A seminar at the Dubai Chamber of Commerce & Industry at the end of May, organised by the Institute of Chartered Accounts in England & Wales, concluded that going bust in the Gulf needs to be made easier and quicker.

It takes on average three and a half years to close a business in the Middle East and more than five years in the UAE. This compares with less than two years in the Organisation for Economic Cooperation and Development. Middle East creditors seeking to recover money from companies being liquidated get less than half of what their counterparts in the West can expect.

The consequences are increasingly damaging. Investors and lenders are less likely to back Middle East businesses. GCC company directors, without the comfort of a system allowing the orderly closure of a company in financial difficulties, risk losing everything they own, even their freedom, in circumstances where liquidation is uncontroversial in other parts of the world.

A wise participant at the seminar observed that GCC company laws were not designed to deal with insolvency. He is right. For almost 40 years, the region has enjoyed high growth rates and abundant liquidity. Governments propped up failing firms. Insolvency was rare and considered shameful. For owners of Gulf firms, liquidation was mainly a way of formally closing dead businesses.

The credit crunch has shown a new approach to insolvency is required. Gulf companies borrowed heavily at negative real interest rates in the years before the summer of 2008. When easy money stopped, some firms immediately became illiquid and, effectively, insolvent.

Dubai World, the conglomerate that owns DP World and Nakheel, was the most prominent victim. Though still largely viable, the company had no insolvency framework to fall back on when it found itself unable to meet its liabilities as they fell due. With creditors, including international hedge funds, poised to dismember the group piecemeal, Dubai World, devised its own solution in the form of a moratorium. It was announced amid widespread dismay last November.

Less than six months later, Dubai World has produced a debt-restructuring plan, which its creditors are now considering. Nobody is happy and some lenders are furious. But it is a proposal that offers creditors the hope of getting back most of what they are owed and Dubai World the prospect of life after debt. And it has taken much less time than a restructuring in the US or Europe would take.

Insolvency professionals, nevertheless, conclude that the region cannot go on like this. Existing insolvency legislation should be revised and modernised. But that is easier said than done.

The challenge is to come up with a better alternative. Should the GCC adopt Western insolvency practices wholesale? But which model is right? Some observers call for the UAE to apply the insolvency code developed by the Dubai International Financial Centre (DIFC), which is based on UK common law. But how can that be done without undermining the federation’s entire system of commercial law, a synthesis of Frances’ Napoleonic code, sharia and common sense? It’s taken 100 years for insolvency regulations to develop in the West. Trying to accelerate the process in the Gulf could do more harm than good.

Pragmatists say the right approach is for insolvency practitioners across the region to work together to create codes of practice that might eventually be turned into law. Judges need to be trained. Perhaps there should be specialist insolvency courts. Other priorities include better enforcement of the law as it is, and a greater understanding among creditors and borrowers about the horrors of insolvency in the GCC.

But perhaps more attention needs to be paid to the reasons why there has been a huge increase in the number of GCC insolvencies in the past two years. The fact is that company owners and managers believed their own propaganda and used credit to finance expansions the market didn’t need. The banks didn’t do enough checking. Government regulation didn’t work as it should have.

Dealing with the GCC insolvency challenge requires a comprehensive review of the way business is done in the region. And it is one that concerns the general public as much as accounting specialists.