UAE insolvency law closer to reality

This country’s existing legal framework for dealing with companies that enter bankruptcy has many drawbacks, experts say. But long-planned legislation to tackle the issue is said to be on the verge of being approved.

The draft insolvency law is not expected to face any major obstacles in these final stages and may well come into effect as early as the first half of this year. Christopher Pike / The National

Waiting for the passing of a new law in this country, or any other for that matter, is a bit like waiting for a bus in London. Bear with me on this.

The wait may be long and uncertain but you are comforted in the knowledge that the law (or bus) is on its way. It may get delayed in committees (traffic, if you will), and if it is not fit for purpose (if it breaks down) it may be abandoned and replaced.

Often when the new law (or bus) arrives, it may not be quite what you were expecting, but usually it is good enough to get you to where you want to go, or at least close enough.

And then, sometimes when you least expect it, the exact bus you wanted arrives and takes you exactly where you want to go.

At the start of a new year, the UAE’s lawyers, bankers, small business owners and, indeed, government officials, are still waiting for the country’s new insolvency bus – sorry, law –to arrive. But the signs are that after many years of standing at the bus stop and waiting, the legislation is getting closer to becoming a reality.

Government sources this week said the draft insolvency law, initially drafted by the Ministry of Finance, has just cleared a crucial hurdle, having received formal approval from the Ministry of Justice, and will be referred to the Cabinet “within a few days”.

As is the way with all laws, once the Cabinet grants its approval, the draft law is then referred to the Federal National Council (FNC) and is then sent to Sheikh Khalifa, President of the UAE, for his signature. After which, the law comes in to force when it is published in the country’s official legal gazette.

A source at the Ministry of Finance says the law is not expected to face any major obstacles in these final stages and may well come into effect as early as the first half of this year.

“The draft law that we’ve passed on is so clear and so flexible,” the source said, asking not to be named.

“I really don’t anticipate there will be long discussions about it at either cabinet or FNC level, so it should pass very quickly. It’s a law that is really needed.”

Whenever the law arrives, however, the fact that it has cleared a key hurdle in its development will come as comfort to those in this country who have been urging the Government for several years to put a modern insolvency framework into place. Although there are more than 255 articles pertaining to insolvency and bankruptcy in the UAE’s commercial transactions law, the majority of lawyers here recognise that the existing provisions are not fit for purpose in the 21st century.

“The existing framework as it stands is very creditor friendly but has a lot of drawbacks,” says James Farn, the head of banking and finance at Hadef & Partners in Abu Dhabi, who helped draft an early version of the new law.

“The existing legislation is very limited in terms of allowing for an insolvent company to work through its financial difficulties,” he says.

“The idea behind a new law is to reshape the legal architecture to make it more relevant to the realities of the 21st century, to help debtors overcome their difficulties, try to get away from the idea of punishment, and to put more emphasis on financial reorganisation.”

It bears repeating that the perceived difficulty in resolving insolvency here is seen as a key obstacle to the country’s economic development.

While the UAE was ranked 22nd in the World Bank’s prestigious Doing Business 2015 index last October, the country ranked only 92nd in the world for resolving insolvency.

While the exact provisions of the new law remain a mystery, in its early form it was largely modelled on French insolvency practices, drawing on a number of provisions from German law. It has subsequently undergone several revisions, drawing on the legal codes of various other countries from as far afield as the Netherlands and Japan.

The old saying in London goes that you wait for hours for a bus and then three come along at once; such seems to be the way with insolvency and restructuring in the UAE, with the Ministry of Justice’s approval of the new law one of three major pieces of news in the past three weeks.

The Abu Dhabi Global Market published its first tranche of draft regulations on January 7 for public consultation, included a comprehensive series of regulations on insolvency and administration. The financial free zone’s draft drew heavily on insolvency procedures from English common law and, critically, provides a means “whereby a company [or possibly, a creditor or a member of the company ...] can propose and seek creditor or member approval and the subsequent sanction of the court, for a scheme involving an arrangement or compromise between the company and its creditors or members”.

Perhaps more significant was the announcement by Dubai World that it had applied for a voluntary arrangement notification under the terms of Decree 57, a specially devised set of insolvency legislation, for the restructuring of US$14.6 billion worth of debt.

Dubai World’s decision to use a legally driven process for the restructuring of its debts flies in the face of the standard approach to insolvency and restructuring in the UAE, and indeed the wider Arabian Gulf, whereby negotiations take place behind closed doors away from public scrutiny.

“The commencement of the Decree 57 process, which is tried and tested and has very similar characteristics to parallel regimes in other international jurisdictions, is an entirely logical and expected step to complete the agreed debt optimisation exercise,” Dubai World says.

Decree 57 was passed in December 2009 in the wake of the conglomerate’s debt crisis, providing a modern insolvency framework intended to facilitate the restructuring of Dubai World and its subsidiaries.

While the framework was not used by the company at that time, it was successfully deployed by the Dubai World subsidiary Drydocks World in April 2012 for the restructuring of $2.2bn of debt.

Dubai World’s decision this year to go down the legal route to restructure an even larger debt burden may prove a watershed moment for insolvency and restructurings in the UAE, if and when the proper legislative framework is put in place.

The signs seem to be good then, that the insolvency law bus is well and truly en route. Let’s just hope that it doesn’t get caught in too much traffic on the way.

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