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Insolvency Reform in United Arab Emirates on the Horizon

The United Arab Emirates (UAE) appears to be finally in the process of issuing a long-awaited new federal insolvency law. Described by some as a game-changer, the government announced in July that its Cabinet has approved a draft of the new law replacing the old (and largely unused) insolvency regime. The highly anticipated law is now pending the approval and ratification of the Federal National Council and Supreme Council before it receives final approval by Sheikh Khalifa bin Zayed bin Sultan Al Nahyan, the UAE President.

United ARab emirates UAE insolvency reform

Similar announcements have been made since 2010 based on the growing demand for a clear and modern insolvency law in the wake of the global financial crisis. Currently, while the UAE ranked 22nd in the World Bank’s influential Doing Business 2015 index last October, up from 25th position for the previous year, the country’s ranking for resolving insolvency matters slipped to 92nd position from 88th, below countries including Cote d’Ivoire and Mongolia.  The need for improvement in this important sector is clearly evident.

The new law follows a series of new legislation issued in 2015 such as the considerably revamped Commercial Companies’ Law, Law No. 2 of 2015 (“Companies Law”), which came into effect on 1 July 2015, and the Law Respecting the Partnership between the Public and Private Sectors in the Emirate of Dubai, Law No 22 of 2015 (“PPP Law”) which will take effect from 18 November 2015.

The existing insolvency and bankruptcy regulations are scattered across different federal laws of the UAE such as the Companies Law, the Commercial Transactions Law, Law  No. 18 of 1993 (“Commercial Transactions Law”) and the Civil Procedures Law, Law No. 5 of 1985 (“Civil Code)”. Whereas commercial companies are offered liquidation as a solution to their insolvency under the Companies’ Law, the Commercial Transactions Law regulates the bankruptcy of persons who are considered ‘traders’ while the Civil Code regulates those persons who are not classified as traders. All of these laws have failed to provide debtors, investors and businesses alike with a modern insolvency and/or bankruptcy scheme, an impediment that has caused some investors’ reluctance to enter the UAE market. In fact, among the main disadvantages of the current regulations is not only the criminalization of bad cheques but also the potential imprisonment of the issuer of the bounced cheque, who might, for example, be the manager of a company carrying on business in the UAE.

Particulars of the new law have yet to be revealed and there is some confusion as to how it will be structured.  Some commentators have suggested that the new law is likely to include provisions inspired by Chapter 11 of the US Bankruptcy Code; others have stated that the new law will be largely based on French insolvency practices, drawing on a number of provisions from German law, as well as legal codes from countries such as the Netherlands and Japan.

Certainly one of the most significant changes as announced earlier this summer would be the decriminalization of “bad cheques” which is considered ground breaking for existing and future investors in the UAE as well as for domestic lenders and other financial institutions.  Presently, the writing of a cheque with insufficient funds to back it may be considered an act of criminal fraud.  The use by banks of post-dated cheques for security has been cited as a real impediment to local banks adopting proper credit checks and other contemporary safeguards and practices.

Several announcements have been made by government officials endorsing the issuance of the new law. Sheikh Mohammed bin Rashid Al Maktoum, UAE Vice President and Ruler of Dubai, stated in The National – Business newspaper on 6 July 2015 that the law aims to ‘mitigate risks of bankruptcy and ensure a safe and attractive business environment in the UAE that nurtures and supports investments’.

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About this Author

Radwa Alrifai, Corporate lawyer, Squire PB

Radwa Alrifai is based in the Dubai office of Squire Patton Boggs and works frequently with our Abu Dhabi and Riyadh offices as well. She focuses her practice on M&A, corporate law and corporate governance. She also works regularly with our dispute resolution team. She has several years of experience during which she has advised a diversified base of clients in terms of nationality and business sector.

Prior to joining the firm, Radwa received her training at an Egyptian law firm in which she worked on project finance, M&As and general corporate matters....

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Douglas G. Smith, corporate attorney, private equity lawyer, Squire Patton Boggs, Dubai law firm
Of Counsel

Douglas Smith has over 30 years of experience in the Middle East, North America and Asia, Doug’s main areas of practice include corporate law, M&A, private equity, finance, corporate restructurings, joint ventures as well as corporate governance and regulatory matters.  His practice has involved him in transactional work in numerous jurisdictions in the Middle East including the UAE, Saudi Arabia, Qatar, Oman and Bahrain as well as in East and Southeast Asia, encompassing Indonesia, China, Malaysia, Thailand, Singapore, India, as well as other nations.

Doug has been recognized for his corporate-commercial and M&A expertise on numerous occasions by Who's Who Legal and The Legal 500.