Creditors of companies that go bust in the Emirates are likely to be paid less than in most other Arab countries, creating a deterrent to investment, says a report from the World Bank. Policymakers in the country have been urged to focus their efforts on reforming the UAE's insolvency framework to lay the foundations for a better business environment.
Creditors get an average of 10.2 cents (37 fils) in the dollar if a company in the UAE files for bankruptcy, data from the World Bank's International Finance Corporation shows. In MENA, only Mauritania has a lower rate of recovery, at 6.7 cents. Bahrain has the highest rate of recovery in the region: creditors can on average expect to get back 63.2 cents in the dollar. "For the UAE, as for most economies in the Arab world, those systems could stand to improve," Dahlia Khalifa, the senior strategy adviser for the World Bank, told a conference yesterday in Abu Dhabi where the lender released its report called 2010 Doing Business in the Arab World.
In economies where insolvency laws are inefficient, "bottlenecks in bankruptcy" cut into the amount claimants can recover, providing a "strong deterrent to investment", the report warns. Other figures from the World Bank, based in Washington, show that inadequate insolvency laws means it takes an average of five years to close a business in the UAE. In the Arab world, again only Mauritania scores worst, with it taking an average of eight years.
"Insolvency should be the focus of the next stage of reform," said Dr Nasser Saidi, the chief economist at the Dubai International Financial Centre (DIFC) and the executive director of the Hawkamah Institute for Corporate Governance. "Market efficiency and integrity, corporate governance and insolvency frameworks and practices are intrinsically linked." A review of insolvency systems in the MENA region by Hawkamah showed they were "substandard" compared with international best practice.Overall, Gulf states had stronger insolvency laws but needed to improve credit and information systems and dealing with cross-border issues, the Hawkamah report found.
Dr Saidi said the region needed to develop an efficient insolvency and restructuring regime to help ease the cost of closing a business. Despite the global financial crisis, there have been few insolvency cases in the Emirates. By law, if a company does not make payments to creditors for 30 days it must declare insolvency or face charges of bankruptcy by negligence, a criminal offence. Legal structures also exist for companies after they declare insolvency, with courts able to appoint trustees to manage a bankrupt firm, as well as being able to adjudicate on agreements between creditors and troubled companies to resolve their financial distress.
The greater use of advisers to represent creditors and an improvement in the efficiency of courts dealing with insolvent companies were among measures the UAE could implement to improve insolvency legislation, said Philipp von Randow, a finance partner at the legal firm of Latham and Watkins in Qatar. "The markets and jurisdiction systems fare better if liquidation procedures are implemented more quickly," he said. "As time is the biggest enemy to value when it comes to liquidation or rehabilitation of a business, it is important that either the business case is re-established quickly or it is liquidated as otherwise ties to customers will be strained and that will lead to waste of value."
But he advised against the GCC adopting US Chapter 11-style bankruptcy laws. "I would advise against a blueprint from abroad," he said. "The economy here is more transaction-based and family business orientated than the US. "What is more important is creating a framework of legal rights and legal capacity to deal with business failures or rescues." @Email:email@example.com