Hawkamah: regional insolvency laws need updating

A more transparent legal framework to deal with insolvencies and corporate bankruptcies – defining the rights of both debtors and creditors – are important to attract both foreign investments and foster domestic entrepreneurship in the region, experts at a conference on insolvency reforms in Dubai said.

Organised under the umbrella of the Forum for Insolvency Reforms in MENA (the FIRM), (founding members of which are Hawkamah, the World Bank, INSOL International and the OECD), participants examined the legal and policy dimensions of insolvency and restructuring via case studies on restructuring and panel discussions on insolvency law.

Hawkamah, the UAE-based Institute for Corporate Governance, held the first Hawkamah MENA judicial colloquium at the Dubai International Financial Centre (DIFC) recently. The two-day event brought together experts in the field for frank and forthright discussion on the need to strengthen the legal framework regarding business debts and liabilities.

“The absence of efficient exit mechanisms discourages the entry and financing of new businesses into a country’s markets, if they cannot be freed from the burden of past obligations,” said Nasser Saidi, chief economist of Dubai International Financial Centre (DIFC).

He said the idea is not to provide defaulters with an easy way out of their liabilities, but rather to provide potentially viable, solvent, debtor companies with an appropriate framework for restructuring and re-organising their businesses, in order to survive financial and economic shocks, and continue – instead of focusing only on liquidation.

Enabling the restructuring and re-organisation of companies is one of the most important features of a modern insolvency regime. The UAE has two insolvency systems available, in two jurisdictions: one in the DIFC and another for the UAE.

Experts at the forum, the first event of its kind in the region, said regional insolvency regimes are evolving, but need to be updated to suit the business environment in the country.

“Given the effects of the global economic downturn, our region needs to review its insolvency laws and policies more closely and pursue higher judicial standards in these areas,” said Judge Jamal Al Sumaiti, director general of the Dubai Judicial Institute.

“Enabling the restructuring and re-organisation of companies is one of the most important features of a modern insolvency regime. A country’s insolvency and restructuring framework should be widely and equally accessible to both debtors and creditors. A healthy insolvency system provides predictability to debtors and creditors in case of financial distress while balancing liquidation and re-organisation,” said Saidi.

Judicial officials and legal experts said existing insolvency laws in the region are dysfunctional and inefficient compared to other systems.

As an example, insolvency procedures here in the UAE take more than five years; against a regional average of 3.4 years; the cost to go through the process of insolvency is 30 per cent of the estate in UAE versus the Middle East and North Africa (MENA) average of 13 per cent. Recovery rate is 11 per cent for the UAE versus 29.7 per cent for MENA.

Analysts suggest that the UAE’s existing insolvency legal framework is dated; and needs to be updated to suit the current business environment.

The bankruptcy regime is part of the Commercial Transaction Law (Federal Law 18). The UAE bankruptcy regime in Law 18 is the UAE equivalent of Chapter 11 proceedings in the US.