The final draft of the much-awaited federal bankruptcy law, which is expected to give a vital new thrust to the UAE's business environment by making it more investor-friendly, has been adopted by the UAE Cabinet.
"Today, we approved the final draft of the federal law on bankruptcy," His Highness Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, said in a tweet on Sunday.
"The law aims to enhance the investment attractiveness of the UAE's economy and facilitate the work of commercial companies," said Shaikh Mohammed.
On Sunday, the Cabinet issued a federal law regarding the use of digital technology in criminal procedures, as well as a Federal Law regarding the amendment of Federal Law No 06 for 2007 regarding the establishment of a committee to organise the work of the insurance sector.
The landmark law, which has been given final shape after years of deliberations and studies, will provide a lifeline to businesses in financial distress by helping them to restructure debt rather than opting to flee the country to avoid criminal proceedings and arrests.
The UAE Minister of Economy Sultan bin Saeed Al Mansouri said last week that the law was imperative to help owners of small and medium enterprises surmount the challenges posed by a slowing economy and rising bad debts.
The International Monetary Fund and several other government and financial bodies, including Dubai SME and the UAE Banks Federation (UBF), have been campaigning for an insolvency legislation that will provide a lifeline for businesses in distress by decriminalising bounced cheques and facilitating corporate bankruptcies.
Legal experts say the law, which has been in the pipeline since 2009, will have a major impact on easing the business ecosystem in the country.
It is expected to enable both listed and privately-owned companies that get into difficulties the option of restructure and rescue rather than being forced to wind up.
They believe the legislation will have a positive impact on the national economy by enabling it to adapt to changes, and support businesses to achieve optimum performance, thus driving economic growth.
In March this year, as a prelude to the law, banks in the UAE pledged that they would suspend legal action against cash-strapped SMEs, which account for more than 60 per cent of the nation's gross domestic product.
The UBF, a professional body representing 49 banks in the UAE, has announced a new mechanism that in effect would act as "a mini insolvency law" aimed at preventing a surge in defaults.
According to AbdulAziz Al Ghurair, chairman of the UBF, the initiative by the banks would be applicable to companies that have borrowed Dh50 million or more from several banks and are showing signs of financial stress that often lead to inability in servicing their debts. "This mini-insolvency law is meant to help customers with time and space as long as they are genuine," he said.
The insolvency legislation is coming at a time when there is a surge in the number of bank defaults and incidents of expatriate businessmen fleeing the country in the absence of a legal framework on debt restructuring and bankruptcy.
Over several months, UAE banks have been hit by a spate of defaults in the wake of a sharp drop in prices of commodities.
Months ago, bankers had estimated total bad loan exposure faced by UAE banks at between Dh5 billion and Dh6 billion.
Consultancy firm KPMG has said the lack of a bankruptcy law was one reason owners may consider fleeing the country rather than sitting with creditors to find mutually agreeable solutions.
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