Doubts cast on new UAE bankruptcy law for restructurings

Even as the planned bankruptcy law works its way through the UAE legal system, doubts are emerging about whether the new framework will be used for future large corporate debt restructuring.

The planned new bankruptcy law – a flagship piece of government legislation - is likely to be bypassed by any large companies restructuring debt in future, say lawyers.

Several companies, mainly owned by the Government, have restructured billions of dollars of debt since the global financial crisis in 2009. Most deals have been resolved privately outside the courts, a sometimes lengthy and complex process. The exception was a special tribunal set up by the Dubai Government in 2009 to decide financial disputes related to the debt restructuring of Dubai World and its units.

In a bid to enhance the development of the economy and create a single, clear and transparent path to guide the reorganisation of any companies in financial distress in the future, officials have drawn up a new bankruptcy law to replace existing outdated legislation.

But doubts have emerged about whether the new framework will be used for future large restructurings.

“A good bankruptcy law is good for the economy, but whether it it is the best solution for cases such as these [involving government-linked companies], possibly not. A process outside the bankruptcy law is better but I’m in favour of having a good structured law and not leaving things totally loose,” said Essam Al Tamimi, senior partner at Al Tamimi & Co, a local law firm, speaking at the Hawkamah Judicial and Financial Colloquium last week.

Under planning since late 2012, the draft bankruptcy or insolvency law is believed to be in its final stages before enactment. The Ministry of Justice has been considering the draft, before its passage to the Federal National Council and then the president’s office for approval.

Officials have made the establishment of the law an important cornerstone in efforts to improve the country’s competiveness. Although the UAE ranks 23rd in the World Bank’s Doing Business report for 2014, it languishes in 101st place in terms of resolving insolvency, the fifth lowest score in the GCC.

James Farn, a partner at Hadef & Partners in Abu Dhabi, who was among lawyers advising on the new legislation, said the law was likely to be more suited for smaller, family-owned conglomerates in financial troubles.

“In theory there’s nothing from stopping large corporates from using the new framework set out in the new law. I suspect because there’s a familiarity for large restructuring, people will still go down the consensual route,” said Mr Farn.

“One of the drawbacks of the current law is that it talks about a ‘trader’. When people think of a ‘trader’ they think of someone in a shop. The current law is not that well suited to restructuring large groups. The new law goes some way towards addressing that but it still maintains the concept of a ‘trader’.”

The new law incorporates some of the key features from the Dubai World legislation. A moratorium halts the rights of creditors to secure debts, while it also includes a so-called ‘cramdown’ rule, whereby the court can impose the terms of a bankruptcy without necessarily gaining the approval of all creditors.

One of the pitfalls for companies undergoing restructuring out of court is the risk of dissenting creditors holding up the process by disagreeing with the terms.

Some lawyers say there is a case for creating special legislation designed to address the requirements of government-linked companies in financial trouble.

“We often see SOEs [state-owned companies] be instruments of policy. They’re beyond commercial entities. They’re often loaded or laden with policy goals … so whenever an SOE ends up being in distress there’s a complex wing of priorities that decision-makers have to make and creditors have to be aware of,” said Aaron Bielenberg, a senior vice president at McKinsey & Company in Dubai.

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