Government officials say the UAE needs new bankruptcy laws to compete internationally, suggesting that the country should decriminalise bounced cheques.
Fresh call for reform of bankruptcy and debt law
The UAE's bankruptcy laws must be overhauled and issuing bounced cheques should no longer be a criminal offence, say senior government officials.
Fahad Saeed al Raqbani, the director general of the Abu Dhabi Council for Economic Development, says reforms are needed to attract overseas investment and prevent capital flight.
A rigorous framework for insolvencies is crucial to attracting overseas investors and preserving jobs in the Emirates, he told a conference in Abu Dhabi yesterday organised by the Council for Economic Development.
Investors are "going to go to the countries that serve their best interests. If closing a business takes four to five years, then of course they're going to go elsewhere."
Although Mr al Raqbani stopped short of announcing any new initiatives that would bring the UAE in line with international standards, he said the Government "was looking at tackling this issue collectively". Any new system should be Sharia compliant and encourage insolvent companies to file for bankruptcy sooner, rather than delaying proceedings and causing further damage to lenders and the wider economy as had happened under the current system, he said.
Late last year, Al Murjan Real Estate became the first developer to file for bankruptcy since the onset of the global financial crisis battered company earnings across the Emirates.
Dr Mohammed Haitham Salman, a legal expert at the Abu Dhabi Department of Economic Development, added the UAE should seek a "thorough review" of its policies on bounced cheques, move to clarify personal and corporate bankruptcy laws and establish specialised bankruptcy courts.
Individuals and companies owed money on cheques from insolvent companies would always seek criminal charges to reclaim quickly their investment in full rather than wait years to receive a sliver of their original investment via bankruptcy proceedings, he said.
Dr Nasser Saidi, the chief economist of the Dubai International Financial Centre and executive director of Hawkamah, the UAE's institute for corporate governance, agreed the current system needed an overhaul. "We need to decriminalise bounced cheques. This practice harks back to the 18th century, and this is something that we should rapidly get rid of."
He added that a number of other measures were necessary, including the creation of a public registry of companies, similar to the UK's Companies House, so that creditors were able to "find out who owns what and where".
Delegates at the conference also spoke of the lack of a process, such as the US Chapter 11 bankruptcy legislation that protects a company that is unable to pay its bills, saying it could help preserve jobs and investment.
According to the World Bank, the UAE this year ranks 143rd out of 183 countries in ease of closing a business, with an average time of 5.1 years and an average recovery rate of 11.2 cents on every dollar invested.
Though the Emirates' ranking for ease of doing business was higher, at 40, the recovery rate compared poorly against the Middle East average, where it is 33 cents on the dollar.
The UAE's recovery rate is less than a sixth of the Organisation for Economic Co-operation and Development average of 69.1 cents on the dollar.
"Perhaps the fact that debtors and creditors rarely use bankruptcy processes speaks volumes about its fitness for purpose," said Michael Barker, a partner at the international law firm Herbert Smith.
The laws and the stigma surrounding bankruptcy could also potentially make restructuring a more attractive option for troubled companies, he said.
Mr Barker added that Al Murjan's bankruptcy proceedings may serve as a test case for the UAE's current laws. "On paper, they're not out of kilter with other countries' laws. The procedure looks OK … but I do wonder how it will play out in practice," he said.