Overview of the Bankruptcy Law The Bankruptcy Law is the UAE’s first stand-alone insolvency law. It repeals the existing preventive composition procedure and bankruptcy procedure in Chapter 5 of the Commercial Transactions Law (Federal Law No. 18 of 1993) and various provisions of the Penal Code (Federal Law No. 3 of 1987), with effect from 29 December 2016. The Bankruptcy Law introduces modernised versions of these procedures. This is the first in a series of notes on the United Arab Emirates’ new Bankruptcy Law, Federal Decree Law No. 9 of 2016 (the “Bankruptcy Law”). The Bankruptcy Law is in force from 29 December 2016 and applies across all seven emirates comprising the UAE. In this note, we provide an overview of the main features of the Bankruptcy Law. The UAE Bankruptcy Law of 2016 The Bankruptcy Law in context The Bankruptcy Law has been in gestation for a long time and expectations of it are high. The new law comes into force amid a global wave of insolvency reform in the wake of the recent financial crisis, as many jurisdictions have sought to modernise their insolvency legislation in order to encourage entrepreneurship and investment, facilitate the efficient management of defaulting loans (thereby increasing banks’ capacity to make new lending available) and encourage the development of a “rescue culture”, in order to reduce the number of unnecessary liquidations of viable companies. Many aspects of the Bankruptcy Law are consistent with international “best practice”, and also the “best practice” set out in the European Commission’s proposal for a Directive on “ preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures” which was published last month. The Bankruptcy Law includes a “debtor in possession” pre-insolvency rescue regime with the possibility of obtaining new financing on a priority basis, provides for a moratorium on enforcement, includes measures allowing the cram down of unsecured claims, imposes clear deadlines and permits certain transactions to be unwound if they are found to be detrimental to creditors. However, it does not allow the claims of secured creditors to be crammed down without their consent. Assuming that the value of the secured assets are sufficient to discharge the debt owed to them, secured creditors will therefore be in a better negotiating position than unsecured creditors albeit the ease of realising that value may be questionable, given existing enforcement mechanisms. Should they decide to use such mechanisms, the opening of proceedings under the new Bankruptcy Law will not prevent them from enforcing specific security over assets, provided that they obtain court approval before doing so. The new Bankruptcy Law replaces the previous, rarely-used, bankruptcy regime. The outgoing regime was generally regarded as being too uncertain, too slow and too likely to result in the company going into insolvent liquidation. As a result, companies experiencing financial difficulty have, to date, tended to pursue lengthy, out-of-court, consensual debt restructurings. Abu Dhabi | Amsterdam | Antwerp | Bangkok | Beijing | Berlin | Brisbane* | Brussels Cape Town*** | Delhi ∆ | Dubai | Düsseldorf | Frankfurt | Hanoi* | Ho Chi Minh City* Hong Kong | Jakarta** | Johannesburg*** | Lisbon | London | Luxembourg | Madrid Melbourne* | Milan | Moscow | Mumbai ∆ | Munich | New York | Paris | Perth* | Port Moresby* Rome | São Paulo | Seoul | Shanghai | Singapore | Stockholm | Sydney* | Tokyo | Warsaw Washington, D.C. * Office of integrated alliance partner Allens ** Office of formally associated firm Widyawan & Partners *** Office of collaborative alliance partner Webber Wentzel ∆ Office of best friend firm TT&A
Transcript
Overview of the Bankruptcy LawThe Bankruptcy Law is the UAE’s first stand-alone insolvency law. It repeals the existing preventive composition procedure and bankruptcy procedure in Chapter 5 of the Commercial Transactions Law (Federal Law No. 18 of 1993) and various provisions of the Penal Code (Federal Law No. 3 of 1987), with effect from 29 December 2016. The Bankruptcy Law introduces modernised versions of these procedures.
