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JANUARY 2013
Legal Focus
its business. A struggling debtor will generally be more inclined to voluntarily subject itself to a statutory restructuring regime, provided the regime is aimed at continuity of business (under protection from creditors). This can be seen as distinct advantage in that debtors may not wait “until it is too late” before seeking protection.
In
an insolvency-only regime, debtors will be unlikely to subject themselves to the court process when the only foreseeable outcome is liquidation.
What legal challenges and complexities arise when dealing with insolvency and restructuring in your jurisdiction? How can you assist clients in navigating/solving these challenges and complexities?
The primary challenge with this area in the UAE is the trepidation around how the UAE courts would apply and administer the provisions of the Commercial Code relating to insolvency in each case, and how long it would take for such proceedings to take their course. The regime in the Commercial Code is aimed at preventing individual proceedings against the debtor, verifying creditor claims, prioritizing them and then encouraging agreement on a settlement plan among creditors. It is a time consuming process, especially so if the creditors do not agree on the settlement plan (and in such case liquidation of the debtor is the only option prescribed, under the supervision of a court or creditor appointed trustee). As a conse- quence, creditors and debtors have historically preferred to keep the negotiation and settlement process outside of the courts to the extent possible.
Another challenge in the UAE is a fear of potential criminal consequences for managers or directors in an insolvency scenario, as the UAE Criminal Code provides that such individuals are subject to potential criminal liability punishable by fines and imprisonment when any of a broad spectrum of acts or oversights are committed preceding or during a bankruptcy proceeding. There is a general perception that it is better to avoid the risk of criminal liability by avoiding the bankruptcy judgment in the first place. In addition, there is a cultural aversion to submitting to insolvency proceedings or to declaring bankruptcy, as there is a stigma associating business failure with personal failure.
can you talk about any recent cases you have been involved in?
We represented the majority shareholders of a company listed on a UAE exchange which became insolvent, and earlier this year sold a substantial stake in the company to repay creditors.
The share sale proceeds repaid part of the outstanding debts of the owners (and
companies owned by them) to their lenders. The borrowers have since restructured between 1 and 2 billion UAE Dirhams of debt with lenders (comprising of nine banks where there were bilateral loan agreements with each one). The lenders entered into standstill agreements declaring a moratorium on repayments for a period of two years in order to enable the borrowers to sell their mortgaged properties in an orderly manner to repay their obligations. The standstill arrangement was preferred as an alternative to filing for bankruptcy and/ or insolvency of the borrowers. This is an example of the preference for commercial arrangements outside of the UAE court system.
How do you see this practice area progressing over the next 3-5 years?
In our view it is unlikely that there will be significant developments in this practice area in the UAE in the next 3-5 years. The possible exception to this that we are aware of is the new insolvency law noted above which is currently still in draft form undergoing reviews by the UAE Ministry of Finance. It is hoped that the new law will create a more accessible, predictable and transparent insolvency regime, including a component aimed at creditor- protected compositions or restructurings. Once the new law comes into force, there is no certainty that it will be well used, as parties in the UAE may continue to prefer to negotiate settlements out of court regardless of the prevailing legislation; however, at this stage the content and impact of the new law is purely speculation. LM
contact details:
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James Bowden afridi & angell
Emirates towers offices - Level 35 Sheikh Zayed Road Po Box 9371 dubai UaE
tel: +971 4 330 3900 Fax: 971 4 330 3800
Email: jbowden@afridi-angell.com