The UAE’s recently introduced bankruptcy law will affect most businesses in the UAE, including those in real estate Image Credit: Shutterstock

The UAE made a huge step late last year towards further raising the country’s attractiveness as a business and investment hub with the introduction of a bankruptcy law. While the law is still in its infancy, industry experts says the long-term effects of the regulation will be beneficial to various industries, including real estate.

The Federal Law 9 of 2016, or the bankruptcy law, applies to all private sector companies in the UAE, including those incorporated in free zones, except those companies incorporated in the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), which have their own insolvency regimes, according to Joe Neilson, associate at Trowers & Hamlins.

While citing the law’s impact on the economy as a whole, Neilson says the new regulations will be favourable to most businesses operating in the UAE, as well as banks and other financial institutions that lend to those businesses. The modernity and flexibility of the regulations will encourage businesses to operate in the UAE, offering them greater autonomy to manage their finances, he says.

“It introduces three new procedures available to businesses that are facing insolvency, known as protective composition, insolvency with restructuring and insolvency and liquidation. These, along with a new balance sheet insolvency test, will assist businesses by giving them more opportunities to identify problems, recover and/or restructure when they find themselves in difficulty,” says Neilson.

As it is still in the early stages of the law’s implementation, Neilson believes its impact on the real estate market is yet to be observed. “The law will encourage lenders to support the businesses and, ultimately, lead to businesses being more successful in the UAE,” says Neilson. “Successful businesses expand and, therefore, require more space and more staff to operate — be it office, warehouse, industrial. As a knock-on effect of expansion, residential real estate will be required to house the extra staff. Hence, the increased demand is going to impact upon the UAE real estate sector and the market as a whole positively.”

Confidence boost

While the enhancements in the business environment as a result of the new bankruptcy regulation would take time, the law already brings the UAE more in line with global business best practices, which creates stronger confidence among small and medium enterprises (SMEs), government-owned companies and individual traders, says Mario Volpi, chief sales officer of Kensington Exclusive Properties.

“It will offer creditors and debtors increased flexibility in dealing with financial distress, while ensuring certainty and security for business owners,” says Volpi. “Owners will be able to rely, to some extent, on protection for their businesses during re-structuring and effectively be able to negotiate with their creditors.”

Commenting on its positive impact on the property sector, Volpi adds that the law will help banks potentially lower their bad loan rate and improve their financial health, thus becoming more flexible in deciding on future home loans.

The law might also influence the rental market since companies may consider leasing units directly on behalf of their employees, he adds. This is because the new law stipulates that cheques issued by commercial entities will not be considered as a criminal offence, if they bounce, Volpi explains.

“If more companies go in for direct leasing on behalf of their employees, this will affect the property market,” he says. “They might be able to take on multiple leases, therefore, be able to negotiate better terms than individuals. Some serial landlords who may own buildings or multiple units might also prefer to deal with one corporate entity rather than multiple tenants.

“From a commercial perspective, this law will help improve the efficiency of the bankruptcy proceedings and improve the UAE’s [global ranking in terms of] ease of doing business, which the UAE wishes to top by 2021. Hence, commercial real estate will also follow the same advantages as mentioned before with residential units.”

Attract new businesses

“The bankruptcy law offers an enduring and promising platform for a remarkable improvement by eliminating the criminal offence of bankruptcy by default,” says Manan Chadha, associate director of TRC Pamco Auditing and Accounting ME. “The new provisions about the bouncing of cheques and the requirements for a creditor-initiated insolvency proceedings will prove to be a game changer in instilling a sense of confidence among the SMEs that serve as the backbone of the UAE economy.

“Although there is a lack of real-time evidence to signify and ascertain the improvement in the redressed mechanism about the time taken to resolve insolvency, recovery rate and insolvency cost to debtors, there will definitely be a major boost to the insolvency procedures, timelines, and redressed mechanisms.”

Citing a recent World Bank report, Chadha adds that it costs up to 20 per cent of a debtor’s estate and yields an average recovery of about 29 cents on the US dollar to resolve insolvency in the UAE.

He believes the local courts will play a pivotal role in implementing the new bankruptcy code and laying the foundation by ensuring that the provisions of the system are interpreted correctly, especially as the law has been seriously tested in court until now.

“The main objective of this law is to generate an upfront framework for bankruptcy proceedings to be held by the court, creating an alternate for liquidation,” says Chadha. “Earlier, debt restructurings were considered expensively lengthy due to lack of formal in-court arrangements and expertise. However, by establishing and maintaining a proper check on the interpretation and implementation of the new law and proceedings, the courts can manage to provide a strong base for such companies to have an opportunity to consensual debt restructuring before liquidation proceedings. Both debtors and creditor can benefit from the same.”

Reduce speculation

“Stringent bankruptcy laws, which are now in place, should safeguard property owners against bankruptcy and help reduce associated risks,” says Faisal Durrani, head of research at Cluttons. “These laws enable transparency and are likely to boost demand in the office sector, encouraging landlords and tenants to commit to space for a longer term. As these rules and regulations mature, we expect to see it increasingly benefit business investments.

“Companies will now know they are more accountable with regards to bankruptcy since there is a legal setup that will identify and actively deal with this issue. Therefore, they are likely to reduce the number of speculatively created new businesses and filter out tenants who commit to long-term leases but do not manage high-scale overheads and, eventually, default contracts.”

Real effect

However, pundits agree there remains a level of apprehension. “We are now 10 months after the law was implemented and to date, we are not aware of any successful filings for bankruptcy,” says Adrian Low, partner, banking and finance at Clyde & Co says. “The new law has not removed the perceived social stigma of bankruptcy.

“In other markets, such as the US, many claim that entrepreneurs learn more from a business failure and how to do better next time than those who have never had a business go bad. Until businesses are able to see, and show, that bankruptcy can help a good business come through difficult times and ensure that creditors are given a fair payout in the case of a business failure, then there is likely to be a reluctance to engage with the process.”