There has been no legal provision for the rehabilitation of distressed companies through creditor agreements.

Jojo Puthuparampil is a business news writer for Inc. Arabia.

The effective implementation of the UAE’s new bankruptcy law will depend on the ability of the courts in the country to interpret the law and handle proceedings, according to global rating agency Fitch Ratings.

The law aims to create a clear framework for court-based bankruptcy proceedings as an alternative to liquidation, as the UAE’s existing insolvency law does not provide for the rehabilitation of distressed firms through creditor agreements.

The law was introduced after many SME owners fled the UAE as they could not repay bank loans. This happened because, under the domestic personal criminal law, expatriate borrowers can be jailed if they bounce a cheque or fall behind on their financial obligations.

“The new law could benefit banks and corporates, by allowing for going-concern restructuring,” said the rating agency in a research note.

Existing UAE law defines how a court can declare a company bankrupt, appoint a trustee, realize assets and settle debts.

But there has been no legal provision for the rehabilitation of distressed companies through creditor agreements. So far debt restructurings have been informal, out-of-court arrangements, partly due to perceptions that local courts lack legal expertise and those legal proceedings will be lengthy and expensive, Fitch said.

The rating agency said when economically significant entities have experienced financial difficulties, the government has intervened.

For example, when Dubai World rescheduled debt repayments in 2009, it introduced bespoke legislation.

This has left some issues unclear, such as whether courts can annul certain transactions by a borrower in the run-up to a declaration of bankruptcy, Fitch said.

“Therefore, the potential benefits of the new law will only be fully felt once the courts have established a track record of interpretation and implementation,” the rating agency said.

It may take time to determine whether giving distressed companies the chance to embark on consensual debt restructuring before the start of liquidation proceedings, will increase and speed up recoveries, which could improve the theoretical position of creditors, it said.

Works on paper, but…

UAE President H.H. Sheikh Khalifa bin Zayed Al Nahyan issued the long-awaited Federal Law on Bankruptcy by decree back in October. 

At that time, it was stated that the law would provide a legal framework to help distressed companies avoid bankruptcy and liquidation. It also promised lower risks for those who want to run businesses in the country as it allows entrepreneurs to skip a jail term if their firms default on debt payment.

But like Fitch, many others doubt as to what the law will look like in implementation rather than wording.

Essam Al Tamimi, founder of legal firm Al Tamimi & Co, told a gathering of businesses in Dubai in October that law will suspend legal proceedings in “certain situations” rather than outright decriminalizing bounced cheques. 

Al Tamimi did not disclose further details on these situations but said that the legislation does not contain powers to decriminalize bounced cheques.

The new law, supposedly based on ‘Chapter 11’ bankruptcy laws in the US, will provide traders with three options when in financial crisis—restructuring, preventative composition and (declaring) bankruptcy, Al Tamimi said.

Restructuring ensures troubled businesses are put through a yet-to-be-established Financial Restructuring and Bankruptcy Committee to avoid bankruptcy via mediation outside the courts.

Preventative composition involves court action to protect creditors’ assets at risk from bankruptcy.

Bankruptcy gives businesses a legal route to enacting bankruptcy proceedings through the courts.

“The emphasis on restructuring suggests that traders should be given a chance to restructure, pay their debts and avoid bankruptcy,” said Al Tamimi.

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