We investigate the newly proposed UAE Federal Financial Restructuring and Bankruptcy Law aimed at increasing legal sustainability.
It’s been over two years since the first murmurings of potentially new bankruptcy legislation were circulated. Earlier this year it was reaffirmed by Dr. Hadef Bin Jouan Al Dhaheri, the UAE Minister for Justice, that the legislation would be finalised for the end of 2012, noting that provisions of the new draft law will apply more widely than the current rules and procedures governing bankruptcy in Book 5 of Federal Law No. 18 of 1993.
At the Global Policy Conference in May of this year Hani Al Hamil, Secretary General, Dubai Economic Council (DEC), commented that the primary aim of the legislation was to increase legal sustainability and flexibility of the economy. “This step should enable the economy to maintain the existing businesses operating in various sectors and attract prospective foreign investments,” he said.
As per its vision to be a strategic partner for the Government of Dubai in economic decision making, the DEC is involved in reviewing the legislation. Catering to this evaluation process, the two-day policy conference was organised to bring together both the decision makers and practitioners to draw lessons from the best international practices in financial and bankruptcy law and to refine the proposed legislation accordingly.
Existing federal bankruptcy legislation remains untested in the UAE courts as distressed companies often prefer to settle creditor claims privately because the existing legislation is both obscure and complex, leaving a considerable amount of space for differing interpretations. It’s hoped that the new laws will ease debt restructurings with greater provision for out-of-court negotiations, which in turn should logically lead to a boost in foreign investment in the Emirates.
Al Hamil explained to attendees at the policy conference that the law draft covers various advanced concepts in the field of financial restructuring and bankruptcy, such as cross-border solutions. Therefore, while effectively acting as a hybrid law, it will be tailored to meet local circumstances, working in tandem with what is sufficiently suitable and beneficial from a pro-UAE viewpoint.
“This law will make the UAE the first GCC country to handle the financial restructuring and bankruptcy law in an objective and scientific manner, as well as to combine the regulatory and legislative framework with experience and practice. The new law will separate from the existing company law; it will be interlinked to the company law because it will tackle the practice of the company and the governance,” he commented.
So, who exactly will fall under the remit of this new legislation? Richard Catling, Corporate Commercial, Al Tamimi & Co., noted in his recent review of the new legislation that not all businesses in the UAE will be able to avail of the laws. Companies incorporated under the Commercial Companies Law, establishments and individuals engaged in commercial activity can utilise the new provisions, but government authorities and entities in financial free zones cannot.
“The Law sets up a new regulatory body, the Committee of Financial Restructuring and Bankruptcy, which must administer the law and its procedures. Outlined within are twin gates through which any debtor becomes subject to its processes – Payment suspension and Excessive indebtedness,” notes Catling.
The former gate will apply where the debtor has stopped meeting or servicing debts; the latter instance is applicable where the debtor’s assets do not cover liabilities. In either instance, the debtor can access the law’s procedures to protect the debtor from other legal attacks. The law also provides for active involvement by creditors, who can attend meetings, inform court appointed experts of their debt claims and vote on any proposed restructuring.
Catling also makes mention of further plans for preventative composition procedures. “Similar to the Financial Re-Organisation Procedures, a debtor, a regulatory authority or, a creditor, may apply to the Court for (or it the court may instigate itself) a court sponsored plan for the restructuring of a debtor’s liabilities, which will be known as a Preventative Composition of Bankruptcy plan,” he says.
Indeed, the next stage can involve the court appointing an agent of the debtor one or more Supervisors of Composition (court registered bankruptcy experts and other specialists) to assist the debtor in the restructuring of the debtor’s liabilities and a judge may be appointed to oversee such proceedings where extra complexity arises.
In his assessment, Catling notes the various avenues of action, each according to the circumstances of the debtor. He writes: “A Preventative Composition of Bankruptcy plan must be logged with the court. From the beginning of this plan, the debtor shall manage the ongoing conduct of his commercial or financial dealings under the direct supervision of the Supervisors of Composition (who have wide ranging powers to interfere in the conduct of the debtor’s business and affairs).
