UAE’s bankruptcy law to help attract foreign investors

The United Arab Emirates’ (UAE) recently approved federal bankruptcy law will help mitigate risks for both businesses and banks, and consolidate the country’s position as the regional business hub.

Modelled on international standards, the proposed law will provide struggling companies “debtor-friendly” options, such as asset liquidation or debt restructuring, along with provision for composition procedures with creditors. 

“It is understood that the framework is based on ‘Chapter 11’ bankruptcy legislation in the US, and the bankruptcy practices in other countries such as France, Germany and the Netherlands,” said Nika Silva, associate with law firm Reed Smith.

The law, which is slated for implementation in 2017, will likely prove favorable for small and medium enterprises (SMEs) as it eases past challenges and reduces uncertainty.

“This law adds substantially to the quality of the UAE’s legislative ‘soft’ infrastructure, which together with the UAE’s regional edge in transport and services infrastructure, means the UAE will have a leading advantage in attracting foreign business to the region,” Shady Shaher Elborno, head of macro strategy (global markets and treasury) at Emirates NBD, told Argaam.

In the long run, it will also help banks reduce non-performing loans and the costs of lending, along with helping boost the credit demand in the country.

“By allowing businesses to restructure their debt, this will improve the chances of salvaging businesses that have run through some trouble, and have a better chance to continue operations with a restructured business model,” Elborno said.

According to Central Bank of UAE’s credit sentiment survey for Q3-2016, the demand for business credit in the country is on a decline, with the slowdown most evident in the SME and non-resident segments.

“The ongoing tightening of credit conditions for business loans suggested the reduced willingness to extend business loans among financial institutions,” the central bank said in the recent report.

While the proposed law will create a new insolvency framework for companies, it is still unclear if it will entirely decriminalize bounced checks.

“It has been reported in the media that legal proceedings might instead be suspended in certain situations,” Silva said.

It is intended to apply to companies established under UAE commercial company laws and companies that are party or fully owned by federal or local governments.

It may also extend to companies in the free zones, which do not have an existing bankruptcy framework, but will not apply to companies in the UAE already governed by bankruptcy provisions – such as companies in the Dubai International Finance Centre and the Abu Dhabi Global Market.  These two free zones have their own insolvency regime.

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com