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Revised Bankruptcy Law Can Support SMEs With Credit Challenges

Abdulla Alawadi & Associates, one of UAE’s oldest and prestigious law firms stated that impacted organisations with the SME sector in UAE will be in a better position to mitigate the challenges with the recently announced bankruptcy law. However, the firm strongly believes that the debtors and creditors within the SME sector should work closely and mitigate the risks posed by the pandemic. The UAE Cabinet approved amendments to the provisions of the Federal Law by Decree No. (9) of 2016 on Bankruptcy.

“Initially, SMEs in the UAE may not have sufficient knowledge or experience when faced with the prospect of being insolvent. Further, SMEs do not have the luxury of hiring corporate lawyers to provide sound legal and financial advice in case of financial distress. Furthermore, SME owners lack sophisticated financial and legal knowledge when faced with such circumstances. According to the National Law Review, 2020, a cap should be placed on the monetary amount that would trigger insolvency proceedings. Such a cap should be high and revised frequently, depending on the economic conditions of the country in question. For instance, it is unfair that an SME could go bankrupt simply because of a $5000 debt. The demand cap should be reasonably set,” said Abdulla Alawadi, Chairman of the law firm Abdulla Alawadi & Associates.

Close to 10,000 small and medium-sized enterprises (SMEs) and more than 1,500 private sector companies used the economic stimulus, according to UAE Central Bank. However, despite the support, there are several SME’s who have been impacted by this pandemic, and the revised bankruptcy law could provide them with another opportunity to survive.

The key purpose of the amendments is on restructuring businesses rather than dismantling them and selling their assets, which would be detrimental to the economy. The amendments stipulate the addition of new provisions to the law with regards to ‘emergency situations’ that impinge on trade or investment, to enable businesses to overcome credit challenges in times of pandemics, natural and environmental disasters and wars.

Based on the above, a new mechanism has been put in place wherein if SMEs face financial difficulties, such a mechanism provides grace periods whereby creditors are prohibited from filing for bankruptcy. During this grace period, both the debtor SMEs and creditors would have to engage in good faith negotiations to, among other things, defer payments and financial fines. This grace period would provide debtor SMEs the breathing space required to recover.

“In other terms, the new amendments stipulate that the debtor shall be exempted from commencing procedures to declare bankruptcy. Should the debtor file an application that would be approved by the competent court, he may reach a settlement with creditors wherein he may request a grace period or negotiate a debt settlement within a period of not more than 12 months,” Bahjat Abou Zeyd, Senior Associate, Corporate, Abdulla Alawadi & Associates.

“While the new amendments to Bankruptcy Law favours debtors by giving them greater flexibility and protection in the event of insolvency, it will be interesting to see how the Law is implemented in practice and whether debtors make use of its provisions. Nevertheless, the introduction of an insolvency regime which offers protection and encourages businesses to survive what would otherwise have been a bankruptcy situation is welcome and is a milestone development in the UAE’s business law landscape,” added Bahjat.

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