“Creditors can apply for up to five observers to represent them in the Preventative Composition Procedures. The observer’s job is to ensure that the views and interests of the creditors as a whole are represented throughout the process,” he notes.
So, in the case where this plan will simply not deliver the results hoped, or where it becomes apparent that the debtor is a hopeless position of excessive indebtedness, what are the viable options available for the debtor?
“In this instance. the court may, upon a request from the Supervisors of Composition or at its instigation, transfer Preventative Composition Procedures into bankruptcy. Whilst bankruptcy procedures in effect deprive the debtor of the power to manage the debtor’s business and affairs; as all such powers are assumed by the Court appointed bankruptcy supervisor.
“After a meeting or creditors is convened, the bankruptcy supervisor will produce a plan to the Court which will recommend either a restructuring plan or the liquidation of the debtor’s assets. Once approved by creditors and the Court the key terms of the plan are published. The plan will set out time limits for returning the debtor to profit, the provisions recommended by the bankruptcy supervisor for settling all liabilities and the preferential treatment of creditors if justified. The restructuring plan cannot exceed five years in duration,” Catling explains.
According to a statement from Hadef & Partners, the new law will empower the supervisors to maintain a centralised register for disqualified persons and directors and a centralised register of bankruptcy restrictions and orders.
Hadef & Partners and Clifford Chance have both been instructed by the UAE Ministry of Finance to assist in formulating key policy proposals and to assist in drafting the new legislation. Ricahrd Briggs, Executive Partner at Hadef & Partners told SME Advisor that both legal firms have been requested to conduct comparative analysis’ of various jurisdictions, largely focussing on the UK, the US, Germany, France and Singapore.
“The proposed draft law is intended to provide balance between the rights of creditors and the rights of debtors. The idea is to avoid obliging certain businesses that could potentially survive into liquidation. Thus, one idea would be that a business which is unable to service its debt or pay its creditors could file to the court for protection. This would allow breathing space for restructuring of the business; for example, the ability to acquire financing by giving new lenders first priority. This flexibility may assist some entrepreneurial SMEs that are weighing up possible growth against related risks. However, the rights of creditors must also be taken into account and balanced in the legislation and the implementation,” says Briggs.
If the new legislation is introduced by the end of 2012, will the various institutions concerned be equipped to handle the changes effectively? Briggs explains that, pursuant to the UAE constitution, each of the seven Emirates is permitted to opt out of the Federal court system and operate its own courts. Those courts must follow and enforce applicable Federal laws. Each of Dubai, Ras Al Khaimah and most recently Abu Dhabi has elected to operate its own courts. The remaining four Emirates operate under the Federal court system.
“Two of the jurisdictions that were assessed in formulating the draft financial restructuring and bankruptcy law are in essence civil jurisdictions (France and Germany). In tandem with promulgating a new financial restructuring and bankruptcy law, specialist bankruptcy judges must be trained in all relevant courts of the UAE. The local legal and accounting professions will also need to adapt efficiently to the new law,” he says.
So, what are the shortcomings of the new legislation? What is rather surprising is that the bankruptcy laws do not address the criminal sanctions under existing law for dishonoured cheques. “In practice, the culture of using cheques to support payment obligations and provide security still constitutes an important component of the UAE business community’s approach to risk. The interface between the new law and this issue will continue to unfold in the coming years,” explains Briggs.
Gordon Stewart, President, International Association of Restructuring, Insolvency & Bankruptcy Professionals, (INSOL), echoed such sentiments while praising the new legislation at the Global Policy Conference this year. While emphasising that the real test would come from the ability of the courts to enforce the laws, he also noted that: “One has to look at the existing civil and criminal laws of the country and the ones governing the issuance of cheques. While our contributions might take certain situations for granted, this is a crucial aspect.”
Therefore, it would seem that while the new proposed laws will represent considerable shifts to the approach of debtors in the UAE, and will afford more breathing space to some sinking SMEs, the element pivotal to its successful integration will be under close review.
As Catling notes in his review: “The law presents significant implications for the administration of the procedures set out in the law, not least given the lack of professionals and court officials with acute expertise in the handling of expertise.”