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UPDATE ON BANKRUPTCY LAW PROJECT IN THE UNITED ARAB EMIRATES


UPDATE ON BANKRUPCYLAW PROJECT IN THE UNITED ARAB EMIRATES

As attractive and financially lucrative operating a business in Dubai may seem, uncertainty still plagues the business environment which is so heavily reliant on global trade and commerce. Today, Small and medium-sized enterprises (SMEs) are under pressure amid weak oil prices and slowing global economic growth.

As a result, some businesses choose to close shop and head for the border, leaving behind unresolved debt. The problem for those who decide to bail and leave behind their debts, is that it eventually catches up to them. The UAE is a signatory to several conventions and treaties with other countries, such as the Riyadh Convention which permits local UAE banks the right to enforce UAE judgments in Saudi Arabia, and pursue legal proceedings against the defaulter.

Even in countries like the UK, debts from Dubai can be sold to UK debt agencies, which will pursue legal proceedings from the debtors.

Many banks in the UAE, such as Emirates NBD, are now increasing their recovery efforts and employing international debt collectors. As Dubai's largest bank, Emirates NBD is one of several UAE banks who have hired American and British debt collection agencies, to pursue expatriate defaulters who have fled the UAE back to their home countries without first settling their debts.

In November, a senior banking official said lenders in the emirate are working together to try to stem the number of small business owners fleeing the country with unpaid debt, a trend which had allegedly reached around AED5 billion ($1.4 billion) by that point.

Current laws in the country mean a bounced cheque can land the issuer in jail, which prompts many business owners to flee the country with unpaid debts.

Article 401 of Federal Law No. 3 of 1987 on issuance of Penal Code (the "Criminal Law') of UAE states: "Detention or a fine shall be imposed on anyone who, in bad faith, gives a draft (cheque) without a sufficient and drawable balance or who, after giving a cheque, withdraws all or part of the balance, making the balance insufficient for settlement of the cheque, or if he orders a drawee not a cash a cheque or makes or signs the cheque in a manner that prevents it from being cashed.

Article 644 of Federal Law No. 18 of 1993 on the issuance of The Commercial Transactions Law, states: "If a penal action in any of the cheque-related crimes provided for in the law of penalties have been filed against the drawer, the holder of the cheque who claims the civil right may sue the court for obtaining an amount equivalent to that of the cheque or to the extent of the unpaid amount of its value, apart from the compensation when necessary."

Amendments to the country’s insolvency law, passed by the UAE cabinet in July 2015, are expected to decriminalize issuers of bounced cheques and facilitate the introduction to corporate bankruptcies. However, the legislation is yet to be ratified. The cabinet approved a draft law in July but it still needs the support of the Federal National Council, the country's legislative body, and the president.

In the meantime, small businesses owners are continuing to flee the country with unpaid debts and the severity of the problem has forced the country’s banks to halt prosecution of those who issue bounced cheques for SMEs under a rescue initiative. However, The UAE’s new bankruptcy law will not offer protection from jail for individuals unable to repay their debts, according to a top government official.

The final draft of the law will offer protection for company employees, shareholders and directors who are undergoing court-led insolvencies, but private individuals facing insolvency will not be able to benefit from this law to avoid criminal prosecution.

Apart from the DIFC and ADGM jurisdictions, whom both have their own independent insolvency regulations, the new legislation will apply to all onshore and free-zone companies throughout the UAE,

According to Obaid Humaid al-Tayer, Minister of State for Financial Affairs. Although, the new law means thata bounced cheque is no longer a criminal offence in the UAE, however,

businessmenwill still face a prison sentence of up to five yearsand a fine of up to Dhs1m ($272,000) iftheir companies fail to pay debts and deliberately avoid filing for bankruptcy.

Importantly to note, the new law will not apply retroactivelyto businessmen who are already facing criminal cases over unpaid debt. TheUAE isalso working on a new personal insolvency law that would apply to individuals and would take take12 months to draft, according to Al Tayer.

UAE banks have agreed to halt criminal prosecutions for bounced cheques drawn by small to medium-sized business customers under a “rescue initiative" launched by the banking industry.

