The Impact of UAE Insolvency Law Reforms

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Insolvency Law Reforms – How will revision change this process & what will likely be the impact on commercial activity in the United Arab Emirates

UAE insolvency

The latest World Bank’s Doing Business report 2015 ranked the UAE as the 22nd easiest place to do business worldwide and the easiest place to do business in the GCC region.  However, the UAE were also ranked 92nd out of 189 countries in terms of insolvency resolution, with only Saudi Arabia ranking lower than the UAE, in the GCC region.  This is a somewhat troubling paradox, as western businesses and investors increasingly view insolvency law as an integral part of the overall commercial business environment.

There are approximately 5,000 UK companies doing business in the UAE, and with international commercial activity consistently increasing in the region, a modern insolvency regime is essential to maintain and attract foreign businesses to the region.  The flexibility of entering easily into restructuring procedures is vital for modern companies encountering financial situations which might otherwise require the outright liquidation of a company. Whilst improvised responses to various cases have been put in place, including the ‘Dubai World Tribunal’, these are neither practical in terms of cost, nor do they create the impact, which an intrinsic change in insolvency law would achieve.

Since 2009, this revision has been underway and there are now signs that law reform could be imminent. For commercial lawyers, investment bankers and foreign and domestic business owners alike, this will come as welcome news for a number of significant reasons, including the continued development of the UAE’s economy.  Should this reform to the insolvency law result in changes to the existing processes, businesses that find themselves in a position of insolvency can expect a far more rapid reorganisation and rehabilitation. In addition, the sense of stigma associated with insolvency will be somewhat diluted.

The most crucial change to be experienced with a change in the insolvency law process would be the impact on commercial activity in the Emirates. Companies that have the potential to be salvaged and achieve future growth will have the opportunity to be rescued. This in the interest not only of the company itself, but also the wider economy. In addition, creditors in the UAE, who currently only receive 10% return on investment through liquidation, would stand to gain longer term benefits in the form of higher returns on their initial investment where a distressed company has the ability to restructure itself and continue to trade.

From the perspective of foreign investors, a more flexible legal framework will give investors greater confidence and result in an increase in the ‘pulling power’ for the UAE as a hub for FDI in the region. If and when these likely changes come into play, it is paramount that the wider business community is made aware and that emphasis is placed on the new reforms to announce the UAE as the financial core of the GCC region.

Significant commercial and legal changes of this kind carry with them other challenges as well. In continental Europe, the restructuring of a distressed business is now thought of as part of the business cycle, having shed the stigma that used to attach to financial failure. It remains to be seen as to whether embedding such legal concepts in the UAE will be as well received, although there is already a strong indication that legal practioners in the UAE are positive about the prospect of reform of the insolvency system and the benefits that this may bring for troubled businesses.

(About the Author:  Leigh Crestohl is a Senior Solicitor with Zaiwalla & Co Solicitors)

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