Ever since the financial crisis in 2008, the bankruptcy law in the UAE has been the focus of attention with many commentators voicing concerns on the insolvency regime in the UAE, writes Essam Al Tamimi, Senior Partner, Al Tamimi & Company.
While certain commentators did not, perhaps, fully understand the bankruptcy laws that already existed in the UAE, their concerns were to a large extent warranted. This was reflected in an environment where court supervised bankruptcy procedures were not seen as a viable option, and skipped debtors remained the norm.
The passing of Federal Law Number 9 of 2016 concerning bankruptcy in the UAE has been welcomed. The law applies to traders who conduct business for profit, including lawyers, doctors etcetera. It provides three options: restructuring, preventative composition and bankruptcy.
Restructuring is an out-of-court process that involves the newly established committee of financial reorganisation supervising the restructuring in a manner mutually agreeable to debtor and creditors. Preventative composition is akin to US Chapter 11, and the bankruptcy option ensures that full bankruptcy proceedings can be brought in the courts.
It should be noted that restructuring and preventative composition could morph into bankruptcy. The law lays down detailed processes as well as sanctions for debtors who transfer assets to defraud creditors. The question now is what impact will the law have?
While the impact remains largely hypothetical, I don’t expect a flood of applications.
While the law contains aspects that may make preventative composition or bankruptcy more attractive, it is likely parties will still prefer to restructure debts consensually. Such applications have strict requirements that many debtors may not satisfy, for example, suspended debt payments for over 30 business days when applying for preventative composition.
Also, although a debtor may wish to seek court supervision for preventative composition or restructuring, depending on the type of application (and approach of the trustee/court), the debtor may lose the ability to manage its business and could still be placed into liquidation. Therefore, the decision to file an application would need to be carefully considered.
Debtors also will continue to skip the country.
The law does not decriminalise bounced cheques, although it does suspend such criminal proceedings, which is a welcome development to give debtors the necessary comfort to remain in the UAE and restructure their debts, especially those with a viable business and true intention to restructure. However, the protection offered is only a suspension, meaning some may still choose to skip the country and undertake any restructuring or bankruptcy from outside the UAE.
It is likely that in the next two or three years criminal proceedings for bounced cheques will become less commonplace and may even be abolished if bankruptcy overtakes them as the more favoured option.
Like any new law it will take time for all stakeholders, including the legal fraternity, to fully understand how the law will be implemented in practice. Until applications are filed, the approach of the courts and trustees, timelines and practical implementation of the law will remain a theoretical analysis.
Creditors will not suddenly put debtors into bankruptcy.
That right already exists in the UAE with no monetary thresholds (the new law introduces a de-minimised threshold of AED100,000 $27,220). Although the new law may prompt creditors to consider a different avenue for debt recovery, the simple fact that someone has missed a payment does not necessarily mean a bankruptcy application would be accepted — the missed payment should be a result of financial difficulties (as opposed to, for example, a dispute over the payment). Creditors may also prefer to continue the practice of initiating individual legal proceedings to claim their debt, as compared to bankruptcy, which will result in all creditors claiming in the proceedings.
Notwithstanding the fact that 2017 should not see the volume many commentators have predicted, it is almost certain reorganisations and bankruptcy proceedings will increase, especially considering that currently they are virtually nonexistent.
Applications are likely to be made where creditors have initiated bounced cheque cases, or as a last resort when consensual restructuring has not been possible.
One of the concerns for 2017 is that the law puts great responsibility on the courts and experts who may not have the manpower or the expertise to administrate the various applications and judicial processes provided therein. It remains to be seen how this challenge in the context of an ambiguous timetable and process set down in the law will be met in 2017 and beyond.
Essam Al Tamimi, Senior Partner, Al Tamimi & CompanyFor 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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