Bankruptcy law under scrutiny as UAE woos start-ups

The United Arab Emirates’ bankruptcy legislation needs to be changed for the country to become a more attractive environment for start-ups and small and medium enterprises, according to a number of influential voices in the ecosystem.

Existing legislation in the country means a bounced cheque risks landing the issuer in jail, causing many business owners to flee the country with unpaid debts.

Speaking at the Collaborative Entrepreneurship Summit, Wamda Capital chairman and Aramex co-founder and vice chairman Fadi Ghandour told Gulf Business that changes to the country’s bankruptcy legislation were “essential”.

“Entrepreneurs don’t think about insolvency when they start their business but you certainly don’t want it to be a serious issue and I don’t see why it cannot be fixed,” he said. “It has been fixed in many markets, the laws are there, they have been tried and I think it needs to be done.”

Prior to the event, a report by Department of Economic Development agency Dubai SME said a “robust insolvency and bankruptcy regime for onshore companies” was needed.

Changes to the country’s insolvency law, passed by the UAE cabinet in July 2015, are expected to decriminalise bounced cheques and facilitate corporate bankruptcies but there has been little information about their implementation since last year.

Local media reports in September suggested the long-awaited insolvency law would be implemented in the UAE following the ratification of the consultative Federal National Council and of the Supreme Council, the country’s senior most legislative body.

In the meantime, small businesses owners have continued to flee the country with unpaid debts during the current period of economic uncertainty. UAE Banks Federation chairman Abdul Aziz Al Ghurair told reporters in November that small business owners had fled the country with around Dhs 5bn ($1.4bn) in debt last year. The severity of the problem forced the country’s banks to halt prosecution of bounced cheques for SMEs under a rescue initiative, announced in March.

“I don’t know of any country in MENA that has a proper bankruptcy law but its time to do it, just because that box needs to be ticked. You need to give the entrepreneur the confidence that you are not going to go to jail if you go bankrupt,” Ghandour said.

The United Arab Emirates stands at 31 in the World Bank’s 2015 ease of doing business ranking but drops to 60 and 91 when measured on starting a business and resolving insolvency respectively.

The founder of one of the country’s start-up success stories Careem, said the ecosystem in the country had matured and it was cheaper to start-up a business now than four years ago. However, he said more than just a change in insolvency law would be needed to boost the country’s start-up credentials.

“Failure is a part of the entrepreneurial journey and I don’t know if it’s just about the laws, it’s the overall mind-set and culture around accepting and celebrating failure. I think that will help entrepreneurship in the region,” Mudassir Sheikha said.