The law, which has been under development since 2009, is aimed at helping business people in financial distress restructure their debts rather than opting to flee the country to avoid the criminal proceedings as happened during the nation’s credit crisis in 2009-10.
Over the last year the UAE’s banking sector has faced a substantial surge in bad debts, according to one media report, resulting in a number of small business owners choosing to skip the country leaving unpaid loans.
The approval of the new bankruptcy law by the cabinet was announced by Sheikh Mohammed bin Rashid Al Maktoum, vice-president and prime minister of the UAE and ruler of Dubai, in a tweet on Sunday.
The new law is expected to take effect by the beginning of 2017 after it is promulgated in the country’s official legal gazette.
Obaid Humaid al-Tayer, Minister of State for Financial Affairs, told reporters in Dubai on Tuesday that the new law will be positive for both foreign and local investors.
The new law will establish a regulatory body, called the Committee of Financial Restructuring, that will oversee restructuring cases and appoint experts to handle them. It provides for companies to receive new loans under terms set by the law.
Tayer said the UAE was also working on a new personal insolvency law that would apply to individuals. “It will take around 12 months to draft the law,” he said.
Leave pressures eased
Under present laws it is difficult for companies to restructure or wind themselves up, and the existing legislation means an unpaid debt or the issue of a bounced cheque can land a business executive in jail.
According to a Reuters report this has proved problematic for smaller companies in particular with executives of troubled firms who have fled the country leaving behind bad debts totalling over $1.4bn (£1.05bn, €1.25bn) last year alone.
The UAE’s Ministry of Economy, estimates Small and Medium Enterprises (SMEs) contribute around 40-45% of nominal GDP in Dubai, and more than 60% of the UAE’s total GDP. SMEs are also responsible for the majority of employment opportunities in the country and provide 86% of all private sector jobs.
Local reports on the new law, quoting unnamed government officials, said it will not offer protection from jail for individuals unable to repay their debts, however, it does offer protection for employees, shareholders and directors of companies undergoing court-led insolvencies.
In other words an executive of a distressed business will still face a prison sentence of up to five years and a fine of up to AED1m ($272,000) if their companies fail to pay debts and deliberately avoid filing for bankruptcy.
The new bankruptcy legislation will apply to all onshore and free-zone companies throughout the UAE, with the exception of companies in the DIFC and ADGM jurisdictions, each of which already have their own separate insolvency regulations in place.