UAE Court System Still Needs to Develop Interpretations, Precedents for New Bankruptcy Law, Fitch Says

As the United Arab Emirates’ (UAE) new bankruptcy law is due to become effective at the end of the year, Fitch Ratings analysts believe courts’ interpretation of the law and how to handle bankruptcy proceedings will be key to its success.

The new law will apply to all companies established under the UAE’s commercial companies’ law, while companies established in the UAE’s free zones are not included because they have their own insolvency and bankruptcy laws.

“Existing UAE law defines how a court can declare a company bankrupt, appoint a trustee, realize assets and settle debts,” noted Bashar Al Natoor, global head of Islamic finance, and Mark Brown, senior analyst, both of the ratings firm. “But there has been no legal provision for the rehabilitation of distressed companies through creditor agreement, and the regime is largely untested.”

To date, debt restructurings in the UAE have been informal arrangements outside of the court system, in part because creditors see local courts as lacking the expertise to quickly and efficiently deal with these matters, analysts said. “When economically significant entities have experienced financial difficulties, the government has intervened, for example by introducing bespoke legislation when Dubai World rescheduled debt repayments in 2009,” Fitch said. “This has left some issues, such as whether courts can annul certain transactions by a borrower in the run-up to a declaration of bankruptcy, unclear.”

Moreover, it could take time for UAE courts to interpret and implement the new bankruptcy law—it is part of the reason why Fitch has yet to change its assessment of the UAE as a Group D jurisdiction in terms of assigning recovery ratings to debt instruments, the firm said. “Group D countries are generally jurisdictions where either the legal regime is less supportive of creditor rights, or the pursuit of a claim is highly likely to be hindered, for example by delays in bringing a claim to court, unpredictable judgments, or inconsistency in following due process.”

– Nicholas Stern, editorial associate

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