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The “Survey on Insolvency Systems in the Middle East and North Africa,” which took 18 months to complete, found that the region’s laws were amongst the least developed in the world, specifically with respect to rescuing distressed businesses or reorganising troubled companies. The survey was conducted by Dubai-based Hawkamah Institute for Corporate Governance, the World Bank, the Organisation for Economic Cooperation and Development, or OECD, and INSOL International.
The report says that sound insolvency laws and related procedural framework and administrative setup are needed to help boost investment and credit flows, protect rights of all stakeholders, strengthen financial markets, and enable economies to smoothly adjust to external and domestic shocks.
“Noting that legal and regulatory reform has made it easier to start new businesses in the region, the survey seeks to focus the attention of regional policymakers on how current country laws on insolvency compare with international best practice with a view to fostering growth and economic development across the region, and safeguarding the gains made from the negative impact of market disruptions and crises,” said a statement issued by Hawkamah to announce the findings of the survey.
The 11 jurisdictions studied in the report are: Dubai International Financial Centre, Egypt, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, the United Arab Emirates and Yemen. The World Bank Doing Business report says that in the jurisdictions studied, it takes on average 3.5 years to close an insolvent business, compared with 1.7 years in OECD countries; the cost of such actions consumes 14.1 per cent of a company’s value, compared with 8.4 per cent in the OECD; and in MENA, creditors recover just under 30 per cent of their debts, compared with nearly 70 per cent in OECD countries.
Dr. Nasser Saidi, Chief Economist of the DIFC Authority and Executive Director of Hawkamah, noted that the chapter on the DIFC jurisdiction in the survey suggests that the insolvency laws in operation within the Dubai International Financial Centre are amongst the most developed in the region, offering cost-effective, efficient and timely mechanisms for dealing with insolvency and creditor/debtor rights issues.
Not only did DIFC score the highest among regional jurisdictions, it also ranked above the OECD average. The report noted that the centre’s insolvency system is regarded as “cost-effective, efficient and timely, and balances the interests of debtor and creditors”. Dr Saidi commented; “The strong showing of the DIFC as a common law” jurisdiction reflects the world-class quality of its legal and regulatory environment and serves as an example for other jurisdictions in the region.”
“In our region, an appropriate insolvency regime also needs to strengthen the capacity of entrepreneurs and the private sector to be able to take risks, innovate, reduce the stigma of bankruptcy and insolvency, and to make it possible for debtors to restart businesses with a clean slate after a failure,” Dr Saidi added. According to Dr Saidi, who also wrote a lead article to introduce the survey, efficient and effectively enforced insolvency systems provide appropriate incentives for debtors, creditors and insolvency trustees to reorganise potentially viable firms, thereby preventing their premature liquidation. This retains economic value in the economy and jobs for workers, which otherwise would be lost. He suggested that, MENA countries would likely benefit from increased foreign investment and enhanced credit access — an ingredient of growth in all markets — since such decisions often favour markets with effective legal systems to support recovery and enable creditors to act swiftly to mitigate losses when a debtor defaults. To drive the reform of insolvency and creditor/debtor regimes, Hawkamah and its international partners have agreed to establish a regional forum. Elaborating on the MENA insolvency forum, Dr Grant Kirkpatrick, Senior Economist at the OECD, said; “The current global economic environment and its impact on the Middle East and North Africa region make the creation of such a forum extremely timely and appropriate.”
The forum will follow the successful model of the OECD Forum on Asian Insolvency Reform, which was founded in 2001 in partnership with the Asia-Pacific Economic Cooperation and other actors, he said.
A call to action
MENA needs to build institutions that would support the development of sound insolvency frameworks. These include institutions and systems that are part of the insolvency framework:
- look at the Liquidation and Rescue process, assess the effectiveness of the process and provide clarity on the various stages of the process while ensuring that an appropriate support infrastructure is in place—be it formal or informal. Time and certainty are of the essence
- look at voting rights and requirements addressing the extent of creditor involvement in the process
- consider lowering financial reporting requirements, which affect the capacity of SMEs to access credit and to benefit from the insolvency process
Main findings of the survey:
- insolvency systems in MENA are generally inconsistent with international best practice
- the gulf States have stronger insolvency laws, but need to improve creditor information systems and dealing with cross-border issues
- both Gulf and Non-Gulf States have room for improvement compared to international standards and practice, in particular in the area of reorganisation of companies
-based on Common Law and the advantage of “purpose-built,” the DIFC insolvency framework is the most robust and highest rated in the region
- strengthening and modernising insolvency laws is crucial to mitigating the risks and effects of economic and financial crises on Middle East and North African countries
MENA Needs Financial Information Infrastructure Institutions
- Developing Central Credit Reporting Organisations to provide information on bank and non-bank credit (including supplier credit). These CCROs can collect, organise and analyze valuable material information in an efficient manner;
- Promoting the establishment of “Companies House” in the countries of the region, allowing the electronic registration of companies and filing of documents and reports
- Developing local Credit Rating Agencies, as they can provide a very valuable service to conduct risk assessments and credit ratings for companies and governments. This is also particularly important for capital market development as they provide credit benchmarks for local markets
- Developing and modernise Registries of Security, for both immovable and moveable collateral
- Developing Special Claim Financial Courts that would be able to facilitate adjudication of highly technical financial issues, particularly those related to insolvency law
- Establishing or providing sufficient resources for the administration of liquidation cases, and the development of trained and experienced private sector practitioners to take prominent roles in various aspects of reorganisation of he affected businesses
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