Bankruptcy invites Dh1m fine, jail in UAE

Jasmine Al Kuttab /Abu Dhabi
Filed on September 7, 2016 | Last updated on September 7, 2016 at 01.08 am

Ministry of Finance reviews federal bankruptcy law approved by cabinet

Those who scheme to declare bankruptcy to dodge their debts face a five-year jail sentence and a heavy fine of up to one million dirhams. The punishment was discussed by the ministry of finance, which reviewed the much-anticipated final draft law on bankruptcy in Abu Dhabi on Tuesday.

Minister of State for Financial Affairs Obaid bin Humaid Al Tayer reviewed the draft law, which also aims to strengthen and protect the UAE's entrepreneurs.

The bankruptcy law has provisioned a new regulatory body, the Committee of Financial Restructuring. The UAE Cabinet will decide on the number of members and entities that will represent the committee, and will administer the committee's law and its procedures.

The committee is in charge of overseeing the procedures of financial restructuring outside the scope of the court, appointing experts in the field of financial restructuring and establishing an electronic record of individuals against whom a bankruptcy ruling has been issued.

The committee is also responsible for organising and sponsoring initiatives that raise awareness among the public on the objectives of the law, submitting periodical reports on achievements, suggesting amendments to any provision of the law and determining any fees.

Al Tayer highlighted that the ministry sought to implement a law that is based on modern legislative and economic principles, while taking into consideration global developments and changes taking place in the economic and business sectors.

These efforts have led to implementing the bankruptcy law, and distinguishing it from other laws on a regional level, as well as in developed countries.

The law was set to match various bankruptcy cases, determine all legal tools to restructure a debtor's business in accordance with specific terms and conditions as well as a legislative framework.

Al Tayer said it is vital for mature economies to implement a bankruptcy law, which helps strengthen the overall status of the country's economy.

"The bankruptcy law is considered as one of the most important pillars for the local economy, as it provides protection for all parties, in addition to its pivotal role in attracting capital, in a safe and attractive investment environment and providing a protection legislation and legal acts."

Avoiding bankruptcy cases and liquidation of the debtors' funds are major parts of the law. The law also works on identifying a comprehensive financial restructuring outside the scope of the court, composition procedures and the possibility to get new loans under terms set by the law.

The law provides for a jail term of up to five years and a fine of up to one million dirhams for those who wish to dodge paying their debts by declaring bankruptcy.

Credit levels, as well as financial guarantee within its legislative priority, will also be raised, in order to strengthen investor's confidence and boost the economy, by enabling the financially distressed businesses to restructure.

Al Tayer highlighted that the law will also encourage entrepreneurs that are looking out for secure investment, preserving their rights, as well as strengthening their trust in the legal infrastructure.

The law will be implemented on businesses that were created under commercial company laws, those not established under the commercial law, semi or fully owned businesses by both federal and local government entities.

Moreover, the law will also be implemented on companies that were established in free zones, and which do not have provisions to regulate composition procedures or restructuring bankruptcy according to the Federal law No. 8 of 2004 concerning financial free zones, any trader and licensed civil entity.

Al Tayer said the law will help to support the strategic plans that are adopted by the nation, to strengthen the financial, economic, as well as the legislative structure.

"The law will also raise the UAE's competitiveness levels in international reports, which will support the sustainable economic growth and enhance the national economy, which in return support the sustainable economic growth and promote the national economy on a global level," added the minister of state for financial affairs.

How the law will help strengthen the economy

Dr Nawazish Mirza, director industry interface projects and associate professor of finance SP Jain School of Global Management, Dubai, highlighted that the bankruptcy law is a paradigm shift to boost economic landscape.

"The enactment of bankruptcy law in UAE is a landmark move to provide an appropriate exit strategy to the financially distressed borrowers. Proper bankruptcy procedures are vital control mechanism that is aimed at improving economic efficiency through systematic reallocation of troubled assets."

He pointed out that UAE's economy has recently experienced an exponential growth of small to medium enterprises on account of liberal bank financing.

On the other hand, he noted that certain small businesses might be affected, due to the dynamic environment.

"The presence of a legal regime will ensure that while businesses may continue to default, restructuring or liquidation can be done in an organised manner to minimise drag on creditors."

Dr Mirza added that the move could ease pressure on the loan portfolios of SME's, and thus reducing credit cost.

"At present, more than 90 per cent of UAE corporate sector is comprised of small and medium scale businesses."

"However, only one third of documented SMEs have access to banking credit with nominal contribution towards gross lending portfolio. With new laws in place, banks' willingness to lend to SME sector will increase offering them to diversify their loan exposure."

He thus noted that companies would be encouraged to reinvest, which will limit expatriation of profits.

"An increased possibility of bank financing will continue to support entrepreneurial ecosystem. All of this will boost business confidence resulting in lowering of investment barriers and ultimately contributing towards increase economic efficiency."

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