UAE's insolvency laws delay business closure up to five years

It takes an average of five years to close a business in the UAE because of inadequate insolvency laws, according to a senior adviser for the World Bank. The Government needs to create an insolvency regime to make the legal process easier for companies unable to continue trading, said Dahlia Khalifa, the senior strategy adviser for the Doing Business 2010 report, which analyses the process of operating businesses across the globe on behalf of the World Bank's International Finance Corporation. The report reveals it also costs UAE company owners an average of 30 per cent of the value of their estate to close their business.

"In the UAE, because there is not a very strong insolvency regime, there are actually very few companies that go through the insolvency process," Ms Khalifa said at an event in Dubai to discuss the results of the Doing Business 2010 report. "What needs to be addressed is the creation of an insolvency regime so companies can go through a very clear process to resolve issues if there are any criminal obligations or results that come from filing for bankruptcy."

The UAE planned to introduce a "couple of reforms" to insolvency legislation, said Abdullah Nasser Lootah, the secretary general of the Emirates Competitiveness Council (ECC), set up by the Government in May to improve the country's global competitiveness. Despite the global financial crisis, there have been very few insolvency cases in the UAE. Under UAE law, if a company does not make payments to creditors for 30 days it must, by law, declare it is insolvent, or face charges of bankruptcy by negligence, which is a criminal offence.

Legal structures also exist for companies after they declare insolvency, with courts able to appoint trustees to manage a bankrupt firm, as well as being able to adjudicate on agreements between creditors and troubled companies to resolve their financial distress. The establishment of committees to represent creditors and an improvement in the efficiency of courts dealing with insolvent companies were among measures the UAE could implement to improve insolvency legislation, said Mrs Khalifa.

The UAE ranked 143rd in the report, published last month, for ease of closing a business. However, it rose from 47th to 33rd among 183 economies worldwide in terms of the overall ease of doing business. The country ranked as one of the world's 10 most active economic reformers, thanks to improvements in the areas of starting a business, dealing with construction permits and trading across borders. But the UAE also needed to improve legislation on the enforcement of contracts, with the country only ranking 134th for the ease of enforcing contracts.

"We are still analysing the findings of the report but there are highlights and lowlights that have been shown up, and we are working to make sure we can turn the lowlights into highlights in time for the next report," said Mr Lootah. [e-mail]