The UAE introduced a new stand-alone bankruptcy law in December 2016, although it had lived for 23 years with a bankruptcy law embedded in the Code of Commercial Transactions (Federal Law No. 18 of 1993).

This law has come at a time where the UAE, and SMEs in particular, are reeling from the economic downturn and suffering losses, and the key question is whether the new law will aid the nation’s economic infrastructure and give greater protection to debtors in general than in the past.

The areas that will have the most significant impact on SMEs (individual non-traders are excluded from the new law) are in relation to debt restructuring and to the bounced cheques.

As regards the former, the new law incentivises SMEs to be more proactive if they want to continue with their business and to put in place viable restructuring plans to do so. The law provides for two distinctive paths for initiating debt restructuring proceedings — a preventive composition scheme (whereby the debtor initiates debt restructuring proceedings in the Insolvency Courts when debts have accrued for less than 30 days) and a financial restructuring scheme (whereby one or more creditors can institute the proceedings to recover debts of more than Dh100,000 due for more than 30 days).

The biggest providers of cheques in the UAE are notably SMEs and a typical scenario during economic crises is a number of absconders fleeing the country after giving post-dated cheques that are at risk of bouncing, which is constitutes, even until now, a criminal offence that could lead to a jail sentence under UAE law.

The new law does not decriminalise the bouncing of a cheque (although that is currently the subject of several other initiatives), but it does suspend the criminalisation of the cheque if the Court has approved the launch of either a preventive composition procedure or a financial restructuring procedure. Such decriminalisation may come very early in the insolvency process and offer a reprieve to those SMEs owners or shareholders that have given security cheques to their lenders or other trade creditors.

Unfortunately, the major pitfall for an SME is that secured creditors are able to continue with their lawsuits during these proceedings, which does not protect failing businesses. It would have been more helpful for SMEs had the law suspended those actions from the moment the preventive composition or restructuring proceedings begin, rather than after the Court’s approval of the preventive composition plan or the financial restructuring plan.

Do debtor SMEs have stronger incentives to use the law? Yes, since the criminal aspect of the cheque is suspended during preventive composition or a financial restructuring proceedings and also if — and it is a big if — the Court sticks with the strict timelines provided by the law. Then, secured creditors may see their actions suspended during the plan’s period, which are three years renewable once for the preventive composition plan and five years renewable for another three years for the financial restructuring plan.

The economic or business incentives for banks to use the law in the case of SMEs are less clear, which might have an impact on its widespread use. Banks usually prefer to “go it alone”, particularly if they are secured creditors, and would not rather launch collective proceedings such as insolvency proceedings that will complicate the recovery of their loans.

The old law was relatively good and exhaustive, but was largely untested, except in a very few cases. It has been replaced by the new law that is somehow procedurally heavy and complex, as it gives a larger role to the Courts in sanctioning the various schemes available under the law.

This will necessitate a specialisation of the judges handling bankruptcy cases, otherwise there will be a negative impact on the law itself and on its use. Such specialisation will constitute a paradigm shift in the UAE legal landscape and could be at the origin of a tremendous change that will affect other areas of the law.

But we imperatively need to see this law tested as soon as possible in order to assess its effectiveness and to have any gaps filled by the Courts.

But it is not only the UAE that is taking steps to address gaps in the insolvency laws. Saudi Arabia, too, plans to institute a new insolvency law, reflecting these nations’ desire to ensure that their legal infrastructure is able to support the implementation of their economic visions and ambitions.

The writer is with the law firm of Baker McKenzie Habib Al Mulla.