A New Insolvency Law for the Dubai International Financial Centre

Not all governmental units within a jurisdiction change their laws in concert with each other, nor should they: They may have different roles, functions, populations and constituencies, and financial profiles.

The structure of insolvency legislation in the United Arab Emirates (UAE) reflects this pattern of diversity in law change, with resulting differences in the operation of the laws: (1) The UAE has its overarching insolvency law;[1] (2) the seven constituent emirates have varying ways of addressing insolvency, in many instances relying on the UAE federal insolvency law; and (3) the internationally oriented financial centers or economic zones of Dubai and Abu Dhabi (the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Markets (ADGM)) have their own insolvency regimes, as well as their own independently functioning court systems for resolving problems that arise within the jurisdictional scope of those centers/zones. These systems were adopted at different times and reflect different styles and policies characteristic of the times of adoption. Until 2019, the DIFC’s insolvency law, dating back to 2003 and replaced in 2009,[2] was older than the ADGM’s (which comes from regulations dated to 2015,[3] with amendments through 2016). In 2016, the UAE modified its own federal insolvency law and regulations, bringing in some concepts of reorganization and rehabilitation.[4]

Of some note, significant insolvencies in the UAE have been governed by bespoke or case-specific decrees (a case of broad note was the decree issued to guide resolution of the disputes surrounding the distressed Dubai World[5]). The regionally infamous insolvency and liquidation of Abraaj Group (a large cross-border and wide-ranging private-equity firm based in Dubai) may have provided a similar impetus for a revision of the DIFC insolvency regime.

On May 30, 2019, the DIFC replaced its insolvency law and regulations with a new act, which took effect on June 6, 2019.[6] This is the first of the UAE insolvency laws that has adopted UNCITRAL’s Model Law on Cross-Border Insolvency (Model Law), making the DIFC unit of the UAE the 46th jurisdiction to adopt the Model Law.[7]

In addition, the DIFC’s new insolvency law adopts a rehabilitation (or reorganization) chapter that is new in the geographical area of the UAE, joining the movement of the last three decades in which insolvency proceedings have added rehabilitation or reorganization provisions to deeply rooted liquidation/bankruptcy and receivership/administration/arrangement principles. As part of that movement, the new DIFC law defines a form of rehabilitation or reorganization that draws notably on U.S. reorganization procedures.

Accordingly, both the management of enterprises and Western lawyers will find now in the DIFC a system that is more consistent with the systems in the U.S. and most of Europe, as set forth below:

1.  Rehabilitation
   
   1. Commencement

Entities organized under the laws of the DIFC are eligible to be debtors; other entities are not.

To commence a rehabilitation, an enterprise must be unlikely to become unable to pay its debts when due and there is a reasonable likelihood that a successful rehabilitation plan will be reached.

2. Automatic Stay

A 120-day moratorium on creditor and shareholder action against the debtor and its estate arises when the DIFC court convenes upon the notification by the debtor’s directors that they intend to make a proposal to the debtor’s creditors. The DIFC court can modify the duration of the moratorium.

The moratorium prevents enforcement or termination of obligations of the debtor.

The debtor has a conditional power to accept or reject outstanding contracts.

Creditors may seek relief from the moratorium.

3. Management of the Debtor

The directors must propose a “rehabilitation nominee,” who must meet certain qualifications. When approved, that nominee takes over a considerable scope of the operation of the debtor.

All the same, the directors are responsible for the management of the debtor’s assets and operations, subject to the supervision of the DIFC court and the limitations of the insolvency law.

In the event of mismanagement or wrongdoing by management, management can be replaced or supplanted by an administrator (appointed by the DIFC court), who takes over the conduct of affairs of the debtor.

4. Creditor and Shareholder Classes

For purposes of voting on a plan, the DIFC court groups creditors and shareholders into various classes, the structure of which is subject to definition by the DIFC court.

5. Plan

The debtor has the right to propose a plan of rehabilitation.

6. Confirmation

A vote of at least 75% (in value) of all classes of creditors and shareholders supports the DIFC court’s confirmation of a rehabilitation plan. A rehabilitation plan may be confirmed over the objection of a creditor or shareholder if there is at least (in language familiar to the Bankruptcy Code) one accepting class of claims or interests, the creditors receive their indubitable equivalent of their claims, and the absolute priority rule is observed.

7. Post-Petition Financing

The DIFC court can approve post-petition financing on a priming basis, subject to providing adequate protection for the positions of pre-petition creditors if priming liens are necessary.

2. Recognition of Foreign Insolvency Proceedings

The provisions of the Model Law are adopted with few changes.

3. Voluntary Arrangements, Receivers and Winding Up

The new law re-enacts, with some updating, the terms of the prior law providing for voluntary arrangements, receivers and winding up (upon either a creditor or debtor request, or upon court order) with liquidation.

The regulations adopted following the enactment of the law[8] supplement the law’s terms with administrative and detailed guidance on the expectations for the re-enacted provisions of the insolvency law, as well as the new elements. The resulting legal structure for rehabilitation seems particularly familiar for U.S. insolvency practitioners and fits within the sense expressed by His Excellency Essa Kazim:

Ensuring that businesses and investors can operate across the region with confidence is crucial to our role in connecting the economies of East and West. We are committed to continuously enhancing our legislative infrastructure in order to give leading global institutions the certainty and access they need to capture the opportunities within the MEASA region, through Dubai.[9]