This article was originally published on MEED and is reproduced with permission.
The UAE has succeeded in creating a dynamic economy
known for its entrepreneurial spirit. In recent years,
however, the rapid development of the business
community has outpaced corresponding changes to its
To address this gap, the Government has passed Federal
Law No.9 of 2016 Concerning Bankruptcy, which
becomes effective on 29 December 2016 and aims to
modernize the country’s approach to business failure.
Effective insolvency regimes aim to maximize return on
capital and establish predictable systems to support the
investment cycle. The new law does so by expanding
options within the familiar frameworks of protective
composition, restructuring and liquidation. In addition to
eliminating certain deterrents, significant improvements
over existing law are evident from three key changes.
According to the World Bank, the average UAE
insolvency proceeding is resolved in 3.2 years, nearly
twice the time required in OECD high income nations.
The new law contains specific, short timeframes allocated
to the courts, applicants, trustees and experts to ensure
that processes proceed swiftly through each stage.
These timeframes are welcome and ambitious, though it
remains to be seen whether parties will be able to stay
Focus on business rescue
The new law moves closer to US and English systems
by allowing a court ordered moratorium to stay actions
against the debtor during composition and restructuring
procedures. Related provisions also afford wide-ranging
powers to bankruptcy trustees to ensure business
continuity and prevent value-erosion.
In addition to adding a moratorium, the new law makes
business rescue viable by allowing security cheques to be
suspended following creditor approval of a restructuring
plan. Successful restructuring relies on the participation
of management. It is common for directors (particularly
in SMEs) to provide security cheques to back up personal
guarantee obligations arising in a restructuring. This
has been a major stumbling block under existing law, as the threat of a prison sentence over a bounced security cheque has proved a potent disincentive for management participation in restructuring. By allowing security cheques to be suspended during court sanctioned restructuring plans, management can concentrate on resolution of the restructuring instead of fretting over jail time.
Super priority funding
The moratorium is meant to provide breathing space for a business, but any benefit from that space is likely lost without working capital. The new law introduces super
priority funding to address this issue. Previously, financiers have been reluctant to lend to struggling businesses for fear that new lending will rank pari passu with existing heavily distressed debt. Affording super priority to new lending makes it viable for new funds to be injected, and increases the likelihood of value preservation and successful restructuring.
It's too early to tell whether the new law will be a game changer, but it is a clear improvement and should provide comfort to investors. The test will be whether businesses are encouraged, at an early stage, to utilise the legislation to engage constructively with its creditors to preserve value.