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Exclusive: Going bankrupt in the UAE? Blame COVID-19 and seek instant relief

Can’t pay the mounting bills that come with building a business? Are banks increasing the pressure on you to repay your loans? No worries. Blame COVID-19 and all your problems will disappear

The court can now grant debtors a grace period of 12 months Both lenders and debtors are reluctant to file for bankruptcy and a tendency to reach a settlement The UAE has taken a number of measures to ease funding for SMEs

Can’t pay the mounting bills that come with building a business? Are banks increasing the pressure on you to repay your loans?

No worries. Blame COVID-19 and all your problems will disappear and you’ll even get a fresh injection of money to keep bankruptcy at bay and continue operations.

It’s not official yet, but the bankruptcy law amendments are coming so you may want to hang on, that is if you still believe in your business model and are convinced that the coronavirus is the only obstacle standing in the way of making a killing with your company.

In an exclusive interview with Mazen Boustany, Partner and head of regulatory at UAE law firm Baker McKenzie Habib Al Mulla, AMEinfo brings you all details you need to know and much more to keep your business afloat.

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What the proposed law says

In addition to the comprehensive economic support and stimulus program launched by the UAE Central Bank to curb the financial impact of the COVID-19 pandemic, the UAE has introduced radical amendments to the UAE Bankruptcy Law.

Because of circumstances outside of businesses’ control causing economic uncertainty and market disruption, the regulator is offering distressed debtors a new level of leniency.

Under the current UAE Bankruptcy Law, there was a mandatory procedure of directly applying to the courts to declare the debtor’s bankruptcy and thereafter appointing a trustee to take hold of the business, leading to imminent bankruptcy.

Key changes include adding new provisions to the law related to “emergencies” such as pandemics and natural and environmental disasters; new debtor’s rights to delay filing for bankruptcy and to resort to an out-of-court settlement agreement with creditors; and mechanisms to obtain new financing under certain rules and conditions.

The court can now consider the conditions surrounding the debtors’ default(s) and opt to grant them a generous grace period of 12 months to amicably negotiate mutual terms with their creditors.

“It’s a good measure, showing the legislator taking into account the situation. And this follows TESS (Targeted Economic Support Scheme), from the Central Bank, allowing banks to reduce reserve requirements in order for them to give breathing space to their own debtors,” Boustany told AMEinfo.

“Lenders have a vested interest to have debtors who have taken an impairment become bankrolled again, giving companies a chance and time to survive and repay their loans.”    

About 10,000 SMEs and more than 1,500 private sector companies used the now 256 billion Dirham ($70bn) Targeted Economic Support Scheme (TESS) which ends on December 31, and from which banks and financial institutions availed nearly $13.5 bn worth of interest-free loans until the end of July.

Read: Top industries MENA entrepreneurs can venture into post-pandemic

Do companies need to prove COVID-19 was the culprit?

The proof is in the social distancing, lockdowns and the trickling economic effect felt by everyone when payments are delayed, and money is being hoarded in times of crisis, according to Boustany.

But is equating COVID-19 to an Act of God (Force Majeure), a good thing?

“Force majeure” is by definition unpredictable and the pandemic, for all intended purposes, was unpredictable.   

In a recent ruling dated 12 March 2020, the French Colmar Court of Appeal has qualified the COVID-19 epidemic as a Force Majeure.

Are bankruptcies on the rise in the UAE?

In a healthy economy, one sees companies go bust, and in the UAE, where thousands of companies operate, one expects thousands or tens of thousands to file for bankruptcy. 

“We are not seeing the number of cases we should be seeing. The UAE Ministry of Finance says there are dozens of filings and is not unhappy with these numbers,” Boustany said. 

There are reasons for this, besides avoiding the stigma of failure associated with going under. 

“There is a reluctance on the part of both lenders and debtors to file for bankruptcy and a tendency to reach a settlement,” Boustany began. 

“Despite the legislator’s efforts to simplify and clarify the law, it’s still a procedurally complex law and potentially time-consuming affair,” he further explained.

But there is more.

“Also, not having specialized courts or specialized judges in bankruptcy, and not having a similar process like Chapter 11 in the US, where a trader could file for bankruptcy one day and establish another company the next. Here, those who file have a rehabilitation period of 5 years before starting a new trade,” Boustany clarified. 

So who’s filing for bankruptcy?

According to Boustany, recessionary times are the reasons behind the filings, where bad economic environments before the pandemic were exacerbated by COVID-19.

Filings are happening across the board, and he’s seen his share of contracting companies do it. 

“We’ve also seen large corporations like NMC Healthcare, but this case is now filed for administration under the Abu Dhabi Global Market (ADGM) free zone because the UAE law does not provision for companies to file as a group, so each entity under the group has to file separately,” said Boustany.

The administration process is similar to the US’s Chapter 11 filing.

Also under UAE bankruptcy law, very large corporates have regulated and unregulated businesses that file with the Financial Reorganization Committee (FRC) who looks into reaching settlements with these companies’ creditors. 

Unregulated companies are those not regulated but the Central Bank, the Emirates Securities and Commodities Authority (ESCA), the Insurance Authority, the TRA, and so on. Examples include contracting and trading companies, small shops like garment outlets, and others.

What else is the UAE doing to ease funding during these times?

The UAE has taken a number of measures to ease funding for SMEs and amongst these initiatives are the Law on the pledge of movables that created the Emirates Movable Collateral Registry (EMCR) and the Financial Leasing Law with those measures intended to facilitate lending to SMEs without overburdening the latter with real-estate mortgages or personal guarantees while at the same time securing lenders so that they open up their purse more readily.

The UAE is also taking measures to attract expats, be it with the new freelance law, retirement visas, and recent amendments to the personal status law, and this to balance out an expat exodus, while also increasing spending and bringing much-needed liquidity to the market.  

What’s missing in the new law?

“There is total silence in relation to cross border insolvency. Under the law of 1993, there was a clear provision on that, but this section was removed under the new law and was not replaced,” noted Boustany. 

The provision then was that any business that had a presence or an entity in the UAE could be placed in insolvency even if the parent company was not in insolvency in its home jurisdiction.   

“We are waiting to see an update on that one,” Boustany ended.