By Bruno Gremez, Co-founder of Fincluziv, Smart Fintex and CT&F, ex-ABN AMRO and BNP Paribas.
I wrote end of 2017 about the new UAE Bankruptcy Law (Federal Law No. 9 of 2016) that came into force on 29 December 2016. This new law, in essence, offers protection for employees, shareholders and directors of companies undergoing court-led insolvencies.
Most people in the UAE believe that any company facing financial hardship will not be able to seek protection from creditors while restructuring its debts in an orderly way. In the absence of adequate laws, any such company and its shareholders and directors face the potential threat of being arrested and of facing criminal prosecution for unpaid debts. Often, those shareholders and directors will flee the country to avoid jail, leaving behind them unpaid employees and a pile of defaulted debts to their creditors.
Hopefully for those companies, their employees and their creditors, this is now about to change. Gulf News recently reported that a UAE company has, for the very first time, successfully restructured its debts under the country’s new bankruptcy law. The Abu Dhabi Judicial Department — through the Bankruptcy Department of the Abu Dhabi Court of First Instance — has allowed the company to restructure its debts and resume business under Federal Law No. 9.
The company, whose name remains undisclosed, is a limited liability company (LLC) founded in 2008. The company had actually debt in excess of 18 times its capital and had requested the proceedings.
Under the law, the court appointed a secretary and relevant experts to oversee the company during its restructuring. They conducted their duties until the restructuring process was successfully completed, by paying off the company’s debts, renewing its commercial licence, and achieving a level of liquidity five times the size of the company’s capital, enabling it to resume its business.
The UAE law identifies different ways to avoid bankruptcy cases and the liquidation of debtors’ assets, including consensual out-of-court financial restructuring, composition procedures, financial restructuring and the possibility to secure new loans under terms set by the law.
The purpose of the new law is to assist troubled companies and protect their creditors, with a view to improve the country’s economic and investment environment. It applies to all private sector companies established in the UAE incorporated onshore or in freezones (with the exception of companies incorporated in the Dubai International Financing Centre – DIFC and Abu Dhabi Global Market – ADGM, which have both their own insolvency regimes).
One should underline the positive effects of such laws.
Banks will lend more if they know they can be protected by a legal framework that enables an orderly and transparent restructuring of debts in the unlikely scenario where their clients face unexpected financial hardship, instead of the gloomy prospect of creditors competing with each other to seize assets of their failing clients in an uncoordinated way in order to limit the bank’s losses.
Entrepreneurs and businessmen will be less afraid of facing the reality of any financial hardship if they know they can directly benefit from legal protection and have time to restructure their debts in an attempt to return their business to profitability as a going concern without banks stepping in by freezing account and without the threat of facing criminal prosecution.
Employees will also indirectly benefit from the new law whenever their employers will be able to restructure their debts to navigate through the business cycle and avoid letting people go whenever they are prevented from paying salaries as theirs banks stop supporting their companies.
This first example of a private company successfully restructuring its debt is great news for the UAE economy. In the long-term, the local economy should greatly benefit from this new development. One can only regret that no more details were made available, as any such example should be widely publicised.