Bankruptcy law to improve credit dynamics in the UAE

UAE law spearheads insolvency reforms in the region

Gulf News

Dubai: The UAE Bankruptcy Law or Federal Law 9 of 2016 is one crucial part of the comprehensive insolvency law reforms that will go a long way in improving the credit dynamics and investor confidence in the UAE, according to economists.

“The law comes at a critical time in the UAE’s economic development road map, especially given the vital role the law will play in incentivising private sector and entrepreneurial activity,” said Shady Shaher Elborno, Head of Macro Strategy at Emirates NBD.

The existing insolvency regime was broadly spread across three pieces of legislation, the commercial companies law, the commercial transactions law, and the civil law. While providing a formal court supervised process for settling creditor claims, the lack of clarity and inconsistency around the laws meant they have been largely untested.

The options for companies seeking to restructure before the law in the UAE were largely limited. Rather than seeking a court supervised process, distressed companies in the UAE have traditionally chosen to undergo private restructuring negotiations. While a liquidation or restructuring under legal protection was nearly impossible under the current laws directors and key executives could face criminal charges in cases of insolvency.

“The new insolvency legislation will contribute positively to the credit dynamics of the UAE economy. By introducing more predictability and allowing for a legal framework to restructure or liquidate, distressed companies and stakeholders across the economy benefit,” said Shaher Elborno.

Traditionally banks in the UAE have opted to write off a business that fails to meet its obligations, as there was little recourse in the first place for distressed businesses to restructure. For these financial institutions, the legislation should boost confidence, by permitting them recourse to a framework that will allow them to make the right decisions on either restructuring and/or liquidating a business, with recourse to collateral in case of the latter.

“This [the new law] will result in better risk management in the UAE banking sector, improving pricing dynamics of credit, and ultimately result in more optimal flow of credit,” said Mohammad Al-Tajir, Manager, FX Analytics and Product Development at Emirates NBD.

The SME sector of the UAE in particular has been bearing the brunt of the absence of legislation to restructure or liquidate. In 2015 SME “skips”, a phenomena where business owners skip the country to avoid legal prosecution, are estimated to have reached Dh5 billion.

“The Federal Law on bankruptcy should have a broad positive impact on both the lenders and the SME sector. Banks will be able realise higher value on distressed assets through the options available to them, and viable businesses are able to restructure and carry on, preserving value for the creditors, owners and the wider economy,” said Al-Tajir.

For the UAE the insolvency legislation should also work to the economy’s advantage in its drive to rise up the ranks as an attractive global business destination. In the World Bank’s Doing Business report, the UAE’s overall rank at 26 was 8 positions higher than 2016 rankings, which was underpinned by factors ranging from ease of starting a business, registering a property, accessing utilities, enforcing contracts to protecting minority investors. However when it came to winding down a business the UAE ranked very low at 104, with almost 3.2 years needed to wind down a business (against the OECD average of 1.7), at a cost of 20 per cent of the estate (against the OECD average of 9.1 per cent).

“As cases work through the new bankruptcy legislation, we expect risks in the SME sector to be mitigated, and credit conditions to improve as banks’ confidence picks up due to improved risk dynamics,” said Shaher Elborno.

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