Calls for stronger insolvency laws are growing as the financial crisis takes its toll on the economy. Current laws governing the liquidation or restructuring of a troubled company remain largely unused and untested, lawyers say.
"In the event of business difficulties, creditors need a sound mechanism to protect their investments and maximise the value of the returns," said Sumant Batra, the president of Insol International, the association of insolvency specialists. Without stronger insolvency laws there would be less foreign direct investment in the UAE and companies here would have higher borrowing costs, Mr Batra said.
The lack of such a framework could put off entrepreneurs, who thrive in environments where risks can be taken without fear of punishment if a venture legitimately fails, he added. "It has a huge impact on the growth of the private sector," he said. Businessmen who have been jailed over insolvency allegations say that they should have been the subject of civil, rather than criminal, cases. They argue that it is impossible to perform the necessary restructuring of a business in trouble while locked up.
Few companies in the UAE have declared insolvency since the downturn began last year: the two most prominent have been Al Barakah in Ajman and Khoie Properties in Ras al Khaimah. It is unclear whether either has launched formal proceedings to protect itself from its creditors. In a report by Hawkamah, a Dubai-based non-profit organisation that promotes higher standards of corporate governance in the region, the UAE scored 74 out of 155 on a scale measuring the strength of insolvency regimes.
Saudi Arabia and Egypt scored 85 and 99 respectively, while the Dubai International Financial Centre (DIFC) scored 126. Nasser Saidi, chief economist of the DIFC, said it highlighted the need for UAE law to be updated. "These international standards were developed to help countries achieve transparency of economic risks and a financial system governed and regulated in a safe and sound manner, which serves the nation efficiently and sustains ongoing growth and economic development," he said.
Government officials declined to comment about any plans to change the insolvency laws, but confirmed that high-level discussions were taking place that could result in new laws being drawn up. One of the major problems with the current system is that the courts take a long time to wind down a business. According to the World Bank, it takes an average of 3.5 years to close a business in the Middle East, compared with 1.7 years in developed countries.
The current laws did not provide for a moratorium on debt collection from a troubled company so that executives could decide whether it was possible to turn it around or if it was necessary to liquidate assets, said Patrick Bourke, the head of dispute resolution for Norton Rose in Dubai. "There may be advantages in allowing the company breathing space so that it can restructure its finances or sell off part of the business to meet its obligations," he said.
Insolvency carried a negative stigma in the region, which tended to put companies off entering into proceedings, Mr Bourke said. bhope@thenational.ae