Draft law outlines insolvency reform for UAE

New law aims at promoting confidence, more certainty

A draft of the UAE's new insolvency law outlines plans to decriminalise the bankruptcy process.
The proposed changes are out for consultation among government officials.
Some of the most significant changes set out in the draft include a move away from a purely court-driven insolvency procedure, while making the requirements for entering into insolvency proceedings more cost-effective and easier to implement, said Hadef & Partners, one of the law firms that helped draft the proposed law.
An entirely new commission would be established by the UAE Council of Ministers to encourage private, out-of-court settlements between debtors and creditors and assist businesses with financial restructuring.
A streamlined bankruptcy process would also be made available for smaller businesses that run into severe financial problems.
"The new law is to promote confidence and more certainty to both debtors and creditors who are trading in a modern business environment - and get a better balance for both debtors and creditors," said James Farn, a partner at Hadef & Partners. "Right now, the perception is [the existing law] is more geared towards creditors."
Last month, a proposed draft of the law was shared with representative offices from each of the seven emirates, while officials from the Ministry of Finance were also provided with copies.
Government officials are considering the proposed changes during an informal consultation process, although any new law is still "months" away, Mr Farn said.
If passed, the legislation would replace the existing insolvency law and would affect any business established under the UAE Commercial Companies Law. Exemptions would include government entities or those that operated from a financial free zone with its own insolvency laws, such as the Dubai International Financial Centre.
Mr Farn said business owners may still be penalised for writing cheques that cannot be cashed, because that was covered within the UAE Penal Code and not by the existing insolvency law.
"That has not been touched. That's going to remain," he said.
The proposed changes focus on removing some of the social stigma and severe penalties meted out when entrepreneurs and chief executives fail to pull a struggling business out of financial crisis.
"Sometimes you end up with decent CEOs and managers behind bars, simply because of the default of their company," said Bachir Nawar, the legal director of the Abu Dhabi office of Berwin Leighton Paisner.
In the UAE's proposed new federal bankruptcy law, insolvency will no longer involve so much stigma and so many sanctions. Rescue is a higher priority than disrepute.
While there will still be formal insolvency procedures as there are now, a new modification would allow for businesses that are declared insolvent to undergo a so-called rescue procedure, as long as those companies are still considered viable.
This procedure would include help for debtors financially reorganising a company. It would also feature a debtor-led but court-driven "protective composition" procedure, which would essentially provide protection to a debtor during financial difficulties to allow for a compromise to be reached with creditors and avoid further formal insolvency proceedings.
In other cases, business owners would be able to work with a panel of mediators outside of the court system while negotiating the rescheduling of their debts.
"Going through the courts has become a little bit of a hassle due to the slow pace," said Mr Nawar.
For the first time, provisions in the law would apply to individuals not engaged in any business activities, under a separate and distinct personal insolvency regime, said Mr Farn.
Yet individuals involved in commercial transactions, such as those who struggle to pay their mortgages, would not fall into this category.
Other scenarios, such as defaults on payment to a contractor after it has built a property may be covered.
"It depends on where on the line is drawn, with individual activity and commercial activity," said Mr Farn. "There are some difficulties in trying to identify which side of the line you'd fall on." The National