Risk of prison for company officials in the UAE as more companies trading whilst bankrupt

Problems in Dubai's construction sector have left foreign-owned ventures with unpaid bills running into hundreds of millions of pounds which in turn means that an increasing number are unable to pay their own suppliers.

Following the financial problems suffered by Dubai-based developer Nakheel, the Association of Consulting and Engineering estimates that UK and international consultancy firms working in Dubai are owed around £400m in unpaid fees.

Nick White, Resident Managing Partner of Trowers & Hamlins' Dubai office, says:

"Continuing to trade without having the means to pay off your existing debts can end up being a criminal offence in the UAE."

"Payment delays are inevitably rippling through the supply chain. UK and US executives who come from a background where insolvency is a civil matter perhaps don't realise the potential risks involved with bankruptcy in the region or the short time frames involved," he added. "According to police there are 450 people in Dubai's central jail imprisoned as debtors which highlights how seriously the UAE authorities view bankruptcy."

Trowers & Hamlins says that directors and senior officers of a company operating in the UAE that cannot pay its debts but wants to seek court protection from its creditors must do so within 20 days of failing to meet a deadline for payment. Alternatively, if they intend to file for bankruptcy they must do so within 30 days of failing to meet a deadline for payment. If they fail to meet these deadlines the directors can be found personally liable for unpaid debts if the company ultimately fails.

Explains Nick White, "Whilst we are not aware of westerners facing trial for negligent bankruptcy they can not consider themselves immune. A number of high profile locals and westerners are being pursued for other financial crimes in the UAE and there is always a risk that pressure will grow for a stricter enforcement of the law against all defaulters."

"Directors may take a false sense of security from being in the same boat with a lot of other companies that are not able to pay their invoices but it may be better to seek the protection of the courts rather than just hope that their creditors or the authorities won't want to pursue them," he added.

Creditors could also risk imprisonment

Trowers & Hamlins explains that under UAE law creditors could also face imprisonment if they are found to have made repayment arrangements with a bankrupt company if they are aware this will put other creditors at a disadvantage.

Nick White comments, "Creditors arranging repayments directly with a bankrupt company must ensure they are not damaging the interests of other creditors or they could face serious legal consequences."

Nick White also points out that creditors will also want to ensure that they do not sour their relationships with clients who are withholding payments.

Adds Nick White, "Any legal action brought by a creditor against a client is likely to put the business relationship at risk. If the client avoids or eventually discharges bankruptcy and continues trading those who have been too heavy-handed in pursuing their debts could find that they are off the tender list in the future."

"Whilst company directors and officers are taking a substantial risk if they try to trade through their financial difficulties, creditors may also find it difficult to recover debts through the courts, with the court process being protracted and uncertain," White said.

"The UAE's economy has grown very rapidly in recent years so previous economic downturns would have affected only a small fraction of the number of companies it is impacting this time around. The region's courts and insolvency laws were not designed with this global financial crisis in mind. Delays make litigation an unattractive option." adds White.