The Introduction of the United Arab Emirates Solvency Law

By Haider Ali

Posted: 18th July 2012 10:49

Despite the vast success many Arab economies had prior to the economic recession that began in 2008, the concept of solvency is relatively new to the region as the law becomes rewritten into constitutions such as states from the United Arab Emirates to Oman.  It is definitely going to have ramifications, both good and bad for the United Arab Emirates, as we bear witness to a new phenomenon taking a grip in the Arabian Peninsula after the last recession.
 
To those unfamiliar with what solvency, in laymen term it’s the ability of a business to have enough assets to cover its liabilities.  Basically the total number of liabilities should be covered via its assets at a ratio of two to one in order to provide shareholders and governments of its ability to make a profit.
 
More pertinent is its specific role within the context of an Arab state like the United Arab Emirates.  The “new” solvency law was created in order to allow companies in financial difficulty to manoeuvre themselves out of their hardship via alternative means.  One was through a negotiated settlement with creditors and the other through a more administered route.  It is also a great improvement on the previous insolvency law that the United Arab Emirates had.  Now instead of companies experiencing protracted periods of time with their hands tied in a distressed state, cases can be seen to and solved at a much more rapid rate.
 
The key reason behind it however was to allow companies experiencing financial hardship to come to a place where they could continue to conduct business and make a profit, which would benefit more people or be wound up and effectively liquidated immediately.  Should a company find itself in financial tumult without the solvency law to turn to for a number of months, the capital tied up within the company cannot be circulated to the local economy.  The company itself would be forced to operate making further losses, making it far harder to pay off debt owed to creditors.  Stuck in a state of limbo the company will eventually begin to decay, without the alternatives of liquidating and growth being feasible.
 
It also means that restructuring can commence through an assortment of creditors instead of having to deal with just one.  One cannot denigrate the importance of time that the new solvency law also provides for a debtor.  Should the company of a debtor go through financial peril, the solvency law allows him to obtain new financing that can be focused on paying off existing debts, thus allowing him or her to persist with their company allowing them to get out of trouble.
 
Remnants of the United Arab Emirates markets may critique the new law because it supposedly kills off competition and could give the United Arab Emirate government carte blanche to intervene at will with failing companies.  Though, the detractors are small in number, protagonists feel this could usher in a new dawn of businesses with far more diverse investment than ever witnessed than before.
 
Even with the current insolvency law many people had grave reservations about creating companies in the United Arab Emirates and investing because there were no sufficient safeguards.  The resolution to companies’ fates experiencing difficulty had an impact on the thinking of banks and creditors pertaining to important aspects of contingency.  The new insolvency law takes away the negative atmosphere that bankers and creditors alike would find themselves in when confronted with a failing company and allows them to play a far more proactive role in the objective of helping to create a strong United Arab Emirate economy.
 
The massive growth that Arab states in general experienced introduced businesses to the international debt market.  Whether arrogance played a part one cannot be certain, but with no brawny solvency law in place, these businesses were exposed to macroeconomic trends.  Creditors in the United Arab Emirates did not even contemplate business growth coming to an abrupt halt and a complete standstill, as seen during the 2008 recession.  They envisaged growth, debts being paid on time and the boom maintaining itself, well more fool them.
 
Of course a humbling moment was witnessed when Dubai found itself in great peril to the shock of the financial world.  Unfinished building projects, upon which Dubai had built a stupendous reputation around the world, unpaid debt and rising local unemployment, left many flabbergasted.  This ultimately left bankers stumped and the confidence of companies wanting to invest in a potential gold mine in tatters.  It took a bail out from the United Arab Emirates, clearly a beacon of light in the region, to quell the decomposition of Dubai’s economy.
 
Many feel that the tightened up insolvency law will help spur on businesses in the United Arab Emirates.  The thought of contingencies being in place is sure to attract external investment, putting the UAE on the path to economic success, bringing with it its smaller and bigger Arab neighbours.


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