JANUARY 2013
Legal Focus
• to provide new and quicker reorganization and rehabilitation processes, which will be implemented and overseen not by the “slow-moving” courts but by an independent commission
• and ultimately, to be more “debtor friendly”
As to the new processes for “financial reorganisation” (for companies in difficulty but not insolvent) and “protective composition” (allowing debtors to reach a compromise avoiding formal insolvency), they have clear parallels and similarities with a number of Western concepts such as administration in the UK and Europe and Chapter 11 of the US Bankruptcy Code.
On the one hand, it seems sensible that companies which have genuinely viable and inherently good quality businesses should not be driven into insolvency, by what may be relatively short term financial difficulties. Indeed, many of the companies in the UAE that did default or came near to defaulting had good quality assets in their portfolios. However, in many instances (for example with real estate or private equity holdings) those assets were either illiquid or simply not producing sufficient income in a bear market.
Fire sales of those assets – whether agreed or on enforcement and even if possible - would likely have achieved very poor levels of realisation, thus ultimately producing a result favouring neither the debtor seller nor its creditors.
A managed process to allow breathing space to such debtors and in which their obligations are either temporarily suspended (e.g. through a statutory moratorium) and/or deferred or rescheduled, will hopefully allow such businesses to get back on an even and financially healthy footing and mean they can eventually repay all (or substantially all) of their borrowings.
However and particularly from the banks’ perspective, care needs to be taken not to allow the pendulum to swing too far in the favour of debtors.
Management must take ultimate responsibility for its stewardship of a business. The US, in particular has seen companies bounce in and out of Chapter 11, sometimes on multiple occasions.
A sensible balance must be drawn between saving “good” businesses that may be affected by macro-economic factors outside stakeholders’ control and providing banks and other institutions that provide credit with proper and effective recourse, in default situations.
That means not only having clear and workable insolvency laws and regulations but also having
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How do you see this practice area progressing over the next 3-5 years?
In some respects, we are at ground zero, as the new laws have yet even to come into force, let alone be applied, in practice, to “real” situations.
Whilst one might actually think that the new law will not need to be applied too frequently over the coming years, such confidence is probably likely to be mis-placed.
For whilst Dubai itself appears to be witnessing a modest, gradual and, dare one say, more prudently managed return to happier and somewhat more stable financial times, the broader, global and macro-economic climate is generally depressed and the outlook seems to be decidedly shaky, not least in the Eurozone and the UK and with the US grappling with the “fiscal cliff”.
Further major, global shocks cannot be discounted. Indeed, they seem depressingly likely.
Dubai and the UAE, as we have seen, are not immune to such downturns and each will bring its new crop of companies in distress and in decline.
Hence, the chances are that the lawyers’ work is not yet done when it comes to interpreting, applying and advising clients on the insolvency laws of the UAE! LM
contact details:
a system of civil and commercial law generally which is transparent and comprehensive and in particular, a robust system within which collateral can be obtained, registered or otherwise perfected and when necessary, effectively enforced.
67
neale downes Partner
tel: +971 (0) 4 309 1002 Fax: +971 (0) 4 358 7732
Email:
n.downes@
taylorwessing.com Website:
www.taylorwessing.com
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