Revealed: why the UAE government is struggling to reform insolvency law

Proposed new law faces delays as officials fight to overcome entrenched cultural attitudes towards corporate distress
Revealed: why the UAE government is struggling to reform insolvency law
By Sarah Townsend
Sun 07 Feb 2016 02:43 PM

New insolvency legislation in the UAE could be delayed because of cultural resistance, lack of information on company accounts and challenges ensuring that the new law complies with sharia principles.

Legal experts warned this week it could be years before the proposed legislation is enacted.

The government has been mulling reforms to its existing insolvency regulations since 2010 when hundreds of businesses unravelled in the aftermath of the credit crunch.

The existing law allows for negotiations between creditors and debtors but it does not explicitly provide for supervised restructurings for companies in distress – unlike in countries such as the US and UK.

A proposed new law was approved by the UAE’s cabinet in July, but, more than six months later, it is still awaiting ratification by the Federal National Council and Supreme Council.

Lawyers told Arabian Business it could be years before the new law “sees the light”.

Brown Rudnick partner Didier Bruère-Dawson, who was one of several lawyers consulted during the drafting of the new law, said: “Many people doubt that the process is matured, despite announcements, because of clear barriers.

“[One of these is that] the Quran essentially says that to voluntarily forgive a debtor is not just a breach of the law, but a sin.”

Mahmood Hussain Ali Ahmad, founding partner of Mahmood Hussain law firm, claimed many UAE businesses do not keep detailed financial accounts, making it impossible to find a record of all of the assets and draw up a viable restructuring plan.

The UAE practice of jailing debtors under criminal law is another factor that would complicate restructuring cases, while the government is also battling the stigma associated with public admission of corporate failings in the UAE.

An anonymous legal executive said: “The truth is, Gulf states are hostile to banks, in particular the stench of usury [unethical loans that unfairly enrich the lender], plus they do not accept that banks should be able to foreclose and take assets from respected local families.

“Combine this with the procedural complexity of introducing insolvency laws and [the new law] is unlikely to happen for a very long time.”

Despite the potential barriers, lawyers agreed that fresh insolvency laws are much needed in the UAE. “Bringing restructuring out of the shadows and embracing it as a necessary and important part of business cycles would be a significant step in the development of the UAE economy and business environment,” said Bharat Gupta, senior director at Alvarez & Marsal Middle East.

Read more about the UAE’s battle to reform insolvency legislation here.

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