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Reorganise and Reform
The COVID-19 pandemic is expected to put to test the insolvency and restructuring reforms that are being implemented across the six-nation bloc of GCC countries. Bankruptcy and insolvency laws seek to stimulate economies by allowing individuals and corporates in financial distress to reorganise their financial affairs and repay their debts.
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The lack of modern bankruptcy legislation in the GCC region created difficulties for cash-strapped companies seeking to restructure debt with creditors since the 2008 global financial crisis and the oil price crash in 2014. However, the structural reforms that are being implemented across the region, including modern bankruptcy legislation, have boosted the oil-rich nations’ efforts to make their economies more enticing to investors.
Though GCC countries introduced billions of dollars in stimulus measures to mitigate the economic impact of coronavirus last year, governments also made changes to insolvency regimes to provide more sustainable options for companies that needed financial restructuring. According to the World Bank, bankruptcy costs play a major role, during both crises and recoveries.
Saudi Arabia’s bankruptcy law faced its major test in resolving the kingdom’s longest-running and largest debt dispute involving Ahmad Hamad Algosaibi & Brothers Co.’s (AHAB). Resolving insolvency was an area of improvement for Saudi Arabia, which saw the Gulf state climbing 30 places to 62nd in the World Bank Doing Business 2020 report.
GCC bankruptcy regimes
UAE
The UAE broadened the scope of the 2016 bankruptcy law in November 2020 to protect individuals and businesses facing insolvency due to “emergency situations”—a category that covers the COVID-19 pandemic and extends to include natural as well as manmade disasters, including wars.
PwC said that the UAE’s bankruptcy law contributes to raising the level of credit and financial security in the country by enhancing investor confidence. The
new insolvency regime stipulates that a debtor is exempted from immediately launching bankruptcy proceedings while they try to settle with creditors, provided they can prove that such an emergency has damaged their operations.
“The real test of the UAE’s insolvency regime will be whether it succeeds in triggering a culture shift, away from the previous mindset in which bankruptcy was regarded as synonymous with going out of business,” said PwC.
It is worth noting that it’s not only the UAE federal insolvency laws that have been revamped to assist businesses and individuals in financial distress to rehabilitate, but economic free zones including the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market recently amended their bankruptcy regimes to offer companies within their jurisdictions more options.
DIFC’s insolvency law, which was enacted by Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE, and Ruler of Dubai and came into effect in August 2019, enhances the rules governing winding-up procedures; and incorporates the UNCITRAL Model Law on cross border insolvency proceedings with certain modifications for application in the centre.
The regime also provides for a new administration process where there is evidence of mismanagement or misconduct. The UAE federal government introduced the bankruptcy and financial restructuring law to support the nation’s legislative structure, protects its investors as well as strengthen its position in various global competitiveness indices to boost foreign direct investment (FDI).
UAE’s high-profile insolvency involving NMC Healthcare and around 25 creditors utilized ADGM insolvency laws allowing the hospital operator to restructure its debt of more than $4 billion and 34 group companies to exit administration.
The International Monetary Fund (IMF) said that the UAE’s insolvency law contributes to raising the level of credit and financial security in the country by enhancing investor confidence as well as stimulating the nation’s economy by allowing people in financial difficulty to reorganise their financial affairs and repay their debts.
Saudi Arabia
Saudi Arabia’s bankruptcy law, which came into force in 2018, has been instrumental in putting a formal end to one of the Gulf state’s long-running debt saga. The Dammam commercial court earlier in October 2021 issued the final ratification order for AHAB restructuring, allowing the family-owned business to end the 12-year debt dispute.
Under the settlement deal, creditors of AHAB including global banks such as BNP Paribas and Citigroup are set to see some of their loans be at least partially repaid as the Saudi conglomerate faces debt claims totalling $7.3 billion (SAR 27.5 billion). The settlement assets include over $213 million (SAR 800 million) in cash, a portfolio of publicly traded shares worth about $987 million (SAR 3.7 billion) and real estate assets in Saudi Arabia.
