Just a month back, newspapers in the UAE reported a probable rise in the number of SMEs ‘skipping payments’ and fleeing the country. Research from Coface revealed that 239 UAE-based companies, mostly SMEs, fled the country between July 2015 and March 2016 to avoid debt repayments and supplier payments.

In the absence of proper bankruptcy laws till now, even a bounced cheque could land an entrepreneur in jail. So it isn’t surprising then, that the introduction of a new bankruptcy law in the UAE, is being lauded as a huge step forward in improving the country’s economic and regulatory environment.

So, what’s going to change?

Being called a significant milestone for the UAE, the new bankruptcy law will safeguard the legal rights of both debtors and creditors, and will help create a more mature business environment for companies to operate in.

With clear bankruptcy regulations in place, now business owners will not face imprisonment in case of bounced cheques or failure to meet debt obligations. Instead they will be able to approach banks to negotiate restructuring of their debt. In case a company decides to declare bankruptcy, the law will also facilitate the liquidation of the company’s assets.

Under the bankruptcy law, a new regulatory committee will be established – the Committee of Financial Restructuring, which will oversee and regulate all matters related to financial restructuring and reorganization outside the scope of courts.

The law aims to protect the various parties involved in the event of a business becoming insolvent, including employees, shareholders and company directors. The new regulations are also expected to encourage SME growth, and bring the UAE business environment at par with international standards.

[Related: Common contractual mistakes: What many miss in their contracts]

Who will the law apply to?

The legislation will only apply to companies, and not individuals. It would cover all registered companies based in the UAE, both on-shore and free zone, barring those established and operating within DIFC (Dubai International Financial Centre) and ADGM (Abu Dhabi Global Market).

What you should be aware of

Misuse of the bankruptcy law will amount to a serious offence. Punishment for violators includes a prison sentence of up to five years and a fine of AED 1 million.

The new Federal Law on bankruptcy is expected to come into effect in early 2017. Complete details of the new law, its coverage and exceptions, will be available to the public once it is published in the UAE’s official gazette.