Bankruptcy reform in the Middle East and North Africa: Analyzing the new bankruptcy Laws in the UAE, Saudi Arabia, Morocco, Egypt, and Bahrain

• DOI: http://doi.org/10.1002/iir.1378
• Published date: 01 June 2020
• Author: Adam Al‐Sarraf
• Date: 01 June 2020

RESEARCH ARTICLE

Bankruptcy reform in the Middle East and

North Africa: Analyzing the new bankruptcy

Laws in the UAE, Saudi Arabia, Morocco, Egypt,

and Bahrain

Adam Al-Sarraf

International, Commercial Law

Development Program, US Department

of Commerce, Washington, DC

Correspondence

Adam Al-Sarraf, International,

Commercial Law Development Program,

US Department of Commerce, Office of

General Counsel, Mail Stop 5875

1401 Constitution Avenue, NW,

Washington DC, 20230, USA.

Email: aal-sarraf@doc.gov

Abstract

For years, countries in the Middle East and North Africa

(MENA) region have been trying to increase entrepre-

neurship rates and attract foreign investment, however,

their bankruptcy statutes remained antiquated and puni-

tive in nature. Potential start-ups and foreign investors

have been deterred from these markets due to a lack of

alternative solutions to liquidation and a fear of punish-

ment for business failure. At least seven countries in the

region have now taken steps to modernize their bank-

ruptcy laws to provide restructuring mechanisms and

other measures designed to incentivize risk-taking rather

than to deter it. With this year's crash in oil prices, an

unprecedented global pandemic and an imminent reces-

sion, an effective bankruptcy system has become even

more critical to avoid catastrophic results for the employ-

ment rates and economic value of the companies in the

region. However, despite these recent reforms, significant

improvements are still needed to maximize the value and

benefits of bankruptcy procedures in the face of these

growing economic threats.

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not

be attributed, the US Department of Commerce or the Commercial Law Development Program

Received: 12 November 2019 Revised: 6 April 2020 Accepted: 18 May 2020

DOI: 10.1002/iir.1378

© 2020 INSOL International and John Wiley & Sons Ltd

Int Insolv Rev. 2020;29:159–180. wileyonlinelibrary.com/journal/iir 159

1|INTRODUCTION AND BACKGROUND

The global phenomenon of bankruptcy modernization has finally taken root in the MENA

region over the last 4 years.

12

Since 2005, according to the World Bank, at least 110 countries

have reformed their bankruptcy laws to bring them in line with international best practices.

3

The MENA region's bankruptcy systems had historically been characterized as inefficient, inef-

fective, and often lacking essential legal and procedural remedies, such as corporate res-

tructuring, to avoid liquidations. Without modern, transparent, and predictable bankruptcy

systems, the economic growth and foreign investment needed in the region to build infrastruc-

ture and reduce unemployment could not be obtained.

4

More specifically, bankruptcy laws with

a mechanism to salvage firms can increase the creation of new businesses,

5

reduce job losses

caused by the liquidation of viable businesses, increase access to credit and credit recovery, and

more efficiently reallocate resources across the economy.

6

Seeing the importance of bankruptcy

modernization, Tunisia,

7

the UAE,

8

Bahrain,

9

Morocco,

10

Oman,

11

Egypt,

12

and Saudi Arabia

13

have enacted new bankruptcy laws in the last three years with either new or improved res-

tructuring mechanisms.

This article will focus on five of those countries, the United Arab Emirates (UAE), Saudi

Arabia, Morocco, Egypt, and Bahrain.

14

The bankruptcy statutes adopted in these five countries

over the last three years have introduced new solutions such as judicial and pre-packaged res-

tructuring procedures to make their bankruptcy systems effective and attractive for both debtors

and creditors. These bankruptcy reforms have arrived at a critical time for the region as many

businesses and entrepreneurs will be in need of bankruptcy protection and relief as a result of

the COVID-19 pandemic, the crash in oil prices and an imminent global recession. However,

despite the adoption of new and modern bankruptcy procedures, many of the reforms adopted

throughout the region did not go far enough to maximize the benefits of the new restructuring

procedures. Moreover, the effectiveness of these procedures will largely depend on each coun-

try's ability to implement the new legislation through capacity building of its bankruptcy judges

and bankruptcy professionals.

The objectives of this article are to, first, identify the strengths and potential weaknesses of

each country's new statute through a comparative analysis of key elements of an effective bank-

ruptcy regime, relying on U.S. and international best practices and, second, to propose recom-

mendations to improve each country's bankruptcy system. It is hoped that this analysis will also

assist other countries throughout the region and the world in developing their own bankruptcy

reform strategies.

2|BACKGROUND ON MENA BANKRUPTCY SYSTEMS

Prior to 2016, the legal frameworks of the MENA region were characterized by punitive insol-

vency procedures, and most companies avoided legal proceedings when faced with financial

distress.

15

According to an 18-month survey conducted by the World Bank, INSOL, Hawkamah,

and the OECD, MENA bankruptcy systems did not include the necessary incentives for compa-

nies to enter into a court-supervised bankruptcy process, such as a restructuring procedure.

16

Moreover, the survey found that the systems deterred debtors from attempting to restructure

their debts or start new businesses.

17

This deterrence was especially pronounced in Saudi Ara-

bia, where the World Bank reported that neither creditors nor debtors used the court system

due to “inefficiencies and investigation procedures that vary widely from one district to

160 AL-SARRAF