Since the global financial crisis, the Middle East restructuring and insolvency market has come a long way. Having sought to reduce their economies' dependency on oil revenues and become more attractive to international investors, the United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA) in particular have significantly developed the restructuring and insolvency toolbox available to creditors and debtors alike.
The distress brought about by the COVID-19 pandemic, and the connected rise in non-performing loans, has served as a timely test of the changes in these jurisdictions. Below we summarise some of the key points from the recent 'Hot topics' seminar hosted by our global restructuring and insolvency team looking at some of these changes, as well as the challenges that remain.
Over the last five years, the most significant changes in the UAE (onshore) and KSA include the introduction of legislation creating the framework for formal insolvency processes. The processes are very similar in nature across the two jurisdictions and can broadly be labelled under three different categories:
- debtor-led processes that can be adopted to compromise claims with creditors prior to insolvency – these are known as 'preventative composition' in the UAE and 'preventative settlement' in KSA;
- post-insolvency rehabilitation processes – these are known as 'restructuring in bankruptcy' in the UAE and 'financial reorganisation' in the KSA and can be initiated by debtors, creditors or regulatory authorities where the underlying business has entered insolvency; and
In both the UAE and KSA, these processes are court supervised and the laws are heavily procedural in nature. Nevertheless, at the time of their introduction, they marked a significant step forward in developing an environment to support businesses that are experiencing financial (di)stress but may well be viable with the right level of support and protection.
The federal government of the UAE enacted further changes to the bankruptcy law in November 2020 to introduce specific protections in ‘emergency situations’, like the COVID-19 pandemic. If a debtor can prove that such an emergency has damaged its operations or investments, the debtor is now exempt from immediately commencing bankruptcy proceedings, giving them much needed breathing space while they try to agree a consensual restructuring or settlement terms with creditors.
Providing a nimble, robust framework for restructuring though is only part of the equation. There are a number of other challenges that must be overcome:
- Restructuring is not a dirty word – the lack of a rescue culture has meant that historically bankruptcy meant going out of business and potential criminal liability. It will take time for this stigma to shift.
- A specialised court system would be transformative – neither the UAE nor KSA currently have specialised bankruptcy courts. If introduced, the timetable and processes could radically improve, resulting in swift resolutions/conclusions in time-sensitive matters, giving significant confidence in the system.
- A robust corporate governance framework is needed – corporate governance failures are a global issue, not limited to the Middle East. Robust and transparent corporate governance is key though.
Drivers for change
The drivers for change are continuing to gather momentum so there is plenty of reason to be optimistic about the future. In particular:
- We have seen increased foreign investment, particularly from distressed debt investors – this demonstrates growing confidence in the market and this of itself encourages further change and progress.
- The growing numbers of restructuring-focused specialist advisers is bringing a level of sophistication to the market that was not previously present.
- The level of distress in the market requires solutions – in some instances, the problems cannot be ignored and therefore finding a solution is becoming the imperative, using the expertise of key market participants and advisers.
We are hopeful that the market will come out in a better place as a result of all of these catalysing influences.
For the time being at least, what we have to remember is that to achieve a good outcome, it is often important to focus on the consensual dynamics and consider the political landscape carefully, and to be creative around potential solutions.