The lack of a modern bankruptcy law, and possible criminal prosecution for debt default, has long been a major issue for entrepreneurs in many parts of the Middle East. That may all be about to change in the UAE as the Cabinet has approved a new draft Bankruptcy Law which aims to encourage foreign investment, boost investor confidence and assist SMEs in managing their business operations. That law is expected to be introduced in early 2017.
An unsettling feature of past business failures, particularly during the 2008 financial crisis, has been for business owners of SMEs to flee the UAE without repaying loans due to fear of being jailed for defaulting on loans or other financial obligations. Under the UAE’s criminal law bouncing a cheque can result in a jail term.
The banking sector itself has attempted to tackle the problem through the introduction of an informal miniinsolvency scheme in an effort to encourage restructuring by businesses. For example, some banks have committed to halt the prosecution of bounced cheques relating to certain SMEs (such as companies with a minimum borrowing of AED50 million, or a turnover of more than AED100 million): debtors are allowed a 15 day period to agree a restructuring plan with their creditors, followed by a period of 90 days in which the banks will refrain from taking enforcement action (such as prosecution in court or applying for travel bans against certain individuals).
The introduction of the proposed Bankruptcy Law (which contains provisions on composition procedures, restructuring debts and liquidation funds) must be seen as a positive step establishing a formal mechanism to encourage businesses to continue and work through their problems. It will allow business owners to agree a restructuring plan addressing unpaid debts with their creditors, and hopefully will mean that many more enterprises survive difficult times and many fewer owners flee overseas.
At present, the UAE's insolvency laws favour creditors over debtors and offer limited options to companies for debt restructuring. The proposed Bankruptcy Law, however, draws on international experience having been modelled on bankruptcy protection practices in jurisdictions including Germany, Japan, France and Chapter 11 proceedings conducted in the USA.
The proposed Bankruptcy Law will establish a Committee of Financial Restructuring, a new regulatory body tasked with responsibility for supervising financial restructuring procedures undertaken outside the jurisdiction of the courts, appointing financial restructuring experts, establishing and maintaining electronic records of bankruptcy rulings, and imposing restrictions ordered by the court. Perhaps most importantly, the Committee will be able to impose negotiated debt restructurings if talks secure the support of two-thirds of a company's creditors by value and an outright majority by number. The Committee will be supervised by the UAE Cabinet who will be responsible for determining the number of members and entities who are to act as the Committee's representatives. Any attempts to circumvent the proposed Bankruptcy Law, by failing to pay debts or deliberately avoiding filing for bankruptcy, will be subject to punishment in the form of a prison term of up to 5 years and/or a fine of up to AED1 million.
While the proposed Bankruptcy Law offers protection to employees, shareholders and directors of companies by creating options to avoid bankruptcy, those protections lie in the future. The law will not apply retrospectively to business owners of companies already subject to criminal prosecution for unpaid debt.
The introduction of the proposed Bankruptcy Law remains subject to the approval of the FNC, the signature of the President, and publication in the UAE Official Gazette. Once passed, the law is intended to apply to all onshore and free-zone companies (including those which are federal or local government owned) in the UAE: but companies based in the financial free zones of the DIFC and ADGM will be exempt as they have their own bankruptcy and insolvency legislation and regulations in place.
In a final piece of good news, while the proposed Bankruptcy Law itself does not apply to individuals unable to repay their debts, the Ministry of Finance has recently announced that it is drafting a personal insolvency law that will apply to individuals. The Ministry has not yet outlined a timetable for the proposed personal insolvency law, but we hope that it will be published within the next 12 months.