x Abu Dhabi, UAE Friday 21 July 2017

Entrepreneurs need bankruptcy reforms

The present bankruptcy laws are an anachronism in a modern economy. Not only do they make it harder for debtors to come clean, but they deter people from taking risks that drive innovation and economic growth.

In 2007, the German businessman Martin Bender was incarcerated in Dubai Central Prison. The owner of a company that built luxury yachts, he had bounced a Dh16 million cheque which, he said, was meant to be held as security until he had sufficient funds in the bank, but it was cashed early.

While he was imprisoned, he defaulted on other debts until eventually he faced the possibility of 16 years in jail.

As The National reported yesterday, there is now a push to deal with these types of situations much differently. Bender's case illustrates one of the key paradoxes in the insolvency laws: how is a person supposed to pay his debts from a prison cell?

Currently, if people bounce a cheque, they can be jailed. It is a threat to which some banks resort regularly. Those laws have lent the UAE a Dickensian reputation for "debtor's prisons", but there is a reason for them. As recently as three years ago, debt collection agencies openly admitted that expatriates who fled the country would probably get away without paying what they owed. That is an impermissible burden on the country's financial institutions. And it has been exploited - the UAE has filed 150 red notices with Interpol seeking arrests for fraudulent activity committed within the country, much of it debt related.

But there are other ways to manage insolvency. In addition to the personal toll on people like Bender, the present laws are an anachronism in a modern economy. Not only do they make it harder for debtors to come clean, but they deter people from taking risks that drive innovation and economic growth.

In a competitive environment, some businesses must fail but there is a massive disincentive to invest in the UAE's economy if the penalty for failure is prison. "The failure of a business should not be a criminal offence," said Habib al Mulla, a prominent Emirati lawyer. "Indeed, the failure to pay a post-dated cheque is in my view no more than the failure to perform a contract and it, too, should not be made criminal."

Mr al Mulla is just one of a growing number of voices that are calling for reform. Dubai's Supreme Fiscal Committee and Chamber of Commerce have both stated that updated laws are a clear priority. They should be. The sooner cases like Bender's are resolved before they reach the criminal justice system, the sooner debtors will start repaying their obligations.