UAE Bankruptcy Law: The landmark law spells relief for businesses in times of financial difficulties

by Clotilde

A meeting held by Cabinet in Abu Dhabi has resulted in the adoption of a new Federal Law on Bankruptcy in the UAE.

The final draft of the new federal bankruptcy law is expected to have a positive impact on the national economy, aimed at “strengthen[ing] the legal sustainability and attractiveness of the investment environment in the UAE, and to increase the ease of doing business,” wrote His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai on his official Twitter account.

The enactment of the new federal law will add a much-needed positive outlook on the national economy, make room for international adaptability and provide support to businesses in their financial goals, ultimately positively impacting the economic growth of the UAE. The support will be in the form of improved access to bank funding for businesses and an increased asset quality in the banking sector.

The current legislation provides for jail terms to those companies and businesses falling into financial distress and debt which has in the past driven business owners and managers to leave the country and their unpaid debts behind.

The issuance of bad cheques has long been reported by UAE residents as one of their major concerns while doing business in the Emirates – the implications of criminal charges provided by Article 401 of the Penal Code for bad cheques are a cause of business insecurity.

Coupled with the ‘rescue scheme’ led by the UAE banking industry to halt criminal prosecutions for bounced cheques drawn by small to medium-sized business customers, the adoption of the new federal law governing bankruptcy and insolvency will allow business owners and managers to either restructure or liquidate (and not forcefully unwind) their businesses in a manner that is provided for and compliant with the legal framework, thus also allowing creditors to recover their debts.

In times of tough economic environments, SMEs are the first to be affected, with increased chances of falling bankrupt. The UBF estimated AED 7 billion SME bad debts following the fleeing of a number of business owners from the country.

According to the UAE Banks Federation Annual Report-2014, financing SME activity is now vital for a burgeoning economy.

Introductory comments of the provisions contained in the law are soon to follow. The UAE’s Ministry of Finance is scheduled to share further details of the new federal law in a media round table today (September 6).

For more information and an in-depth discussion on how this will affect your business, please contact Giulia at giulia@yungo.ae or at +971 4 42766120.