By Yaser Dajani, Managing Director and Quantuma’s Middle East lead
Insolvency, bankruptcy and restructuring laws continue to evolve across the Middle East. But there are still questions over whether these reforms are meeting their key aims of improved creditor protection and the survival of viable businesses in what remains a complex, varied and often under-utilized set of legal frameworks.
Drawing on the discussions from a Quantuma-hosted roundtable for lawyers and insolvency practitioners in London, Yaser Dajani looks at the thinking behind these developments and how to unlock the potential.
Insolvency, bankruptcy and restructuring laws continue to evolve across the Middle East. But there are still questions over whether these reforms are meeting their key aims of improved creditor protection and the survival of viable businesses in what remains a complex, varied and often under-utilized set of legal frameworks.
Drawing on the discussions from a Quantuma-hosted roundtable for lawyers and insolvency practitioners in London, Yaser Dajani looks at the thinking behind these developments and how to unlock the potential.
In the past, businesses running into trouble would have settled the issues privately and informally. Many still do. There was also an implicit credit guarantee within government-related businesses, though this can no longer be assumed.
The wake-up call of the corporate collapses and debt defaults that followed the global financial crisis changed all that, setting off a wave of insolvency reform across the Gulf and wider Middle East.
Legislators want to bolster international investor confidence by strengthening transparency, stepping up regulatory oversight and bringing insolvency procedures into line with other parts of the world (e.g., US Chapter 11 or UK administration).
From the business and debtor side, the key aims include opening up more options for business restructuring and survival, rather than letting rescuable enterprises go to the wall. The reforms have also provided an opportunity to move debt from the criminal to the civil realm – failing to honor a cheque had been a criminal offence in many states, for example.
Building on international best practice
The United Arab Emirates (UAE) has led the way, both in its onshore reforms and additional resolution options opened up within the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM).
Onshore provisions include allowing solvent debtors to initiate business restructuring through a court-approved preventative composition. This proactive move gives the business time to restructure its debts and seek a voluntary settlement with creditors to help avoid the risk of collapse.
The DIFC has gone further by introducing debtor rehabilitation procedures akin to Chapter 11 and recognizing foreign insolvency proceedings in its courts. These openings have made the DIFC courts the favored route for international creditors.
Unintended consequences
The concern is that frequent changes and updates in UAE legislation are creating needless confusion and the risk of unintended consequences. For example, Law 21 on bankruptcy requires that court-appointed experts must have specific qualifications, which has limited the pool of available practitioners, and created delays and bottlenecks.
Another new bankruptcy law is imminent, though what this entails, and the resulting impact, are uncertain. Some legal experts at the roundtable expressed fears that the outcome could be one step forward and one back.
Regional push
Elsewhere in the region, Saudi Arabia (Bankruptcy Law in 2018 pursuant to Royal Decree Number M/50), Oman (2020 Bankruptcy Law), Bahrain (Law No 22 of 2018 on promulgating the Reorganization and Bankruptcy Law) and Kuwait (Law No 71 of 2020 regulating insolvency law) have all introduced new and more formalized bankruptcy frameworks in the past five years.
The direction of travel is broadly similar to the UAE. The Saudi and Bahraini frameworks include preventative settlements along the lines of the UAE’s preventative composition, for example. But important differences remain in both legislation and application, underlining the need for local expertise.
The outlier is Qatar, which hasn’t updated its insolvency framework since the enactment of the Commercial Law No 27 of 2006 and Qatar Financial Center Insolvency Regulations 2005. However, new legislation is planned for 2024.
Falling short
Are these regional reforms delivering? The general view within the roundtable was that the restructuring options are not being used as widely or as effectively as many would have hoped – we look at the outcomes of a series of recent landmark cases in a companion article in this series. Many potential applicants may also be put off by the perceived cost, complexity and timescales of the court proceedings and subsequent difficulties with enforcement in the face of widespread concealment and dissipation.
Set up to succeed
The good news is that with the right expertise, approach, and support, it is possible to secure a favorable outcome.
The key is assembling the right team, including industry restructuring expertise, specialist legal advice and licensed insolvency practitioners and liquidators on the ground as appropriate.
In addition to action on the ground, it also pays to explore the growing range of international options opened up by mutual recognition. In a recent example within our own work, we supported the provisional liquidation of a Cayman Islands-based fund on behalf of its shareholder, a Middle Eastern sovereign wealth fund.
In relation to fees, these can be built into the settlement. This ensures that corporations can focus their capital resources on the business itself, maximizing profits for shareholders and promoting growth, rather than spending time in unfamiliar legal territory, or mired in potentially costly and lengthy civil proceedings. The outcome is significant capital optimization.
Let’s talk
If you would like to discuss any of the issues raised in this article or how we can support debt recovery, please feel free to get in touch.
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Yaser Dajani |
