A NEW RULE BOOK

Dubai 2017 | FINANCE | FOCUS: BANKRUPTCY

The new bankruptcy law is a boon for the UAE's Doing Business ranking. It is expected to aid the flow of capital to start-ups and SMEs, segments that have been targeted as catalysts for innovation.

Law 9 of 2016 was the year's biggest piece of legislation. The long-awaited bill is designed to tackle the estimated USD5 billion worth of non-performing loans in the UAE. January 1, 2017 saw the implementation of the law, but businesses have been afforded some time to return to solvency before its full implementation.

The need for a gap is a symptom of the old legal framework, which punished businesses that struggled with cash flow. Article 24 of the Commercial Transactions Law 1993 stated that any individual declared bankrupt in the first year of practicing their trade cannot trade until “rehabilitated,” or had paid off the entirety of their debt. This provided a catch-22 as the individual may not have any means of repaying the monies owed subsequent to becoming insolvent, leading to the business owner becoming economically inactive. At the same time, the law prescribed that those who are self-employed, largely being small business owners, were not required to keep their books. This represented a double-edged legislative sword, creating a system that did not do enough to discourage malpractice and then criminalized those whose businesses failed.

Compounding the issue, there was no structure for post-commencement financing or repaying the outstanding balance. This meant that the UAE suffered from a lot of skip cases and had a low recovery of cents on the dollar, at 29, while countries in the OECD achieve almost 73 on average.

The new law also applies on a much wider scale than the previous commercial code, covering most fee zone companies, sole establishments, and civil companies conducting professional business, including government-owned companies. However, companies in the DIFC and ADGM have their own insolvency provisions and there are no provisions to address individuals acting in a private capacity.

The bankruptcy law will push up the UAE's Ease of Doing Business ranking (the UAE dropped five places to 104th in the 2017 report under the resolving insolvency category) and specifically assist the SME and entrepreneur segments, which bore the brunt of 2016's liquidity crisis as banks looked to avoid any risky lending at a time when deposits were low. Similarly, it will assist the government's drive for innovation and move through the fourth industrial revolution.

The new law essentially allows for three potential positive resolutions to insolvency, or impending solvency, for businesses. The parties can make a pre-emptive settlement that will be overseen by the courts, which must occur before the business has actually filed for insolvency. Financial restructuring can take place, whereby a company might renegotiate the terms of the debt and offset some obligations on their books to payback creditors. This must be done within the satisfaction of the majority of creditors holding two-thirds of the outstanding debt and will be overseen by the courts. Additionally, companies may seek additional funding, according to criterion determined by the courts. Debtors who are regulated by either the Central Bank or the Securities and Commodities Authority may look for a settlement that does not require the courts. They can reach out to a newly created body called the Committee of Financial Restructuring (CFR), which can assist their financial restructuring, and which will be overseen by qualified professionals appointed by the CFR.

Businesses can be filed against for bankruptcy if there has been an outstanding amount of USD27,220 that has remained unpaid for 30 days. A business owner can file for bankruptcy if there has been a cessation of payments on debts, or the company has reached a state of “over-indebtedness,” while the new law also allows the courts to file for bankruptcy against an owner.

Broadly speaking, the new law represents a step forward for the UAE's insolvency regime and contains much to be welcomed. The law remains complex and requires insolvency expertise, and many argue that its ultimate success will depend on the availability and ability of local courts and UAE-based insolvency experts to implement and apply the law in real-life cases.