Fitch Ratings-Dubai/London-19 December 2016
The ability of the UAE courts to interpret the federation’s new bankruptcy law and handle bankruptcy proceedings will be key to its effective implementation, Fitch Ratings says.
The law is due to come into effect at the end of this month. It aims to create a clear and predictable framework for court-based bankruptcy proceedings as an alternative to liquidation. We think the new law could benefit banks and corporates, by allowing for going-concern restructuring (see “Fitch: Bankruptcy Law May Benefit UAE Bank SME Lending”).
Existing UAE law defines how a court can declare a company bankrupt, appoint a trustee, realise assets and settle debts. But there has been no legal provision for the rehabilitation of distressed companies through creditor agreement, and the regime is largely untested.
This is because so far debt restructurings have been informal, out-of-court arrangements, partly due to creditor perceptions that local courts lack judicial expertise and that court proceedings will be lengthy and expensive. 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. 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.
We therefore think the potential benefits of the new law will only be fully felt once the courts have established a track record of interpretation and implementation. It may take time to establish whether giving distressed companies the chance to embark on consensual debt restructuring before the start of liquidation proceedings, will increase and speed up recoveries, which could improve the theoretical position of creditors.
But uncertainty whether its practical application by the legal system will be in line with the legal theory means that the new law, in and of itself, does not change our assessment of the UAE as a Group D jurisdiction for the purpose of assigning recovery ratings to debt instruments.
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 judgements, or inconsistency in following due process. Most emerging markets fall into the Group D category, resulting in a soft cap on recovery ratings (which we assign to entities rated ‘B+’ or below) at ‘RR4’.
The law will apply to all companies established under the UAE’s commercial companies’ law. Companies established in the UAE’s free zones are not included because these areas have their own insolvency and bankruptcy laws.
Bashar Al Natoor
Global Head of Islamic Finance
+971 4 424 1242
Fitch Ratings Ltd
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Dubai Media City
Senior Analyst, Fitch Wire
+44 20 3539 1588
Media Relations: Rose Connolly, London, Tel: +44 203 530 1741, Email: [email protected].
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