Firms prefer reconciliation to ward off uncertainty - Emirates24|7

Firms prefer reconciliation to ward off uncertainty

Mutual reconciliatory arrangements still remain the preferred option for corporates when it comes to financial disputes in the present economic scenario that is witnessing high exposure to risks and increased defaults, a top official of a leading law firm has said.

“Many companies are going in for mutual work-out arrangements with debtors as it saves them the risk of uncertainty, losses and may also enable them to exercise options facilitating a closer watch on the company they have lent money to,” Murad Abida, Partner and Head of Corporate at Hadef, Legal Consultants and Advocates, told Emirates Business.

Abida said sectors like finance and real estate are more exposed to credit risks because of the present market conditions and these are more affected than the others. In the present economic situation, where concerns on payment defaults are may be higher than normal, businesses are exercising varied options to emerge relatively unscathed or minimise the impact of such risks, he said.

Among the key options, he said, “could be meeting with  creditors for a mutually agreeable solution or re-scheduling of the debt. Many prefer access to decision making in the company they lent money to by being on the board and closely observing how the company is functioning. Another option available for a distressed company would be declaration of bankruptcy or preventive composition with the creditors.”

He said the “market needs more awareness of issues such as insolvency, bankruptcy and preventive composition, especially these days. Preventive composition option may be the ideal solution for many insolvent companies because of the current slowdown in the market. He invited “companies suffering from financial difficulties to study this option in order to survive in the market and continue in business instead of facing closure, creditors and the legal consequences of the claims to be submitted by them.”

He said the “preventive composition order is subject to certain conditions that are specified in the law, in order to ensure of the seriousness of the request. The company in default, and whose application for preventive composition had been approved by the court, avails itself of protection from the creditors during the period of the preventive composition, which enables the company to initiate negotiations with its creditors for the purpose of rescheduling its debts.

“Furthermore, the preventive composition agreement that deals with the rescheduling of the debts, is binding upon the creditors if creditors who hold two-thirds of the debts accept the same”.

There has been no significant rise the number of those wanting to go in for a legal action so far, he said. “Only in an event of very high risk do some businesses exercise the option of a law suit these days.”

He said lenders were being more cautious but the market still had opportunities to offer.

“People are studying the market and in these stressful situation there may be management buyouts. There still are opportunities in the present market situation, one would probably find more takers for Islamic finance as some of the liquidity in the region has not been tapped because people believed it has to be invested in a ‘right’ way,” he said.

 

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