Bankruptcy Legislation: UAE drives through reforms

The Decree of Federal Law 9 of 2016 on Bankruptcy in the UAE holds the potential to be one of the most influential legislative developments to benefit the private sector. Allowing businesses in distress the opportunity to restructure should they face genuine challenges, under a comprehensive legislative framework would be a positive development. The law will significantly improve the outlook for the private sector businesses and especially the SME sector, by better managing debtor/creditor relations. While there could be some short term challenges to the implementation of the law, in the long run it will have a positive impact for the economy by helping both creditors and debtors mitigate and manage risk in a more constructive manner.

The introduction of the law comes as part of wider bouquet of reforms taking place both in the UAE and the wider GCC to improve the business environment. While building infrastructure and investing in diversification are central to the economic development goals, there is significant scope for “soft infrastructure” reforms to the policy and regulatory infrastructure that is the back bone of any strong and well developed economy. The fiscal reforms undertaken in the region over the last two years, have been very significant, and while they might have detracted from some near term growth dynamics, they are reducing the risk of future fiscal shocks. Reforms to improve the legislative environment governing and protecting businesses are equally important. The new UAE legislation on bankruptcy will form a cornerstone of these legislative reform efforts.

Some of the key benefits of the legislation are:

• Realizing more private sector and entrepreneurial driven growth. The lack of legislation around credit/debtor rights in relations to restructuring or insolvency has limited the growth of that sector, by constraining credit.
• Preserving and preventing value destruction. Allowing businesses in distress, the opportunity to restructure should they have more value as an ongoing business, means businesses have the opportunity to reorganize, and continue contributing to the economy.
• Better risk management and improved credit costs. With the legislation improving risk assessment by allowing for a more robust framework for the enforcement of debt claims, banks will be able to more competitively price credit. 

Time to resolve insolvency (years)

Source: Emirates NBD Research

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