U.A.E. Edges Closer to Law Removing Threat of Debtor Prison

  • Cabinet adopts legislation in bid to attract foreign investors
  • Absence of law blamed for many fleeing U.A.E. in 2008 crisis

The United Arab Emirates’ cabinet adopted the final draft of a bankruptcy law that will help remove the threat of jail time for unpaid debt.

The law “aims to enhance foreign investment and ease the work of commercial companies,” Sheikh Mohammed bin Rashid Al Maktoum, the U.A.E.’s prime minister and Dubai’s ruler, said on Twitter on Sunday. The post included no details on the steps required for the law to go into effect. Federal laws in the U.A.E. usually need presidential approval.

The absence of a bankruptcy law was widely blamed for the flight of thousands of Dubai residents who lost jobs in the 2008 financial crisis. Faced with the possibility of jail time, many said they had no choice but to leave their cars and belongings after the economic slowdown left them unable to repay debts. Post-dated checks are the most common way to pay residential rent in the U.A.E., and the method is used to secure most debts.

“An effective bankruptcy law will help banks by encouraging them to restructure a bad loan without resorting to pursue criminal proceedings to resolve the bad loan,” said Sanyalak Manibhandu, an Abu Dhabi-based analyst at NBAD Securities LLC. “In the absence of a bankruptcy law, banks end up seeking justice in the criminal court, which has led borrowers to skip the country.”

The legislation is expected to be modeled on Chapter 11 proceedings in the U.S., The National newspaper reported last September, citing the Abu Dhabi Council for Economic Development. The U.S. system allows companies to renegotiate the terms of their debts with creditors.

U.A.E. Finance Minister Sheikh Hamdan bin Rashid Al Maktoum said the law offers several options such as “financial reorganization and precautionary settlement,” the state-run WAM news agency reported.

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