19 February 2017

By Yasmine Saleh and Reem Wafai

The United Arab Emirates will begin organising workshops in March for small- and medium-sized enterprises (SMEs) to educate them about a new bankruptcy law, which aims to reduce the risk of doing business in the Gulf Arab state, a senior finance ministry official said.

The SME sector, which accounts for 60 percent of the UAE’s gross domestic product, has faced difficulty securing credit lines from banks that are concerned about a surge in defaults following an economic slowdown after oil prices plunged starting mid-2014. Many expat business owners fled the country to avoid facing criminal charges in the absence of an insolvency law.

The new bankruptcy law, which was issued and published in the official Gazette last September, will establish a regulatory body, the Committee of Financial Restructuring, which will oversee restructuring cases and appoint experts to handle them. It also details the process for companies to receive new loans under terms set by the law.

Younis Al Khouri, under-secretary at the UAE finance ministry, told Zawya in an interview last week that many SMEs did not have ready access to legal resources to explain the law.

“There are categories of companies. Companies that are of big size, they have internal legal affairs, they have outsourced professionals and they are in more advanced stages of understanding the law. Then comes the SMEs, who are either small in size or cannot provide the financial support for a third party to explain. Here, the government has decided to step in to conduct workshops’ sessions,” Al Khouri said.

“We decided to move through the chamber of the UAE. Next month in March we are conducting a session with Dubai Chamber on this specific (issue) and planning to conduct similar sessions with other chambers in the UAE, whereby through the chambers whoever needs clarity or requires further consultations we will be available for a full day to explain the 200 plus chapters (of the law) and, if there are any specific enquiries or questions, we will be available to answer,” he added.

The UAE is working to support the SME sector, which accounts for 95 percent of companies in the country. Access to finance has been one of the main issues for the sector as banks have traditionally seen SMEs as high risk, especially those which are seen to have a lack of professional accounting systems and management experience.

Lack of clarity

The new law will be applied to public and private companies, as well as joint ventures between both, with the exception of those based out of the Dubai International Financial Centre and Abu Dhabi Global Markets, which have their own insolvency jurisdictions.

With 231 articles divided across seven sections on 137 pages, the law is too complicated for many small businesses to comprehend, if they are aware of it at all.

“I had no knowledge of the law until a friend mentioned it to me,” said Nina Paravesh, owner and founder of Concept-me, a design and project management company in the UAE.

“I have many questions, what are the liabilities of filing for bankruptcy? This is a very important question. I mean when you are restructuring do you pay from your personal assets?” she told Zawya, adding that hiring a legal expert to help her navigate the law would be expensive, costing between $600 and $700.

Mohammed Jomaa, owner of Assist.ae, an online personal assistant that offers UAE residents a wide array of services, also expressed his concerns regarding the mechanisms of the restructuring process.

“From my end, I can’t see clarity yet and I think the law still needs to be clearer.”

The process of filing for bankruptcy could prove to be expensive for SMEs and require a lot of documentation.

“Cost will be a factor,” said Nicola Reader, senior associate at legal firm Clifford Chance.

Reader said firms should be prepared to present the courts with several legal and financial documents, such as a cash flow forecast, a list of creditors and a memorandum summarising the company’s economic and financial position, along with a copy of their book of accounts.

“So there is quite a bit of information that would need to be provided and there will be a cost associated with that and time needed to be spent pulling that together, although we would expect that well-managed companies would have some of that information readily available” she added.

What’s in the law?

One of the issues many SMEs in trouble often face is the bouncing of cheques, which is a criminal offence under UAE law and can lead to a prison sentence. This important issue is addressed under Article 212 of the law, which states that a debtor cannot be held criminally liable for a bounced cheque once they have begun formal bankruptcy proceedings. However, action can be taken against any bounced cheques issued after the proceedings.

The bounced cheques will be settled as part of the final decision issued at the end of the bankruptcy proceedings.

The law is unclear on the amount needed for creditors to be able to declare their debtors bankrupt. In paragraph one of article 69, the law stipulates an amount of at least 100,000 dirhams ($27,225). However, paragraph two of the same article gives the state’s council of ministers the right to amend that amount to less or more than 100,000 dirhams.

The court can impose jail sentences and/ or financial fines on companies or their executives if the court finds they are responsible for the companies’ losses or had not kept a record of their financial situation before the bankruptcy.

Implementation is key

Darren Harris, partner in Addleshaw Goddard legal consultancy said that overall the law was a step in the right direction but more details are still needed on how it will be reinforced.

“How the law is applied and interpreted by the courts and authorities in the UAE will be crucial in respect of how far the new bankruptcy law will reach and aid the growth of SMEs in the UAE,” Harris told Zawya in an interview.

He said time will determine how effective the new legal entity will be.

“As with all new regulations in any developed economy, implementation is key as to how the new bankruptcy law is applied and understood in practice and will have a large bearing on the effectiveness of the changes it is designed to introduce,” Harris said.

The lack of a sufficient number of judges with experience in handling insolvency cases could pose a challenge to the application of the law, according to Mazen Boustany, Dubai-based partner at Baker Mckenzie law firm.

Boustany told Zawya that he does not expect new amendments to be made to the law anytime soon.

“It took ten years for the country to prepare the law, so I don’t expect amendments anytime soon. At least for the next two or three years it will be untouched.”

© Zawya 2017