The business community in the UAE has been waiting for proposed bankruptcy legislation for four years now. Lately, the drumbeat of opinion — from lawyers to bankers, and from entrepreneurs to investors — appears to be getting louder.
Three weeks ago, Aziz Abdullah Al Yaqout, the regional managing partner of law firm DLA Piper, told us his views on the subject.
“I’ve seen so many situations in the last three to four years where there’s been so much frustration and also, arising out of that, a loss of trust in the business community here, especially from foreign banks, because of the experiences they’ve gone through and that’s something that really has to change,” Al Yaqout said.
“Governments have seen that and I think we’re going to see modern structures, modern rules being rolled out across the GCC.”
This week, Jonathan Morris, the chief executive of Standard Chartered UAE, also added his weight to the push for new legislation.
“The UAE has built this incredible infrastructure that it is leveraging brilliantly,” Morris said. “What is lacking at the moment is the institutional infrastructure. What we really need is an effective bankruptcy law, an effective companies law, a banking law and so on to bring the institutional infrastructure to world-class standards.
“If they do that, I think the level of foreign direct investment is going to go through the roof.”
According to the World Bank’s Doing Business survey, which ranks each country by its ‘ease of doing business’, the UAE is listed in a creditable 26th place for 2013. When it comes to resolving insolvency, however, the country is ranked in 101st place, behind Azerbaijan, Togo and Senegal. It takes an average time of 3.2 years to resolve the issue (compared to the OECD average of 1.7 years) and the recovery rate is a worrying 29.4 cents on the dollar (as opposed to 70.6 in the OECD countries).
Put simply, if you have invested in or lent money to a company that has gone bust in the UAE, you will be lucky to get a third of your investment back — and the process will take twice as long as it would in more developed countries.
The lack of bankruptcy legislation in the Gulf has forced some firms to go to unprecedented lengths to prevent themselves from going under. Last year, Bahraini investment bank Arcapita filed for Chapter II bankruptcy protection as it struggled to pay off a $1.1bn loan. This summer, Arcapita’s restructuring plan was approved by a court in Manhattan in what is believed to be the first bankruptcy that is compliant with Sharia law.
The agreement allowed Arcapita to repay its secured creditor in full, and it also set a minimum value for the future sale of any assets, leaving both shareholders and creditors largely satisfied.
As Dubai and the UAE bid to become the global capital of the Islamic economy, taking a lead in Sharia-compliant bankruptcy legislation would be a good way to mark the city out from the crowd.
So when will we see this legislation coming in? After the consistent delays in the approval of the companies law — which has been discussed for decades — I wouldn’t like to hazard a guess. But there’s no doubt that new rules would be hugely beneficial for the business community here. After all, entrepreneurs are taking enough of a risk as it is without having to worry about a possible jail sentence if their ideas fail.
Ed Attwood is the editor of Arabian Business.