The ability of the UAE courts to interpret the country's new bankruptcy law and handle proceedings will be key to its effective implementation, according to Fitch Ratings.
The law, which is due to come into effect at the end of this month, aims to create a clear framework for court-based bankruptcy proceedings as an alternative to liquidation.
The UAE's existing insolvency law does not provide for the rehabilitation of distressed companies through creditor agreements.
There are many recent examples of 'skip' cases, where SME owners have fled the UAE when they could not repay their bank loans because, as under domestic personal criminal law, expatriate borrowers can be jailed if they bounce a cheque or fall behind on their financial obligations.
"We think the new law could benefit banks and corporates, by allowing for going-concern restructuring," said the ratings agency in a research note.
Existing UAE law defines how a court can declare a company bankrupt, appoint a trustee, realise assets and settle debts. But there has been no legal provision for the rehabilitation of distressed companies through creditor agreement, and the regime is largely untested.
So far debt restructurings have been informal, out-of-court arrangements, partly due to creditor perceptions that local courts lack judicial expertise and that court proceedings will be lengthy and expensive, Fitch said.
It added that when economically significant entities have experienced financial difficulties, the government has intervened, for example by introducing bespoke legislation when Dubai World rescheduled debt repayments in 2009.
Fitch said this has left some issues unclear, such as whether courts can annul certain transactions by a borrower in the run-up to a declaration of bankruptcy.
"We therefore think the potential benefits of the new law will only be fully felt once the courts have established a track record of interpretation and implementation. It may take time to establish whether giving distressed companies the chance to embark on consensual debt restructuring before the start of liquidation proceedings, will increase and speed up recoveries, which could improve the theoretical position of creditors," the research note added.
The law will apply to all companies established under the UAE's commercial companies' law. Companies established in the UAE's free zones are not included because these areas have their own insolvency and bankruptcy laws.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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