women Council.

"I think it'll definitely make us more risky: to go out there, start something and look at losing [the business] or being bankrupt, but at least feeling safer if that had to happen," she added.