The UAE’s long-awaited bankruptcy law has yet to be applied in court almost a year after it came into effect, lawyers have told Arabian Business.
The legislation – the first time the country has ever had a dedicated law to help insolvent businesses and their creditors – is more widely used as a tool to encourage warring parties to settle out of court, two UAE-based lawyers said.
They argued that, while it is a “good law” in principle, in practice businesses seem reluctant to use it.
One lawyer suggested this could be because bouncing cheques remains a criminal offence in the UAE and businesses are worried that bringing a bankruptcy case to court could expose them.
“I haven’t seen much evidence of it [the bankruptcy law] being practised, and I think the success of a law is that it should be used,” Habib Al Mulla, managing partner of Baker McKenzie Habib Al Mulla, told Arabian Business in an interview. “So far, we have not seen people resorting to using it.”
He added: “I think it’s because of the issue of bounced cheques – that [criminalising this activity] has not been fully abolished. That’s the main issue that makes people still hesitant to use the bankruptcy law in order to restructure their businesses.”
Al Mulla added that negative and deeply engrained cultural attitudes towards failure could be another reason UAE businesses are not using the law. But he concluded it goes beyond that.
“This bankruptcy law is more geared towards punishing people who fail, rather than simply trying to protect genuine cases of failure,” he said.
Essam Al Tamimi, founder of one of the UAE’s largest Emirati-led law firms, also told Arabian Business: “I have yet to see it used in front of a judge.”
However, he added that the drafting of the legislation was sound. “It’s a very good law. We have used it to as a tool to get people to sit down with us and settle [out of court],” he said.
The new law, which took effect earlier this year, is said to be based on ‘Chapter 11’ bankruptcy legislation in the US. It provides traders with three options when in financial crisis – restructuring, preventative composition and (declaring) bankruptcy. However, it does not decriminalise bounced cheques, and instead only offers courts the power to suspend legal proceedings ‘in certain situations’.
Under Chapter 11, debtors usually propose a plan of reorganisation to keep their business alive and pay creditors over time. Business and individuals can also seek financial assistance under Chapter 11.
Al Mulla said: “To put it simply, we do not have Chapter 11 here yet.”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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