It is an undisputed fact that the UAE is one of the most dynamic and advanced economies in the region. An economy of this nature needs equally a dynamic and advanced legal foundation to properly serve it.
For quite a lengthy period, the UAE’s legal framework was the centre of attention — even criticism — for not adapting enough to the changes that the economy experienced and to the needs of an ever demanding business community. As a result, the UAE’s legislature endeavoured to address these criticisms and to take a proactive approach to the issue. In an attempt to clear some of the deadlock of legislations that have been waiting in the pipeline for years, two fundamental pieces of legislations were finally issued.
In 2015, after years of speculation regarding an overhaul of commercial companies law, Federal Law Number 2 of 2015 concerning commercial companies was enacted. The law introduces some new features and approaches intended to raise the levels of corporate governance, protection of minority shareholders and the promotion of social responsibility of companies.
It also has provisions allowing the incorporation of a one-man company, enabling debt to equity conversion, enabling the legal pledge of quotas in limited liability companies, recognising holding companies, and incorporating securities book building mechanism.
However, most of the essential features of the previous law were maintained to the extent that the new law is merely a face lift and does not address the structural shortfalls of the previous law. For example, foreign ownership restriction of 49 percent, which has been the focal point of criticism for so long, was not amended.
As such, it is not expected that the new law will do much to boost the economy or to meet the expectations of the business community.
In 2016, the UAE introduced a Federal Bankruptcy Law. Contrary to the common misconception, the UAE has had a bankruptcy regime since 1993, laid down in the Commercial Transactions Code. However, the regime was not practical and hence was rarely used.
The law is supposed to be drawn on the best bankruptcy protection laws with the aim of facilitating doing business in the UAE and boosting credit markets.
Whilst there is no doubt that the new law has brought a level of modernisation and reform, it is not expected to deal with the issues arising out of the previous regime in real terms. Some of the improvements that the new law has introduced include the introduction of a financial reorganisation committee entrusted with supervising the reorganisation of regulated financial institutions in distress, simplification of the preventive composition process, possible debt restructuring and the ability to seek new financing.
On the other hand, some of the shortfalls of the new legislation are: a) the new law continues to be procedurally heavy and the process of filing for bankruptcy has not materially changed; b) the issue of criminalising bounced cheques has not been fully abandoned; and c) government-owned entities are exempt from the application of the law unless their Articles of Association provide otherwise, which could limit its application.
The real test of the bankruptcy law’s success will depend on how much businesses will resort to it and how many default instances it will help to avoid.
Looking forward to 2017 and beyond, the UAE still needs to modernise its commercial laws to bring the business environment in line with global standards and to fill in some of the current gaps. For example, the UAE is still lacking a modern arbitration law, a standalone capital markets law, a banking law and a data protection law, to name a few.
What the UAE also needs to do is to take a bold approach to address the issues that hinder the business community rather than the cosmetic approach that has been the trend so far, in order to truly realise its global ambitions.
Dr Habib Al Mulla, chairman, Baker & McKenzie Habib Al MullaFor all the latest business 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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