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10Questions: The United Arab Emirates' New Insolvency Law « Back
August 2012
 
FW speaks with David Stark at Deloitte Corporate Finance Limited about The United Arab Emirates' new insolvency law.



FW: What is your understanding of the purpose of the proposed new law?

Stark: The new law is designed to provide a consistent framework under which companies in financial distress can reach a resolution to their predicament, be it by way of a consensual negotiated agreement with its creditors or through a more formally administered procedure. The driving concept is to provide a method by which stressed and distressed companies can either come to a place where they are able to resume trading profitably and to the advantage of all parties, or be wound up and liquidated in a controlled manner. Ultimately, companies that spend protracted periods of time in a distressed state tie up capital that therefore cannot be circulated around the local economy which in turn suppresses liquidity and growth. A law that allows this capital to be redistributed whilst encouraging corporates to admit the existence of difficulties will therefore benefit the economy as a whole.

FW: Why introduce it now?

Stark: In the Middle East the concept of restructuring is fairly new. The phenomenal growth of local economies over the past few years has introduced businesses – and sometimes governments – to the major international debt markets and that has brought with it exposure to global macroeconomic trends. The most recent global financial crisis signalled the first instance that many businesses and lenders in the region have had to face up to the idea that their businesses may not keep growing and that their debts may not be repaid in full and on time. With respect to legal frameworks, many Middle Eastern jurisdictions, including the United Arab Emirates (UAE), had not previously considered the possibility that businesses would fail, or be unable to repay debts, meaning that the appropriate legislative frameworks had not been put in place. While the UAE does have an insolvency law, the general consensus amongst the legal community is that the outcome of any cases heard under the existing law would be highly uncertain and take a protracted length of time to resolve. This leads to an uncertain environment for banks and other creditors with regards to their contingency and enforcement options, should consensual discussions with a struggling business not bear fruit.

Ultimately uncertainty is likely to result in reduced lending and a general suppression of liquidity in the local economy. A case in point is Dubai World which, in November 2009, caused shockwaves throughout the financial world with the surprise announcement that it could not pay the Nakheel Sukuk amortisation of $3.5bn due in December 2009. Aidan Birkett, ex-head of Deloitte UK Corporate Finance, was immediately appointed as chief restructuring officer (CRO) for the group. However, there remained insufficient time to pull together the crisis management plan required. This led to surprise in the banks and a collapse of confidence in the region. Ultimately a special court within the Dubai International Financial Centre (DIFC), the ‘Dubai World Tribunal’, had to be established to hear these cases, based on principals adopted by other countries.

FW: When can we expect it to come into force?

Stark: As with any new law, the key to successful implementation will be to get it right first time and not require significant amendments post-enactment. To this end, in our opinion, the UAE government is going to great lengths to ensure that the right law is developed for the region rather than just ‘copying and pasting’ from other jurisdictions. Experts from across the world have been assisting the UAE government, providing input into the advantages and disadvantages of the laws their countries apply while, as you would expect, other experts are helping to ensure that any new statute meets Sharia’a requirements. The new laws will also need to be both practical and enforceable and so the Ministries of Justice and Finance will also have a significant input into ensuring that the right law is released first time. In summary, whilst a date of late 2012 has been talked about in some quarters I wouldn’t be surprised to see any such law delayed, but it should be worth waiting for.



FW: So has the new law been entirely drafted from scratch?

Stark: No, not entirely. The underlying principals all loosely based on the processes used in a number of jurisdictions including the UK, the US and France, which have then been shaped to make them more appropriate for the local region including ensuring that they are consistent with Sharia’a principles. Local lawyers have assisted the government in drafting the law with help from international lawyers with experience in other regimes. My team and other professional advisors have been asked to provide commentary to various government departments and bodies such as UNCITRAL and INSOL have been consulted. Obviously one challenge that the law makers will face is the conversion to Arabic of a law that we understand was initially penned in English, as ultimately this will be administered by the local courts which, unlike the DIFC courts, do not conduct hearings in English.

FW: What are the key processes under the new law?

Stark: The new law will introduce three main concepts which have been termed ‘Financial Reregulation, Preventative Composition of Bankruptcy and Bankruptcy’. The first of these, ‘financial reregulation’ sets out the processes under which an out of court agreement can be achieved between the debtor and its creditors with the help of an assistant. ‘Preventative composition of bankruptcy’ is a restructuring process overseen by the court and an independent supervisor. This is a debtor in possession procedure which appears to be similar to a US Chapter 11 process or the Company Voluntary Arrangement (CVA) procedure in the UK. It allows the debtor to retain control of the business with the protection of the court for a period of time while consensual solutions are sought. Finally, ‘bankruptcy’ covers a process available to insolvent businesses where they are controlled by a bankruptcy supervisor, rather than the debtor. The process provides for either the restructuring of the business or the liquidation of its assets. The law also sets out provisions around the insolvency of individuals.
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