Insolvency laws need to be updated to attract investments

Dubai: A clear legal framework to deal with insolvencies and corporate bankruptcies that define the rights of both debtors and creditors are important to attract both foreign investments and foster domestic entrepreneurship in the region, experts at a conference on insolvency reforms in Dubai said yesterday.

"The absence of efficient exit mechanisms would discourage the entry and financing of new businesses into a country's markets, if they cannot be freed from the burden of past obligations. Having said that, the idea is not to provide defaulters with an easy way out of their liabilities," said Nasser Saidi, Chief Economist of the Dubai International Financial Centre (DIFC).

Enabling the restructuring and reorganisation of companies is one of the most important features of a modern insolvency regime. The UAE is unique in the sense that two insolvency systems are available in two jurisdictions: one for the DIFC and another for the UAE.

Experts speaking at the forum said the insolvency regimes in the region are evolving and need to be updated to suit the business environment in the country.

"Given the effects of the global economic downturn, our region needs to review its insolvency laws and policies more closely and pursue higher judicial standards in these areas," said Judge Jamal Al Sumaiti, Director General of the Dubai Judicial Institute.

Enabling the restructuring and reorganisation of companies is one of the most important features of a modern insolvency regime. A country's insolvency and restructuring framework should be widely and equally accessible to both debtors and creditors. A healthy insolvency system provides predictability to debtors and creditors in case of financial distress while balancing liquidation and reorganisation," said Saidi.

Judicial officials and legal experts said yesterday that the existing insolvency laws in the region are dysfunctional and inefficient compared many systems around the world. For example it takes 5.1 years to go through insolvency in the UAE versus a regional average of 3.4 years; the cost to go through the process of insolvency is 30 per cent of the estate in UAE versus the Middle East and North Africa (Mena) average of 13 per cent and the recovery rate is 11 per cent for the UAE versus 29.7 per cent for Mena.

Experts said the UAE's existing insolvency legal framework is dated and requires changes to suit the current business environment. The bankruptcy regime is part of the Commercial Transaction Law (Federal Law 18). The UAE bankruptcy regime in Law 18 is the UAE's equivalent of Chapter 11 proceedings in the US.

"Although the UAE already has a legal framework, it is not geared to deal with large businesses. It was created at a time when businesses were small and less complex than today," said Essam Al Tamimi, senior partner at Al Tamimi & Company.

The legal fraternity agrees that the DIFC undoubtedly has the best insolvency legal framework in the Mena region, but many said that the DIFC system needs to be fine tuned to suit businesses of all sizes.

"Under the DIFC laws a moratorium on a debt obligation involving personal liabilities is not available above obligations that exceed $20 million. This simply means a debt standstill is difficult in situations where restructuring involves obligations of more than $20 million," said John Houghton, global co-chair of the Latham & Watkins Insovency practice.

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