U.A.E businessmen will no more have to face arrest or legal prosecution for unpaid debts, nor do they have to flee the country - as many had done in the past- to avoid jail term following the implementation of the landmark UAE insolvency law, legal experts and analysts said.
However, since the law, which came into effect by end-2016, is applicable only to commercial firms, government-owned companies and individual traders, non-trader individuals who are unable to repay their debts will not get protection from arrest under the law. In other words, insolvent individuals will not be able to resort to the new bankruptcy law to avoid criminal prosecution. As a result, cases of personal bounced cheques will remain subject to the general rules under the UAE Civil Code, experts said.
The new legislation, which applies to all onshore and free-zone companies in the UAE - with the exception of companies in the financial free zones - will offer protection for employees, shareholders and directors of companies undergoing court-led insolvencies, experts said at a "Technical seminar on UAE's new bankruptcy law".
The seminar was organised by The Institute of Chartered Accountants of India (ICAI) - Dubai.
The new bankruptcy law contains 230 articles and offers creditors and debtors increased flexibility in dealing with financial distress while ensuring certainty and security for business owners and investors, who can rely to some extent on protection for their businesses during a restructuring. It will also enable them to effectively negotiate with their creditors, they said.
Following the implementation of the law, there is no need to set up special tribunals as in the past to deal with the insolvencies of large companies.
"With proper insolvency regulations, businessmen will no more have to face arrest or legal prosecution for unpaid debts nor do they have to flee the country to avoid arrest as many had done in the past," experts said.
Legal experts said the new law, which repeals much of the previous bankruptcy regime laid down in the Commercial Transactions Code (CTC) which was in existence since 1993, primarily involves four new procedures, each of those supervised by the court. These include a 'light touch' rehabilitation process for solvent debtors facing financial difficulties called "the preventative composition;" a more substantial rehabilitation process for insolvent debtors - the restructuring scheme; an end-of-the-line insolvent liquidation process, and a framework for the financial restructuring of financial institutions.
As per the new law, criminal proceedings in connection with dishonoured company cheques drawn by the debtor prior to the commencement of the relevant process stay once a preventative composition or restructuring scheme has been initiated. "However, misuse of this protection may result in criminal liability for a fraudulent insolvency offence."
Dr Habib Al Mulla, chairman of Baker & Habib Al Mulla, who was a keynote speaker at the seminar, said criminal actions filed for dishonoured cheques would be suspended if a "preventive composition plan" or "debt restructuring plan: is initiated. In this case, the cheque holder becomes one of the unsecured creditors.
"This may encourage distressed businesses to initiate composition plans and potentially consider filing for bankruptcy and debt restructuring rather than prompting a member of the management to abscond and exit the UAE."
"Under the new system, the ability to seek new financings is reinforced. Provisions in the new law are more flexible compared to those the CTC. More powers are attributed to bankruptcy trustees who are nominated by debtors under the new regime. "This may potentially reduce the court' involvement and lead to a smoother and more efficient process," said Dr Al Mulla.
He said the much-needed federal bankruptcy law has indeed brought a level of modernisation and reform, although it has its shortfalls. "However, real assessment of the successful impact of these laws will depend on how they are used and how much they will improve the business and investment climate in the UAE."
Christian Saunders, the partner of Allen & Overy LLP, who was also a speaker at the seminar, said the new law is focused very much on rehabilitation. For the first time workable 'cram down' processes that allow courts to modify loan terms are available.
"Likewise, the new law imposes mandatory timelines for the completion of the processes. While the new law is not perfect in every respect, it represents a significant improvement on the existing legal framework."
Only a debtor can apply to the court for a preventative composition. This procedure appears to be intended to be used at the early stages of financial distress to provide breathing space to a debtor facing initial financing difficulties. The aim of the process is rehabilitation supervised by the court.
A restructuring process may be commenced by a debtor where it has failed to meet its debts as they have fallen due for a period of more than 30 working days as a result of financial difficulties or where such debtor is balance sheet insolvent. The process may also be commenced by an unsecured creditor owed a debt of more than Dh100,000 that is more than 30 working days overdue following a formal demand by the creditor.
In the case of a court ordering an insolvent liquidation, the debtor (or presumably its board if it is a company) may no longer participate in any commercial activity. An official or insolvency trustee shall be appointed by the court to manage the debtor or its business. The court-appointed official or insolvency trustee is tasked with determining the indebtedness of the debtor and monetising the debtor's assets under the court's supervision.
"The new law represents 'evolution not revolution', but constitutes a significant improvement on the existing framework. Implementation will be critical, however - whether the new law is a success or not will depend almost entirely on the approach taken to it by the local courts - will they abide by the spirit of the law, and bring in best international practice," said Saunders.
Pankaj Mundra, chairman, ICAI UAE (Dubai), said the new law embodies a sea-change in the method to the treatment of debtors in the UAE and presents significant implications for the administration of the procedures set out in the Law.
"The removal of the criminal offence of bankruptcy by default, provisions for bounced cheques and new requirements for creditor-initiated insolvency proceedings are likely to be helpful."
The previous insolvency regime, which was set out in the CTC, was largely untested and much criticised by practitioners and market participants.
"In short, it was regarded as cumbersome and unsuitable for a modern dynamic economy with prevalent sophisticated financial products and institutions. It appeared to serve neither the goal of prompt and efficient liquidation nor the goal of corporate rehabilitation," Allen & Overy legal experts said.
The World Bank has calculated that on average an insolvency process in the UAE results in a recovery for creditors of less than 30 cents on the dollar, takes 3.2 years with a cost of the estate of 20 percent of the estate. If you compare that to, say Singapore or the United Kingdom with figures for recovery of 88.7 and 88.6 cents on the dollar, taking 0.8 and one year, with a cost of four and six per cent.