This is the first in a series of notes on the United Arab Emirates’ new Bankruptcy Law, Federal Decree Law No. 9 of 2016 (the “Bankruptcy Law”). The Bankruptcy Law is in force from 29 December 2016 and applies across all seven emirates comprising the UAE. In this note, we provide an overview of the main features of the Bankruptcy Law.
The UAE Bankruptcy Law of 2016
The Bankruptcy Law in contextThe Bankruptcy Law has been in gestation for a long time and expectations of it are high. The new law comes into force amid a global wave of insolvency reform in the wake of the recent financial crisis, as many jurisdictions have sought to modernise their insolvency legislation in order to encourage entrepreneurship and investment, facilitate the efficient management of defaulting loans (thereby increasing banks’ capacity to make new lending available) and encourage the development of a “rescue culture”, in order to reduce the number of unnecessary liquidations of viable companies.
Many aspects of the Bankruptcy Law are consistent with international “best practice”, and also the “best practice” set out in the European Commission’s proposal for a Directive on “preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures” which was published last month. The Bankruptcy Law includes a “debtor in possession” pre-insolvency rescue regime with the possibility of obtaining new financing on a priority basis, provides for a moratorium on enforcement, includes measures allowing the cram down of unsecured claims, imposes clear deadlines and permits certain transactions to be unwound if they are found to be detrimental to creditors.
However, it does not allow the claims of secured creditors to be crammed down without their consent. Assuming that the value of the secured assets are sufficient to discharge the debt owed to them, secured creditors will therefore be in a better negotiating position than unsecured creditors albeit the ease of realising that value may be questionable, given existing enforcement mechanisms. Should they decide to use such mechanisms, the opening of proceedings under the new Bankruptcy Law will not prevent them from enforcing specific security over assets, provided that they obtain court approval before doing so.
The new Bankruptcy Law replaces the previous, rarely-used, bankruptcy regime. The outgoing regime was generally regarded as being too uncertain, too slow and too likely to result in the company going into insolvent liquidation. As a result, companies experiencing financial difficulty have, to date, tended to pursue lengthy, out-of-court, consensual debt restructurings.
Abu Dhabi | Amsterdam | Antwerp | Bangkok | Beijing | Berlin | Brisbane* | Brussels
Cape Town*** | Delhi∆ | Dubai | Düsseldorf | Frankfurt | Hanoi* | Ho Chi Minh City*
Hong Kong | Jakarta** | Johannesburg*** | Lisbon | London | Luxembourg | Madrid
Melbourne* | Milan | Moscow | Mumbai∆ | Munich | New York | Paris | Perth* | Port Moresby*
Rome | São Paulo | Seoul | Shanghai | Singapore | Stockholm | Sydney* | Tokyo | Warsaw
Washington, D.C.
* Office of integrated alliance partner Allens** Office of formally associated firm Widyawan & Partners*** Office of collaborative alliance partner Webber Wentzel∆ Office of best friend firm TT&A
The UAE Bankruptcy Law of 2016
What procedures are available?There are two main procedures:
Preventive composition
A pre-insolvency, “debtor in possession” rescue regime for debtors facing financial difficulty (but not in payment default for more than 30 business days). It could be characterised as “Chapter 11 lite”, although it also appears to be influenced by the French Sauvegarde procedure.
Only the debtor can apply for preventive composition proceedings.
A composition plan must be submitted to the court within nine to thirteen weeks. Once approved by the court and creditors, it must be implemented within three years (extendable to six years).
This replaces the previous preventive composition procedure.
Bankruptcy (a common gateway to either restructuring or liquidation)
A regime for insolvent debtors.
Debtors who are cash flow insolvent (in payment default for more than 30 business days as a result of financial difficulties) or balance sheet insolvent must apply to commence proceedings.
Leading to restructuring
A post-insolvency rescue procedure.
A restructuring plan must be submitted to the court within three to six months. Once approved by the court and creditors, it must be implemented within five years (extendable to eight years).
This replaces the previous judicial composition in bankruptcy procedure.
