UAE waits to turn the corner on bankruptcy reforms

Monarch Alternative Capital, a New York-based hedge fund, acquired a $45.5 million portion of the Drydocks debt and proceeded in October 2011 to launch legal action in the High Court of London against the company for repayment. Jaime Puebla / The NationalShow less

Ask any commercial lawyer or investment banker about their wish list for legal reform in the UAE, and a new insolvency law is invariably near the top of the list. A modern insolvency regime, one which allows companies to enter court-driven insolvency and restructuring procedures, is widely regarded as essential for the country’s economic development.

Now there are signs that such a new law may be coming closer to reality.

At the end of last year, the Ministry of Finance submitted a revised draft of a new insolvency law – modelled largely on French, German and US regimes – to the Ministry of Justice for its approval. Last week a source familiar with the process said that the ministry was close to giving its stamp of approval for the new law, pending some minor alterations.

The new law may be submitted to the Federal National Council for approval as early as next month, the source said. While such claims should be treated with more than a pinch of salt, it is obvious that the Government is treating the matter seriously.

And not before time. A lack of a modern insolvency regime in the UAE is considered a major potential impediment to the country’s economic development.

The most recent edition of the World Bank’s Doing Business report, issued last October, ranked the UAE as the easiest place to do business in the Arab World, and 23rd overall.

But the UAE ranked 101st out of 189 countries when it came to insolvency resolution, with only Saudi Arabia ranking lower in the GCC.

On a visit to Dubai in February, the Virgin Group chairman Sir Richard Branson told Arabian Business that he was "flabbergasted" that there was no modern insolvency regime in the Emirates.

Development of such a regime was an essential complement for governments trying to encourage growth of entrepreneurship and the SME sector, as it gave would-be start-ups a degree of protection in case of failure.

“It really goes to the core of a mature economy, that ability to deal with companies that have fallen into financial difficulty and to be able to effectively recycle value,” says Christian Adams, a Dubai-based insolvency lawyer with Latham and Watkins.

“Without that framework you get a stagnation [in resolving insolvency] that affects both the companies themselves that are in financial difficulty and also their creditors.”

While it is often said that the UAE has no insolvency law, this is not technically true, according to Mazen Boustany, a partner with the law firm Baker McKenzie Habib Al Mulla.

“There are more that 255 articles that deal with the subject,” he says. “The issue is that they are embedded within the commercial transactions law.”

While Mr Boustany describes the existing framework as “comprehensive”, he admits that it is more applicable towards the resolution of the insolvency of smaller, local companies, rather than larger companies with complicated structures and international operations.

The provisions on insolvency have barely been tested since the commercial transactions law was enacted in 1993.

The deficiency of the insolvency framework was laid bare after the collapse of Dubai's property market in late 2008, a situation that placed Dubai World and its subsidiary Nakheel in peril.

“It had got to the point where local businesses had evolved into global corporations with multiple sources of finance, tiered capital structures and diverse investments,” says Mr Adams. “The legal framework – including that dealing with insolvency – had not evolved at the same pace.”

Faced with this situation, the Dubai Government issued Decree 57 in late 2009, creating a unique legal framework, based largely on UK insolvency law, specifically designed to support the restructuring of Dubai World and its subsidiaries.

Although the restructurings were eventually conducted without recourse to that framework, its existence was still crucial to restructuring deals being signed with creditors.

The framework came into its own in February 2012, when the Dubai World subsidiary Drydocks World used the Decree 57 framework to successfully implement the UAE's first court-driven restructuring process, eventually completed in August of that year, in response to creditor threats.

Such an orderly restructuring demonstrates what is possible if and when the UAE as a whole adopts more modern insolvency practices.

However Mr Adams cautions that a new law in and of itself will not be sufficient to bring about a change in approach to insolvency in the UAE, with the training of judges and practitioners and possibly the establishment of dedicated bankruptcy courts highly recommended.

Further changes to the law will also be required for any new insolvency to really have an impact, says Mr Boustany, with the decriminalisation of bounced cheques near the top of the list.

“The insolvency process is still a long and cumbersome process even if you have the best law in the world in place,” Mr Boustany says.

“If creditors are still using cheques as security, they retain the ability to threaten people with criminal charges if that cheque bounces. In such cases, why would you go through such a long process when you have the power to make such a threat?”

The UAE may well be on the verge of introducing the type of insolvency law that the country’s economy needs. But without other changes in law and culture, it is uncertain whether that will be enough to help the country to rise further up the World Bank’s rankings.

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