Bankruptcy law offers many opportunities

Reforming what happens when businesses get into trouble will help everyone, writes Preeta George.

Running businesses in the UAE will be easier once the bankruptcy laws are reformed. Manuel Lopez / EPA

Continuing the spirit of its pioneering efforts towards diversifying the economy, the UAE Government has shown itself to be one of the region’s most forward-looking nations by approving the bankruptcy law.

A World Bank report ranks the UAE 31st in the “doing business” index. However, on the “resolving insolvency” index it ranks 91st.

Further statistics reveal a recovery rate of 29 cents to the US dollar and the time taken for resolution to be 3.2 years as opposed to 72.3 cents and 1.7 years respectively for OECD high income countries.

It is clear then that there is ample scope for improvement – hence the bankruptcy law.

The new law should foster sustainable economic growth. It will not only facilitate the growth of small- and medium-sized enterprises, but will also encourage investments in innovative business ventures. The law will also strengthen the banking and financial system.

In addition, the law will facilitate a positive transformation to business sentiment by way of a changing perception towards a failed business entity, moving it from that of a “criminal” to an entity “under distress”.

This psychological makeover is in itself a morale booster for the whole business community.

Penalties will come into force if distressed companies do not file for liquidation within a set period. This step will go a long way in shaping the future of business in the region.

Currently, however, SMEs have a low propensity to access bank credit.

It is estimated in one report that only 10 per cent of SMEs in Dubai access bank credit for long-term investments. Most of them use their own finances to invest.

It is possible that with a more structured approach towards liquidation, SMEs will be able to access bank credit easier.

The success of this new law will depend on how well it can maximise the total value to all interested parties after the liquidation process along with also honouring the priority of claims. It also stands to test the time taken for the insolvency process and the transaction costs involved.

New specialised courts for bankruptcy, staffed with judges who are experienced in the specific field would be a critical minimum requirement.

Regulations relating to the qualification and expertise of insolvency practitioners would also become an important prerequisite. In short, the true benefits of the law will only be realised after the entire ecosystem is in place.

Dr Preeta George is the dean and professor of economics at SP Jain School of Global Management