The plan, which will come into effect immediately, is a major departure for the UAE’s financial system, which relies on paper cheques as security in business transactions. The plan has been prompted by the increasing levels of default in the SME corporate sector.

“Current concerns about the sustainability of SME and corporate lending and its effect on the economy as a whole has led the UBF [UAE Banks Federation] to take a more pro-active role in bringing together banks and borrowers to minimise incidents of total default," said Abdul Aziz Al Ghurair, the chairman of the UBF, unveiling the initiative yesterday. “We believe that the modus operandi [MO] now launched will help to restore market stability, stem credit losses and maintain the reputation of the UAE as a place to do business."

The scheme allows debtors a 15-day period to agree a restructuring scheme with creditors, followed by up to 90 days in which the banks will refrain from “pre-emptive action", including prosecution in the courts or travel bans.

Mr Al Ghurair described the initiative as a “mini-insolvency law".

The arrangements will apply to companies with minimum borrowing of Dh50 million or more, or turnover of more than Dh100m.

Debtors already subject to legal action can appeal under the new arrangements and seek a halt to legal proceedings, provided they can show “genuine commercial challenges" and an intent to repay.

Mr Al Ghurair declined to give exact details on the level of non-performing loans in the SME sector, but noted that SME lending accounted for only 3 to 5 per cent of total bank balance sheets.

However, there had been a rise in the level of “skips" – debtors leaving the UAE with unpaid bank loans – as the effect of low commodity prices and generally weaker economic conditions has hit the SME sector hard. SMEs account for about 60 per debt of economic activity in the UAE, according to recent figures from the economy ministry.

“If a lot of people run away to their own country, business will come to a standstill and that will endanger the economy. We want to show how the banking community can come together and support the economy. We will give customers time and space as long as they are genuine," Mr Al Ghurair said.

The MO scheme has been agreed by the chief executives of all UAE banks and approved by the Central Bank.

“This has been discussed by the full board of the UBF and the Central Bank governor, and they have all blessed it. All banks are morally committed to support the initiative," Mr Al Ghurair said.

The MO scheme could open the door for changes to the way the UAE uses cheques as security guarantees for loans. “This is a test. It is a voluntary arrangement and a self-imposed regulation is always a better solution that an outside regulation. This is a voluntary arrangement," Mr Al Ghurair said.

Asked whether arrangements similar to the MO initiative might be extended to personal banking, he said: “Ask in a couple of months. That would involve millions of people".

Most cases of SMEs getting into financial difficulty occurred in the wholesale food and oil services sectors, he said.

The MO arrangements involve a seven-step process over 15 days in which a “remedial credit co-ordinator" will receive a request for action, followed by meetings of debtor and creditors’ banks to assess the extent of stress.

A 75 per cent majority acceptance by creditors is required to adopt the measures of the MO, after which creditors will sign a “standstill agreement" on any further legal action against the debtor.

Creditors must agree that there are “genuine commercial challenges which led to the request for restructuring", according to an outline of the MO process.

Mr Al Ghurair said that the continued appetite of the banks for further lending depended on the condition of the potential borrower and the economy. “We will lend as long as the economy is in good shape and the customer is in good shape. If the economy slows and the customer slows the bank will also slow its lending," he added.

"The law is expected to provide a greater flexibility in dealing with financially distressed companies. It will also provide a degree of certainty and security for business owners and investors, who can rely to some extent on protection for their businesses during a restructuring, to enable them to effectively negotiate with their creditors," he said.

The lack of insolvency regulations during Dubai’s credit crisis in 2009-10 led to a number of businessmen being arrested for unpaid debts, with many fleeing the country to avoid arrest.

A number of small business owners in the UAE have fled the country leaving unpaid loans over the past two years.

Mazen Boustany, a partner with Baker & McKenzie Habib Al Mulla said: "The UAE in the past has had to create special tribunals to deal with the insolvencies of large companies like Dubai World, Amlak and Tamweel, due to the deficiencies of the current law.

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