Proceedings may also be commenced by:
> creditors owed more than AED100,000, where debtor has failed to pay a due debt within 30 business days of request;
> the relevant regulator (if the company is regulated) with proof of debtor’s insolvency; or
> the public prosecutor, with proof of debtor’s insolvency and if in the public interest.
Leading to liquidation
A liquidation regime, for debtors for whom restructuring is not appropriate. The debtor’s business is brought to an end and assets are divided up among creditors and shareholders, according to the priority of their claims.
This replaces the previous bankruptcy procedure.
An in-depth analysis of the features of the two main procedures will be the subject of subsequent notes.
Who can use the procedures?The Bankruptcy Law regime is clearer and broader in its scope than the previous regime, which applied only to “traders”, a term which encompasses individuals or companies engaged in commercial activity in the UAE. In addition to “traders”, the Bankruptcy Law expressly applies to:
> Companies: companies subject to the Commercial Companies Law (Federal Law No. 2 of 2015);
> GREs: companies wholly or partly owned by the Federal or an Emirate Government, which are not incorporated under the Commercial Companies Law, if they expressly submit to the Bankruptcy Law in their constitutional documents. This includes companies incorporated by decree of a Ruler of emirate;
> Free zone companies: free zone companies, if they are not already subject to a separate free zone preventive composition or bankruptcy regime. The law does not apply to companies in the self-legislating financial free zones of Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM),
which have regimes based on English insolvency law. This is a welcome clarification especially for those free zones whose regulations are ambiguous or silent as to the applicable regime (for example, some include winding up provisions but lack comprehensive provisions on bankruptcy and restructuring procedures for distressed companies); and
> Licensed professional civil companies: companies that carry on activities not classified as “trade” under UAE law (for example, professional services or consultancy).
In our view, branches of foreign companies operating in the UAE could be caught by the provisions of the Bankruptcy Law, although not expressly stated to be within its scope.
The law does not address personal insolvency (unless and to the extent that a trader is an individual). A new personal insolvency law is reportedly being developed.
Who administers the Bankruptcy Law?Structural support for the new insolvency framework is to be provided by the institutions and individuals below.
Courts: The UAE courts are to play an active and substantive role throughout the procedures. The court is to review and decide on applications, appoint, instruct and collaborate with trustees and experts, order measures to protect the debtor, review restructuring plans, consider impact on creditors and decide whether to approve new DIP financing or even to suspend the business.
Financial Restructuring Committee: The Financial Restructuring Committee (the “Committee”) is a new body to be established by the UAE Cabinet. It will perform some consultative and administrative functions, including maintaining a register of insolvency experts, determining criteria for registration of experts and their fees and also maintaining a register of those entities subject to orders made under the Bankruptcy Law. The Committee is discussed in more detail below.
The UAE Bankruptcy Law of 2016
Trustees: The trustee has primary day-to-day responsibility and power to manage the restructuring or liquidation procedures, and charges a fee for doing so. The role is significant: preparing an inventory of assets, assessing creditor claims and co-ordinating discussions with creditors, supervising the management of the debtor, preparing reports on its business, publicity and preparing and overseeing the implementation of a restructuring plan or the distribution of assets. The trustee is appointed by the court on the opening of proceedings, and up to three trustees can be appointed.
Experts: The role of the expert is to support the trustee and the court with technical advice on the debtor’s position, for a fee. One of the primary tasks of the expert is to prepare the initial report on the financial position of the debtor, including giving an opinion about whether the assets of the debtor are sufficient to allow successful restructuring.
Creditor committees: The court, in consultation with the trustee, may form creditor committees (one for secured creditors; one for unsecured creditors and one for bond and sukuk holders). The committees act as a conduit between the court/trustee and the wider creditor group. The court retains significant discretion as to how much consultation will take place and it also has absolute discretion to reform a creditor committee, replace or limit the powers of the representative of a committee.
