Following the growing trend of companies participating in acquisitions and corporate restructurings, the rigorous procedure resulting from liquidation becomes incumbent to fully understand before a company’s directors and shareholders propose to walk through this route.

Introducing Liquidation

In brief:

When Hanjin Shipping went into administration in late 2016, reportedly over 500,000 containers were stranded or arrested at ports worldwide, including many in the Middle East. Cargo owners who find themselves in such circumstances can be critically affected (particularly if the cargo is temperature sensitive, perishable or urgently required), and they will often look to their cargo insurers. This note highlights a number of issues which are likely to arise when a carrier becomes insolvent during a laden voyage, and claims are made under a marine cargo policy in the UAE.

The much-awaited new bankruptcy law in the United Arab Emirates is a complete legal framework designed to help financially troubled companies to avoid collapse. The new law took effect on December 29 2016 after being decreed by President Sheikh Khalifa. It is part of the global wave of insolvency reform referred to as the 'rescue culture' and has been warmly received by local and international stakeholders. Although it has yet to be tested in practice by the courts, it is a move in the right direction.

The new UAE Bankruptcy Law (Federal Decree Law No. 9 of 2016) came into force as a response to the 2008 global financial crisis. The new law was designed to encourage the development of a “rescue culture”, and replaces Volume 5 of Federal Law No. 18 of 1993 on the Commercial Transactions Law.

A declaration of bankruptcy, according to Article 645 of the Commercial Transactions Law, can be imposed on any trader who ceases to pay some or all of its commercial debts. While a debtor’s cessation of payment is a presumption against him, the trader might not be considered bankrupt if the failure to pay is due to a dispute regarding the debt. In other words, it is important to prove that the debtor ceased to pay a certain commercial debt due to financial distress and credit issues.

Currently in the UAE, laws related to insolvency are unclear. Companies face harsh penalties in a bankruptcy scenario, and individuals can face criminal sanctions and penal sentences. However, a new bankruptcy law drawing from international best practice is expected to come into force in early 2017, in the wake of low oil prices since 2015. With the implementation of the new law, the UAE government seeks to create a robust legal insolvency framework, within which all businesses can operate and parties can be sufficiently protected.

The lack of a modern bankruptcy law, and possible criminal prosecution for debt default, has long been a major issue for entrepreneurs in many parts of the Middle East. That may all be about to change in the UAE as the Cabinet has approved a new draft Bankruptcy Law which aims to encourage foreign investment, boost investor confidence and assist SMEs in managing their business operations. That law is expected to be introduced in early 2017.

The slowdown in the UAE economy has resulted in a corresponding slowdown in loan growth for the UAE banks and some debt delinquencies, especially in the SME market, and that has lead in some cases to a drop in bank profits as a result of increased bad debt provisions. While we understand that contractors who were the first to be affected have largely already made arrangements, that still leaves many bank customers who are feeling the stress of making scheduled loan repayments when their own profitability and cashflows are coming under pressure.

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