Friday, Sep 09, 2016

The bankruptcy law passed by the UAE Cabinet last week is undoubtedly a new business enabler and source of confidence to entrepreneurs and the financial services industry in the country.

The new legislation has come at a time when the nation is laying greater emphasis on economic diversification and private participation in the economy.

Private entrepreneurs now play a crucial role in economic growth and job creation in the UAE with a significant majority of business belonging to the small and medium enterprises (SME) segment.

While the SME sector has been a key component of economic diversification efforts of the UAE, the sector faced huge vulnerabilities in terms of limited access to finance and harsh consequences when faced with business failures.

Historically, business failures were addressed through informal channels and in the event of failure of negotiations with financial institutions, most often borrowers faced arrests and jail terms, which forced many to flee the country, leaving behind trails of bad debts. Invariably, banks and financial institutions bore the brunt of this legal gap.

With the government showing the will to plug various lacunae in the law and introduce a modern insolvency mechanism, entrepreneurs and banks are sure to find it easy to do business.

The new law includes flexible strategies to bail out businesses in financial trouble. It has provisions for restructuring of businesses in distress with access to additional bank financing.

The objective of the new law is to allow the debtor to retain control of his business and get legal protection for a period of time while solutions are sought. For this purpose, the new law draws from provisions for corporate bankruptcy legislations across the world, including Chapter 11 proceedings in the United States.

While the ability of business to restructure without having to face criminal charges will certainly encourage investors to take calculated risks, banks and financial institutions will find it less risky to take exposures to SMEs as the new law will enable entrepreneurs to restructure their businesses in difficult times, rather than skip the loans and flee the country.

By upgrading its legal framework on corporate insolvency, the UAE has upped its stakes in global competitiveness that will be reflected in investment flows into the country.

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