A new Dubai International Financial Centre (DIFC) Insolvency Law has been introduced incorporating new insolvency procedures and measures to facilitate improved co-operation in cross-border insolvency proceedings.
On 13 June 2019, the new DIFC Insolvency Law (Law No.1 of 2019) (the Insolvency Law) and supporting Insolvency Regulations came into force. The DIFC press release announcing the legislative changes refers to the introduction of:
- a new debtor in possession bankruptcy regime in line with global best practice
- a new administration process where there is evidence of mismanagement or misconduct
- developments in the rules governing winding up procedures, and
- the UNCITRAL Model Law on cross border insolvency proceedings, adapted to the requirements of the DIFC.
It also refers to the aim of the Insolvency Law as: “to balance the needs of all stakeholders in the context of distressed and bankruptcy related situations in DIFC, facilitating a more efficient and effective bankruptcy restructuring regime.”
The Insolvency Law represents a significant development to the existing regime and expands upon the previous insolvency procedures available in the DIFC (namely, company voluntary arrangements (CVAs), receiverships and liquidations). We set out below a further explanation of some of the principal changes.
The Insolvency Law introduces a new Part 3, Rehabilitation (Articles 13 to 31):
- A DIFC incorporated company may apply for a Rehabilitation Plan (that is an arrangement proposed by the creditors or shareholders of the company under Part 3) where the debtor is, or is likely to become, unable to pay its debts and there is a likelihood of a successful Rehabilitation Plan being reached between the company, when eligible, and its creditors and Shareholders.
- Following an application for a Rehabilitation Plan by a company’s directors to the DIFC Court (the Court), it shall impose a moratorium on all creditors in respect of the company for a period of one hundred and twenty (120) days from the date the Court is notified.
- In addition, during the moratorium period there is a limitation on the application of so-called “ipso facto” clauses (which are clauses providing for termination rights for creditors where the solvency of the other party is at risk) unless termination is agreed to by the company, the Court or in relation to debts arising after the start of the moratorium period, which have been agreed to by the company and remain unpaid after payment falls due.
- Creditors are entitled to apply to the Court to terminate the moratorium for cause, including evidence of bad faith and the Court can grant relief from the moratorium on terms and conditions which it deems to be equitable.
- Notably, the availability of a moratorium for any DIFC insolvency procedure is subject to the eligibility requirements contained in the Insolvency Regulations. The imposition of a moratorium will restrict the availability of certain further actions to be taken against the company to recover debts while the moratorium is in place; for example, it is prohibited to submit a petition for the winding up of the company or to seek the enforcement of a security interest in the company’s property, among other restrictions.
- Prior to submitting a notice of a Rehabilitation Plan, the company shall appoint a Rehabilitation Nominee, who must be an insolvency practitioner. However, absent evidence of fraud, dishonesty, incompetence or mismanagement (and a number of other types of misconduct) in the company or its management, the directors are permitted to continue managing the company. Alternatively, an Administrator may be appointed by the Court.
- Following the expiry or termination of the moratorium, the company can take steps to seek directions from the Court, agree an alternative Rehabilitation Plan or apply for the company to be wound up.
- The powers of the Court to sanction a Rehabilitation Plan or take steps to wind up the company and the roles of creditors and shareholders to vote on a proposed Rehabilitation Plan are also set out.
The Insolvency Law introduces new Part 4, Administration (Articles 32 to 41):
- Notably, an application for the appointment of an Administrator (who must be an insolvency practitioner) can only be made by one or more creditors where an application for Rehabilitation has been made and there is evidence of misconduct.
- The Court may appoint an Administrator in circumstances in which a company is, or is likely to become, unable to pay its debts and the Administrator’s appointment might make it more likely to achieve a Rehabilitation Plan, a company voluntary arrangement, a scheme of arrangement under the DIFC Companies Law (Law No.5 of 2018) or to investigate mismanagement or illegality related to the company’s affairs.
- A moratorium will also apply during the period of appointment of the Administrator.
- The Administrator is generally empowered to do all things necessary for the management of the affairs of the company (which are further specified under Part 4 and Schedule 2).
- During the period of administration, a creditor or shareholder of the company may apply to the Court if the company’s affairs, businesses and property are or have been managed in a prejudicial manner to their interests.
The Insolvency Law has also introduced changes to the Winding Up procedures in Part 6 (Articles 51 to 116). Among the changes:
- it clarifies the procedures to be followed by the Liquidator after the company’s affairs are fully wound up and the contents of the Liquidator’s final report, and
- it specifies that, in circumstances where a winding-up order is made by the Court in the context of a compulsory winding up, it is the duty of the Liquidator to investigate why the company has failed (if that is the case) and to prepare a report on the dealings of the company, if requested by the Court.
Cross-border insolvency proceedings
The UNCITRAL Model Law on cross-border insolvency (adapted for the DIFC) is also incorporated which applies where assistance is sought from the DIFC by a foreign court/representative in connection with a foreign proceeding or in a foreign state in connection with the Insolvency Law; or where there are concurrent proceedings in a foreign state and under the Insolvency Law; or where creditors/interested parties in a foreign state have an interest in a proceeding under the Insolvency Law.
The Model Law sets out the applicable procedures in those circumstances related to the access to the Courts, the recognition of foreign proceedings and relief, co-operation with the foreign courts/representatives and the procedures in the event of concurrent proceedings.
The developments introduced by the Insolvency Law represent a welcome reform to the insolvency regime in the DIFC and follow the much-publicised insolvency procedure of Abraaj Capital Limited (now in provisional liquidation) in the DIFC in August 2018.
In particular, the adoption of the Rehabilitation and Administration procedures represent significant developments and are also more closely aligned with comparable international procedures, such as Chapter 11 bankruptcy in the US and administration proceedings in the UK.
In addition, is anticipated that the adoption of the UNCITRAL Model Law will significantly improve the efficacy of cross-border insolvency procedures where there is a DIFC nexus.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.