The new Dubai International Financial Centre bankruptcy legislation, DIFC Law 1 of 2019, is the most recent insolvency regime reform in the Middle East (the New Law). The current restructuring and insolvency framework in the DIFC was replaced and improved by a new insolvency law and rules. The New Law repeals and replaces DIFC Insolvency Law 3 of 2013, as provided in article 1(4) of the New Law (the Old Law). The New Law specifies in Article 3 that it applies throughout the DIFC's jurisdiction, which includes all DIFC established organizations. On August 28th, 2019, the New Law came into force.
Additional Restructuring Options for Debtors and Creditors
When paired with the extended and restated Insolvency Regulations, the New Law intends to encourage trade and investment in the UAE by aligning the DIFC with worldwide best practices in insolvency proceedings.
In so far as it offers a formal restructuring procedure as a rescue tool to debtors, provides a mechanism for binding non-consenting creditors, and promotes a more structured and effective system for businesses in financial distress. The New Law broadly follows the same principles as the UAE Federal Law 9 of 2016 on Bankruptcy.
The New Law offers debtors and creditors a slew of new restructuring choices. While the New Law provides extra protection and tools to debtors wanting to restructure their enterprises, it also assures that these safeguards and instruments are balanced against creditors' rights to reclaim their obligation.
What has changed under the new Law?
The New Law on Insolvency establishes a court-supervised debtor-in-possession system known as "rehabilitation," which effectively allows a debtor to save their firm by presenting a rehabilitation plan to their creditors and shareholders for approval. Suppose a debtor cannot pay its obligations or is likely to become unable to do so. In that case, it may file for rehabilitation if it has a fair chance of reaching an agreement with its creditors and shareholders.
One of the most critical aspects of the New Law on Insolvency, which financially challenged firms will undoubtedly appreciate, is that when a debtor applies for rehabilitation, an automatic moratorium is imposed on all creditors (secured and unsecured) for 120 days. The automatic moratorium provides debtors with some rights against contract termination, among other things. The New Law permits creditors to petition the Court for relief from the moratorium to strike a balance between debtor and creditor rights.
New Law on Insolvency gives authority to the Court
The New Law gives courts the power to sanction the rehabilitation plan if:
- At least one class of creditors affected by it has accepted it.
- All creditors are receiving as much value as they would if the debtor was wound up.
- A junior creditor in a class of creditors is not paid before a senior dissenting creditor in that class.
The opportunity to take on court-approved fresh financing is another key benefit that the New Law affords to debtors during the rehabilitation process (secured or unsecured).
Appointment of an independent administrator by the Court
One or more creditors can apply to the Court for the appointment of an independent administrator to oversee the debtor's affairs throughout the rehabilitation process if there is proof of mismanagement and wrongdoing. The administrator, if appointed, will have the authority to:
(a) approve the rehabilitation plan;
(b) assist a company with voluntary arrangements;
(c) approve a scheme of arrangement under the Companies Law, and
(d) examine any wrongdoing or mismanagement by the debtor and its management.
Effective guarantee of Cross border Insolvency Processes
The adoption of the United Nations Commissions on International Trade Law (UNCITRAL) Model Law is another essential component of the New Law that should provide the international trade community with confidence when it comes to investing in the UAE. It will effectively guarantee cross-border insolvency processes' mutual cooperation and coordination.
The New Law, among other things:
(a) improves on the Old Law's voluntary and compulsory winding-up procedures by streamlining the appointment process for a creditors' committee in a winding up and clarifying the dissolution process;
(b) adds additional provisions governing unlawful trading and the reuse of company names, and (c) creates misconduct in winding up the offence.
The New Law on insolvency has several beneficial provisions that should position the DIFC at the forefront of countries with well-developed and sophisticated insolvency regimes. It is unquestionably a step forward in retaining the UAE's status as a global commercial hub.
This article is presented solely for informational reasons and is not intended as legal advice. Before taking or abstaining from any action in response to the contents of this publication, you should seek professional legal counsel. Don't hesitate to contact us for more information about restructuring and insolvency framework in the DIFC.
Contact us for: Liquidation and insolvency Consultation in DIFC and UAE