AHAB and Saad Group have been locked in legal battles and negotiations with creditors since the duo defaulted on around $22 billion in combined debt in 2009. Saad Group is also going through the bankruptcy process in Saudi Arabia.
Al Tamimi & Co., a UAE-based law firm, said Saudi Arabia’s insolvency law contains many of the features of a modern western-styled bankruptcy regime reflecting the extensive benchmarking process, which occurred before it was drafted as part of its development.
Oman
Oman’s Ministry of Commerce and Industry (MoCI) unveiled the Gulf state’s bankruptcy and insolvency regime in 2019 and it came into effect in July 2020. The introduction of bankruptcy law in the Sultanate would help companies to get
out of the financial turmoil after paying debts and reconciling with creditors as per a restructuring plan.
PwC said that prior to the introduction of bankruptcy law, the laws and regulations on bankruptcies in Oman were fragmented and only partially addressed in existing laws such as commercial law. However, the new regime introduced the concept of a “Restructuring Plan” and restructuring procedures to help businesses overcome the debt stage, reach a compromise with debtors and avoid bankruptcy.
– The IMF
MoCI’s legal department said that a debtor who would have stopped paying their debts can apply to the Audit and Control of Commercial Establishments Department in the country to request restructuring on condition that the debtor continues operating during the two years preceding the filing of the application and that no final judgement has been issued against him to declare bankruptcy.
Oman’s insolvency law also gives inheritors of the debtor the right to apply the same request one year from the date of the debtor death, provided that the company is not in the process of liquidation.
The regime stipulates that the debtor continues to manage his funds during the implementation phase of the restructuring plan and remains responsible for any obligations or contracts arising before or after the date of the adoption of the restructuring plan.
The Sultanate’s bankruptcy law also grants every trader the right to file for bankruptcy, in case they stop paying their commercial debts following the disruption of business activities. “With the bankruptcy law, Oman now has in place a comprehensive bankruptcy regime which is generally aligned with international standards and practices,” said PwC.
Kuwait
The absence of insolvency and bankruptcy protection has been cited as a significant deterrent to foreign investment in most Gulf region countries at a time they’re seeking to diversify their economies away from reliance on oil revenues. Kuwait’s parliament passed a long-awaited insolvency law in September 2020 which is expected to boost the country’s investment and commerce appeal while increasing protection for distressed businesses.
Under the Gulf state’s previous regime, failure to make debt repayments meant automatic bankruptcy and the defaulter faced penalties, including imprisonment, deprivation of political rights and travel bans. However, the new law does not treat failure to pay debt as a criminal offence, rather it allows bankruptcy to be avoided either by a settlement with creditors or a restructuring plan.
Kuwait’s new bankruptcy regime seeks to rehabilitate debt-stricken businesses and save them from default rather than expedite liquidation. The law led to the establishment of a specialised bankruptcy court to speed up cases. It also gives special protection to small and medium enterprises and in some cases waives part of their debt.
Kuwait’s new bankruptcy law is a major step forward and it is influenced by features of several insolvency law regimes in other jurisdictions, as well as international insolvency law trends, said Al Tamimi & Co.
– Al Tamimi & Co
– PwC
Driving forces
Despite a strong economic recovery in 2017/18 in the GCC region, the global financial crisis in 2008/09 and the plunge in oil prices in mid-2014 had a significant negative impact on regional countries’ GDP and the real estate was not immune. The outbreak of the coronavirus pandemic further battered the property market which led to the collapse of UAE construction giant Arabtec and intensified engineering group Drake & Scull International’s financial woes.
Dubai court accepted Arabtec’s bankruptcy application in June 2021 and appointed trustees to oversee the liquidation proceedings while Drake & Scull International said that it is seeking approval from the company’s 600-plus creditors as it waits for court process and rights issue to the existing shareholders.
Meanwhile, in Saudi Arabia, the CEO of Binladin International Holding Group, the country’s biggest construction firm, told Al Arabiya TV in April 2021 that he expects the company to reach an initial agreement to restructure its debt, which is estimated at $8.8 billion (SAR 33 billion) by the end of June.
