Do we need a Bankruptcy Law?

As the current financial crisis bites, hundreds of people are losing their jobs, while others seek bank loans to manage daily life. In the first in a special series, Gulf News hears peoples' opinions on bankruptcy and insolvency laws that could help people protect themselves and move on.

YES

Bankruptcy law will help economy

Jitendra Gianchandani, Chief executive and managing partner, Jitendra Chartered Accountants

From the accountancy perspective, bankruptcy will always take place in any economy. The GCC being a $1 trillion economy, it is surprising that there is no legislation guiding the corporate world.

Bankruptcy is a sensitive issue as it involves multiple stakeholders - the corporate world, auditing, banks/lenders, shareholders, employees, creditors and the management.

As the UAE continues its march towards progress and growth, at some point in time, the country will have to come to terms with legitimate bankruptcy.

It is in this context that I strongly feel that a framework for bankruptcy should be put in place, which will take care of the interests of all stakeholders, and in turn take care of the economy.

Currently, the most talked about bankruptcy is about the three auto majors - GM, Chrysler and Ford. The debate is not about whether these companies will survive, but it is about how to allow them to file for bankruptcy.

If such a scenario had arisen in the UAE, there are no guidelines for any of the stakeholders to follow.

I am of the opinion that bankruptcy is part and parcel of the corporate world. But companies should try all means of revival, including vendor stretching, debt restructuring, cash management and dramatic downsizing before filing for bankruptcy.

A foolproof system will definitely help everyone

Christina Cabading, President, BSEL Infrastructure Realty FZE

There is a definite need for a bankruptcy law in the UAE. Considering the rate at which the UAE economy is growing, combined with the volume of business that happens in the country, the promulgation of such a law should be encouraged.

The government should lay down a strong framework which will help demarcate the genuine bankrupt companies from the fraud ones. There should be categories of companies that will or will not be allowed to file bankruptcy.

The government should have a complete network to support such bankruptcies - a banking ombudsman, courts of law to deal with bankruptcy, agencies to support revival of bankrupt companies, facilities for distressed asset sales and regulations to allow asset restructuring companies to operate.

There should be agencies that are competent to advise and monitor bankruptcy proceedings.From the real estate perspective, a foolproof system will definitely help safeguard and secure the interests of the developers and the investors, which will in turn help boost the economy's growth.

The current crisis calls for bankruptcy law

Mehrooz Manzoor Rufi, Director of Rufi Real Estate and Construction

There should be a bankruptcy law. The kind of crisis that we are going through now has never happened here before. People who are in trouble don't know how to cope with the situation.

There should definitely be a safe exit if a business cannot continue. When there is an issue, it should be addressed. The UAE does not provide such an exit.

The Land Department is now helping people who need a safe exit. In the property sector, there are a lot of projects being cancelled and RERA is helping those who are not willing to continue and funding their needs.

If not a bankruptcy law per se, then at least there should be a module of safe exit for businesses that are on the verge of closing down.

Right now, the immediate effect of having a law of this kind might be negative on the economy, but in the long term declaring bankruptcy is a sign of a developing and mature market.

The ability to declare bankruptcy will give more confidence to the investors putting cash into this country. You will find fewer and fewer people running away. The government should take this into consideration.

Companies cannot just fold up and leave

Nilesh Khalkho, Chief executive of Sharaf DG

Like other countries, the UAE needs a bankruptcy law. Companies cannot just fold up and leave. They need to complete their regulatory laws. On the other hand, because of the lack of a law, companies don't have security, especially during these difficult times.

A lot of companies have become very conservative in doing business with others, because there is no credit rating and they don't know how the other companies are performing.

There are a lot of cases where companies fold up and officials leave the country and all the money has been lost. A law is needed to avoid that.The law would help the company, the banks as well as the economy.

People will know that there is a regulatory body to monitor the firms and companies, how business is being done and the interest is being protected. Right now, we don't know what is happening.

NO

There are other solutions

Essam Daoud, Ambassador of Liberia to the UAE

Whether we like it or not, there is evidence of a solution similar to a bankruptcy law. The only obstacle we have on the path to bankruptcy protection is putting people in jail in the first stage. And after that the judge decides your case on how to pay back the debtors.

Bankruptcy has its benefits and its negatives. The benefits to the economy go hand in hand with the UAE's growing economy. When you have some type of protection for the investor, they take more risk and this gives more velocity for growth of the local economy.

When that protection is not there, there is more fear, people don't take chances, and small to medium business don't flourish and the rate of growth slows down. That is the bright side of having a bankruptcy law.

The disadvantage of this situation in the UAE is that more than 85 per cent of the population are expatriates, so one cannot control this situation where people can simply take off.

But on the other hand, when people are in financial trouble and they don't have bankruptcy laws, they are taking off by default. The parking lot of the airport is filled with cars right now.

The UAE is not ready

Mohammad Bajnaid, Saudi Arabian living in the UAE

The UAE is not ready for the bankruptcy law and there are several reasons for this. There isn't a support system for the expatriate resident community, which make up more than 85 per cent of this country's population.

The law can only work if people have means to pay back their creditors, while being able to support themselves. With the lack of unemployment benefits, among other things, an expatriate living in the UAE will probably still flee the country, as he would be unable to clear his debts.

The risk rate will still continue and people as well as the economy will not benefit from the bankruptcy law at this point.

There will be a high occurrence of flight by individuals who have to pay their creditors, with or without the law at this point. In fact, the number of cases will increase because people will be somewhat protected due to this law.

The lack of fear of prosecution will encourage fraudulent business to spring up and will further harm the economy of the UAE.

Bankruptcy

Bankruptcy is a legally declared inability or impairment of ability of an individual or organisation to pay its creditors. Creditors may file a bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed or initiate a restructuring.

In the majority of cases, however, bankruptcy is initiated by the debtor (a "voluntary bankruptcy" that is filed by the bankrupt individual or organisation). In the United States, it is often referred to as Chapter 11.

There are instances where companies seeking bankruptcy protection, have come back with a strong performance and they not only pay off their debts but also later expand their business.

In the UAE most foreign businessmen who default are known to elope, leaving worthless cheques and debts. Analysts believe that a bankruptcy law could help these companies in difficult times, and that they could make a comeback when the economy recovers.