For the country’s prosperity, better bankruptcy laws

In England the first laws on bankruptcy were passed in 1542 in the time of King Henry VIII. But even then the concept was not unknown or unheard of in our region. The second chapter of the Quran includes the provision that an insolvent person should be allowed time to settle his debts. 

And in fact, ever since trade was established, it has been common for traders and merchants who have run out of money to flee to foreign countries where their debts could not reach them. In the UAE, we have recently witnessed many instances of a foreign partner or trader running from his creditors to an unknown land without notice, burdening his local partner or sponsor with the liabilities and criminal penalties.

Even in extreme cases there exists significant reluctance to declare bankruptcy though there are 255 distinct provisions in the UAE Federal Commercial Transactions Law No 18 of 1993 that allow individuals and businesses to do so. In addition to these federal laws, DIFC, the region’s largest free trade zone, has its own insolvency laws that are clear, well-drafted and based mainly on the English legal system.

There are many reasons why people avoid declaring bankruptcy but many times it results from a lack of understanding of the legal process or the legal consequences of doing so. But there is also a cultural stigma attached to it. No matter where you are in the world, declaring bankruptcy is not an easy choice. It is unfortunate that many indebted individuals and businesses are not aware what a positive decision it can be and how it can lighten their financial burden.

Most of the Gulf states including the UAE have not yet experienced insolvencies of the kind witnessed in other developed financial centres of the world such as those that have occurred in London and New York. Because of the underdeveloped legal infrastructure, delay in its proceedings and a lack of confidence in the judiciary, the regime remains largely untested. Corporations that have problems with their solvency are encouraged to restructure rather than consider bankruptcy.

Today the UAE requires a distinct insolvency law. The law should provide for the development of a clear plan that allows a debtor, who is unable to pay his creditors, to resolve his debts through the division of his assets among his creditors. This division should be supervised and allow the interests of each creditor to be treated with some measure of equality. Certain insolvency proceedings could allow a debtor to stay in business and use revenues to resolve the debts they owe. An additional purpose of bankruptcy law should be to allow debtors to free themselves of many of the financial obligations they have accumulated after their assets are distributed, even if their debts have not been paid in full.

We need a law that treats people, companies, establishments and partnerships who go bust in a respectable way. This would allow them to take action when they realise that they don’t have enough cash to treat their creditors fairly and honestly. Still, such a law should penalise severely those company directors or partners who behave wrongly, recklessly or dishonestly in their pursuit of bankruptcy and they should be disqualified from conducting business for a limited period of time.

Developing such a law can only be a positive choice. Bankruptcy should be an option for businesses who are seriously out of cash. It is their choice whether they want to use this formal option or not but it is important that this respectable option exists and that it is supported by the system. 

I am of the strong view that this regime must cultivate a “rescue culture” to promote the policy that people and companies should be allowed a chance to reconfigure if their business still has value and can be rescued and reconstructed. As this nation strives to be part of a globalised society and one of the key financial centres in the world, we must commit to modernise our legal system by introducing laws that will improve the business environment. Most importantly, we must invest in our judiciary and legal machinery so it boosts the confidence of investors in our market.

As published in The National,  http://www.thenational.ae/apps/pbcs.dll/article?AID=/20090826/OPINION/708259924/1080