The UAE’s government approved new insolvency laws on September 4 that are set to be introduced in early 2017.
The laws will assist in restructuring, as well as facilitate the liquidation of debtors’ assets, safeguard the rights of both debtors and creditors and improve dialogue between the two parties.
Current laws often lead to criminal action against debtors following a default, hampering efforts to liquidate the assets of companies in default. Because of the risks, the growth of smaller private enterprises and the willingness of investors to support such entities have been damaged.
“The current rules are written such as to not contemplate large scale corporates. They are written to deal with individuals or SMEs. Therefore there are not sufficient rules for large complex holdings, despite the fact that the UAE is a hub for many large scale corporations and business,” said Debashis Dey, partner at White & Case.
In addition, the current insolvency regime puts SMEs at a competitive disadvantage to state owned or public companies which have dominated the region’s economy.
“SMEs currently lack the resources required to undergo an efficient restructuring, which limits the options available to them in times of distress and results in significantly higher rates of default,” said Ahmad Alanani, a founding partner at SanctaCapital.
He added that the distress we are currently witnessing regarding SMEs is a by-product of a weak and ineffective insolvency regime that has discouraged the timely restructuring of viable companies and in some instances has resulted in them entering liquidation rather than restructuring.
Furthermore, there is no specific legislation to get all creditors together as a committee to agree by way of a vote on restructuring.
The fallout from weak insolvency laws and their impact on SMEs has carried through to other sectors of the economy.
Banks with a higher exposure to SMEs are struggling to digest higher levels of non-performing loans. “This is reducing the availability of bank capital in a general contraction of the credit cycle, which poses a challenge to banking system stability,” stated Alanani.
The implementation of new laws will not only improve the outlook for SMEs, but also for investors looking to lend to the region, particularly to the SME space.
The laws will add an effective insolvency framework, which would provide certainty to the investment decision-making process and ensure that all stakeholders are aware of the procedures and timeframes involved in a corporate restructuring, as well as their rights and obligations in the event a business runs into difficulties, according to Alanani.
Dey noted that if under the new legislation there is a concept of receivership, then there would be the ability to deal with complex restructuring. With new legislation and perhaps with a court mandated or legal process, the bankruptcy process becomes much more formal, which gives creditors and companies more options.
“A new law would take the stigma out of bankruptcies and insolvencies, and allows market participants to discern between those businesses that are no longer viable and those that could potentially remain viable despite ongoing concerns,” Alanani said.
Modernising the country’s insolvency regime could further strengthen the UAE’s position as the favoured destination for foreign investment across the region.
“Furthermore, on a macroeconomic level, the introduction of more accommodating laws will lead to a more efficient allocation of recourses towards certain entities.”
Dey agreed, adding that the laws will lead to a more efficient use and deployment of credit around the market, and from a borrower perspective, a more efficient ability to deal with potential future financial crisis.