Observers: Observers are court-appointed representatives of interested parties – a creditor or group of creditors, or a regulator – whose role is (rather ambiguously) to work with the trustee, in the creditors’ interests and to oversee the implementation of the plan. It is unclear to what extent creditors or regulators will be incentivised to perform this role, in light of the potential liability that may be incurred and lack of remuneration.
Regulators: The regulator of businesses operating in a regulated sector may also have a role in any process undertaken under the new regime, such as the Securities and Commodities Authority for publicly listed companies. There is a new requirement to give the regulator prior notification of any application to commence a procedure and to obtain approval of a composition plan. A regulator may become involved in the court process, appoint an observer and attend creditor meetings.
First impressions Publicity The Bankruptcy Law provides for a relatively high degree of public disclosure about its procedures which is unusual when judged against other UAE court procedures. For example, the trustee is obliged to publish information concerning its appointment within three to five business days of being appointed. This information must be published in two widely-spread newspapers (one in Arabic, one in English) and summarise the decision for the trustee’s appointment as well as invite creditors to file details of their claims. In addition, the trustee must contact known creditors directly. Later on, during a preventive composition or restructuring procedure, other information must also be issued publicly in the same way, such as invitations to creditor meetings and, upon sanction by the court, a summary of the details of the restructuring plan. Details of an approved restructuring must be recorded against the commercial registrations of the debtor and presumably will be recorded in the Committee’s register.
The stigma attached to being in financial distress and the inherent publicity in the procedures of the Bankruptcy Law, coupled with the time taken for a process to run its course (and, initially at least, the novelty of these procedures) may deter debtors and creditors from taking early action for fear of hindering the debtor’s ability to win new business or to dispose of assets at the best price. It may be that in the first instance, those companies who opt to rely on these procedures are those in most distress who are unable to obtain creditor consent to reschedule their obligations and have few other options.
Court expertise and capacity Many overseas investors and financiers are wary of unfamiliar UAE court processes and often elect for offshore arbitration or courts as the forum for dispute resolution. Notwithstanding the greater detail embedded in the Bankruptcy Law and the role of trustees and experts to assist the court, much discretion remains in the hands of the UAE courts. The uncertainty this represents is a serious impediment – certainly for large scale and complex restructurings – at least until the preventive composition and bankruptcy procedures have been demonstrated to work in a predictable, fair and efficient manner.
Availability of insolvency professionals The procedures set out in the new Bankruptcy Law are heavily reliant on the trustee and expert.
Experts must have specific expertise in financial re-organisation and bankruptcy matters and comply with the requirements of existing legislation regulating the experts used by the courts (as to character, qualifications, professional experience and insurance).
No equivalent detailed requirements are set out for trustees, leaving the law unclear as to whether the trustee needs to have specific corporate recovery expertise, or whether the trustee primarily has a supervisory role, as well as effectively acting as mediator, looking to the expert to provide technical back-up.
As in other jurisdictions, suitably qualified accountants, financial advisers and lawyers could act as experts – and also therefore trustees. However, there are unlikely to be sufficient professionals in the UAE who are able to perform the functions of trustee and expert and it is possible that such professionals may favour advising the parties, rather than be appointed by the court. The involvement of inexperienced trustees and experts is unlikely to be helpful so the fees available to these officials need to be set at a level that attracts experienced practitioners.
Role of the Financial Restructuring Committee There is some ambiguity in the wording of the Bankruptcy Law: it is unclear whether the Committee is intended to have oversight over the financial restructuring “of” licensed financial institutions (ie in respect of banks or financial institutions in financial difficulty) or “for” financial institutions (ie in respect of restructurings that are being conducted by a bank or financial institution as creditor to its customer). Whilst there is no consensus yet amongst industry commentators, our view is that the latter of the two interpretations is the more likely, both as the translation of the relevant article refers to the Committee’s objective being to “reach a consensual arrangement between the debtor and its creditors” (this wording not being expressly
Focus on the Arabicعليك الرتكيز عىل اللغة العربيةIt is important to remember that the Arabic text of the Bankruptcy Law is definitive. The various English translations available are not identical in every detail. Difficulty in interpreting the primary legislation is compounded by translation obstacles.
