UAE moves towards enacting new insolvency law

The new law is reported to be largely based on French insolvency practices, drawing on a number of provisions from German law, as well as legal codes from countries such as the Netherlands and Japan.

Criminal punishment related to bounced cheques has been cited as one of major obstacles to doing business in the UAE. istockphoto.com

The long-awaited new insolvency law has taken a big step towards becoming a reality after being approved by the Cabinet.

Sheikh Mohammed bin Rashid, Prime Minister and Ruler of Dubai, said on his website that the proposed draft law includes flexible strategies to bail out businesses that have encountered financial troubles that might lead to bankruptcy.

“The draft law aims to regulate accumulated debts, eases restructuring of companies as well as support troubled businesses,” he said.

“The draft law aims to mitigate risk of bankruptcy and ensure a safe and attractive business environment in the UAE that nurtures and supports investments.”

The new law, which was approved on Sunday, is reported to be largely based on French insolvency practices, drawing on a number of provisions from German law, as well as legal codes from countries such as the Netherlands and Japan.

Significantly, the new law is reported to contain groundbreaking provisions regarding the decriminalisation of bounced cheques.

The ability to launch criminal charges against individuals who issue bad cheques has long been cited as one of the principal obstacles to doing business in the UAE.

“For those who are going through the bankruptcy process, once a court has sanctioned the procedure, it will issue a letter that will enable postponing of criminal charges relating to bounced cheques until a restructuring plan has been agreed with creditors,” said a person with knowledge of the new insolvency law.

In April, the former world heavyweight boxing champion David Haye was arrested at Dubai International Airport and had his passport confiscated after a cheque for Dh1.8 million, related to the construction of a new gym, bounced.

However, lawyers have highlighted that if such provisions are contained in the new insolvency law, significant amendments to the UAE’s penal code will be required for them to take effect.

The draft insolvency law will now be referred to the Federal National Council for approval. Should the FNC approve the draft legislation, it will then be referred to the rulers of the seven emirates for their approval, and finally to President Sheikh Khalifa for his signature.

An effective legal framework for dealing with insolvent companies has long been identified as one of the key missing pieces in the legal system.

Although there are more than 250 articles in the current commercial transactions law dealing with insolvency, the existing provisions are more suited to the resolution of insolvency of smaller, local companies, rather than international companies with complicated international funding structures.

While the UAE ranked 22nd in the World Bank’s influential Doing Business 2015 index last October, up from 25th position for the previous year, the country’s ranking for resolving insolvency slipped to 92nd position from 88th, below countries including Cote d’Ivoire, Cambodia and Mongolia.

"There has been a big push recently to get the new law approved, as there's widespread dissatisfaction with the country's ranking in this area," said Mazen Boustany, a partner with the law firm Baker McKenzie Habib Al Mulla. "It's good that it's moving forward. It should encourage the growth of entrepreneurship in the UAE, giving would-be entrepreneurs some protection, and meaning they don't get penalised for failing."

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