By Naser:

The global recession has taught many lessons. Some lessons were global, while others more focused on the Arabian Gulf region. One of the lessons that I personally derived from the crisis is that we need formal Bankruptcy Laws that clearly state when a company is considered as bankrupt, and states the rights of each party related to the company.

The definition of bankruptcy globally is when a company fails to fulfill their financial commitments, such as not paying their debtors and bondholders. Once they fail to pay, all the company’s debt matures, and they go through bankruptcy. The company is then either reorganized with debt holders becoming the new owners, or the company’s assets are sold to help repay debt holders. Any excess value would be distributed to equity holders which are on the bottom of the list.

During the past year, the GCC region has seen many potential bankruptcy candidates popp up. Various companies weren’t fulfilling their commitments and their debt was maturing without going into bankruptcy. Some of the notorious examples are Global Investment House, Investment Dar, Safat Group, and Dubai World. These companies setup meetings with their creditors and attempted to amend the covenants of their debt without changing the ownership structure. This keeps shareholders and the whole business community in the dark with regards to the financial health of the company, and it smears its reputation and credibility. Global Investment House were successful in striking a deal with their creditors, and Abu Dhabi stepped in to bail out Dubai World.

We need laws similar to the Chapter 7 (Liquidation) and 11 (Reorganization) Bankruptcy laws in the US. Further, we must establish a bankruptcy court. Such laws would protect the rights of creditors and bondholders. It will also keep management in check and would not allow them to simply stop paying creditors without any serious repercussions.