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Topics DB 2017 Rank DB 2016 Rank
Starting a business 53 65
Enforcing contracts 25 24
Resolving insolvency 104 99
Indicator UAE OECD high income
Recovery rate (cents on the dollar) 29.0 73.0
Time (years) 3.2 1.7
Cost (% of estate) 20.0 9.1
Strength of legal rights (0-12) 2.0 6.0
In future notes, we will consider different aspects of the Bankruptcy Law, including the preventative composition and bankruptcy procedures, the impact on debtor’s and their directors, the impact on creditors and a look ahead at the potential impact of the new law.
We hope that you have found this note useful. Please feel free to contact any of the people below, or your usual Linklaters contact, if you would like to discuss any of the issues raised further.
Source: World Bank
Central Bank on local banks has not been changed by virtue of the Bankruptcy Law. Therefore, we may expect the approach of local banks to remain consistent.
Conclusion It is widely acknowledged that an efficient and reliable bankruptcy regime has the capacity to rebuild companies, preserve jobs, encourage investment and facilitate economic growth. For these reasons, much is being made in the media of the impact which the Bankruptcy Law will have on promoting entrepreneurship (boosting non-oil economic growth) and encouraging foreign investment. Most recent commentary has been positive. Many predict that the Bankruptcy Law will promote bank lending in the UAE, particularly in the SME sector, and help to reduce the number of defaulting debtors who abscond rather than try to restructure their debts and save their businesses.
The Bankruptcy Law is a step in the right direction towards improving the UAE’s World Bank insolvency rankings, which would be likely to increase confidence in the UAE’s business environment. In the World Bank’s 2017 “Doing Business” rankings, the UAE was ranked highly for ease of starting a business (26 out of 190 economies), but its ranking dips quite dramatically when it comes to ease of resolving insolvency (104 out of 190 economies – a drop of five rankings since the previous report). A UAE average of 3.2 years to resolve insolvencies (at a cost of 20% of the estate) compares unfavourably with an average of 1.7 years for OECD high income jurisdictions (at a cost of 9.1% of the estate). To date, insolvencies in the UAE have generated a recovery rate of 29 cents on the dollar as compared to the recovery rate in OECD high income jurisdictions of 73 cents on the dollar.
limited to bank debtors) and as the Committee’s duties (such as approving a schedule of experts, determining the table of expert fees and maintaining a register of persons against whom a bankruptcy judgment has been made), are not particular to bank restructuring, being equally (or possibly more) relevant to the wider restructuring of traders/corporations with bank debt. Collateral In addition to the prevailing bankruptcy regime, another factor that heavily influences a bank’s approach to distressed debtors is the legal regime for taking and enforcing security (including the availability of “self-help” remedies and out-of-court enforcement options). In this respect, there is significant potential for improvement and development of UAE law when compared to international standards which is evidenced by the World Bank’s 2017 “Doing Business” Rankings, where, in connection with “Getting Credit” the UAE was graded 2 out of 12 for its strength of legal rights largely due to the weakness in the UAE security regime. When compared with an average of 6 out of 12 for other OECD high income jurisdictions, this rating is particularly low. Until a more effective regime for taking, registering and enforcing security is implemented, secured creditors in the UAE will remain cautious about their security position and this may drive them to continue to favour a negotiated settlement over the uncertainty of the outcome for enforcing security (and potentially triggering bankruptcy as a result).Provisioning Much of the success of the Bankruptcy Law will depend on how it is perceived by those most likely to become involved in such processes – the banks and financial institutions that extend credit to debtors. Their approach to restructurings is driven not only by the relevant bankruptcy regime, but also by the provisioning rules applicable to them. The provisioning requirements of the UAE
