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New DIFC insolvency law at cutting edge of global legal practice, despite limited applicability

The Dubai International Financial Centre (DIFC) enacted its new Insolvency Law on 30 May, introducing internationally utilised insolvency and restructuring tools to offshore DIFC jurisdiction.

The new law has been warmly welcomed as a great step forward by legal advisors in the region. However, the law’s scope of applicability is still narrow, as it is limited to the relatively small number of companies registered in the DIFC, market participants told Debtwire.

The new legislation is in line with international insolvency standards and trends, and also reflects the EU Insolvency Directive, said Adrian Cohen, partner at Clifford Chance LLP.

The previous insolvency law had been in place for 10 years, said Adrian Low, partner at law firm Clyde & Co’s Dubai office. The authorities in Dubai took Singapore as an example and developed a law which maintains [the jurisdiction’s] competitiveness, Low added.

It introduces a new debtor-in-possession (rehabilitation) regime, as well as administration proceedings, both of which provide for a moratorium, composition and cram-down, Cohen noted. This new law gives debtors an opportunity to protect enterprise value and to turn the situation around. Debtor-in possession-financing gives both debtor and administrator the opportunity to finance the business during the restructuring, he continued.

Another interesting development is the ability to investigate the wrongdoings of directors, managers and shareholders of a company as part of restructuring proceedings, according to Low. This is a very useful concept to make sure that the directors, managers and shareholders are cooperating with the creditors, he added.

Moreover, the UNCITRAL Model Law on Cross Border Insolvency is incorporated into the new legislation, with the purpose of making life as easy as possible for cooperating on cross-border insolvencies, noted Low. This incorporation eases recognition of foreign proceedings as well as access to the DIFC courts, which will assist with multi-jurisdictional cases, said Cohen.

A tool is only as good as its user

As much as the law itself ticks all the boxes contextually, the scope of applicability is one concern raised by two of the market participants. One slight caution would be about the law being limited to the stock of companies established under the DIFC, according to a Dubai-based lawyer. The new law is not drafted to be applicable to onshore [non-DIFC] companies, even if the loan agreement itself is governed by the DIFC law, said Low.

There are 2,137 active companies registered with the DIFC, according to its website.

“This is a different approach than the English courts have taken, for example. The English courts have recognised the ability of EU based companies to restructure under an English scheme of arrangement because their loan agreement was governed by English law. I don’t think this will be the case for the onshore companies [in Dubai],” Low continued.

“In time we will see if the scope can be widened, and to what extent the lawyers will argue to widen the applicability of the DIFC insolvency law to onshore companies”, added the Dubai-based lawyer.

Upgrading the toolbox

There is unlikely to be a wave of DIFC companies making insolvency applications after the enactment, the market participants agreed, because this is not the main purpose of the new law. Distress is rather limited within DIFC jurisdiction and the new law is aimed to meet a developmental need, said Cohen.

Amendments introduced by the new law have the purpose of modernising proceedings rather than promoting usage, said Low. The law is not being introduced because there is a demand for change and the existing laws have not been fit for purpose – in fact, there are not that many distressed companies within the jurisdiction of DIFC apart from Abraaj, as a current high-profile exception. The aim has been to modernise the law and to take it to a more global level, he added.

The new law has an onshore/offshore dynamic and this mix of jurisdictions will be interesting to see, said Cohen. The UAE has its own federal insolvency law, but it is not used much, said Cohen. This new DIFC law may be a shot in the arm for the UAE in terms of developing the country’s law, he added.

There is an onshore bankruptcy law in place that was enacted a couple of years ago, said Low. The onshore law has – so far – been little utilised, and it remains to be seen whether the new DIFC law will be different, he noted.

There are some similar provisions in the UAE insolvency law compared to the DIFC law. The onshore legislation is improved, but it is still different from the DIFC insolvency law, the Dubai-based lawyer added.

For example, the onshore regulation is more traditional with a court heavy-process, according to Low.

Regional Trend

In terms of the regional market there has been an upward trend in terms of restructuring activity - it is slow but upward, said Cohen. There have been many new insolvency laws enacted in the region, including in Saudi Arabia, Bahrain and Oman, he added.

On the other hand, regionally, there is a different inception about how to utilise the insolvency provisions, said the Dubai-based lawyer. In the Middle East, the perception of insolvency is different than the rest of the world. We still haven’t seen people wanting to use – or actively using – the tools yet; how it will unfold in practice remains to be seen, the lawyer continued.

Enforcement

As to the recognition and enforcement of a DIFC court decision, there is a protocol between jurisdictions, Cohen added. In principle, a DIFC judgment can be enforced onshore in the UAE, since the UAE federal law provides for this kind of enforcement. But practice can be a little uneven, noted Cohen.

Enforcement proceedings in Dubai are straightforward, and there are Memorandums of Understanding with local courts, according to Low. However, trying to use the DIFC as a backdoor conduit would be harder since the local courts would hardly accept enforcing a DIFC judgment in such situation, he added.

At the level of recognition and enforcement, it will be interesting to see the arguments that will be brought in by the lawyers as to the applicability of the DIFC law, said the Dubai-based lawyer.

Foreign investor point of view

There have been studies by the World Bank in relation to Emerging Markets, according to Cohen. Decent insolvency law, which is fit for purpose, is very important from an international investor point of view. Investors expect a predictable, efficient system in place, he added.

“A good insolvency regime is a last resort regime,” said Low. Creditors can work on consensual restructurings knowing what the alternative is likely to mean in terms of recoveries, he continued.

For the onshore companies, creditors still appear to be willing to avoid going to court as there is uncertainty as to how the process will work, he noted. If examples can be seen in practice, it will give more confidence in the law. At the moment there are uncertainties as to the time and cost of any outcome, so it acts as a deterrent, he said.

As the previous DIFC Insolvency Law had already been in use, there is already confidence in how it will apply, and these new changes can be seen as further alternatives, Low added. Obviously, there is going to be some uncertainty as to how the changes will work in practice and only time will tell, Low continued.

It is still very early days to comment on how it will unfold in practice, all the sources agreed. Time will allow us to see how it works in practice, especially in the context of international proceedings, noted Cohen.

Asli Orbay Reporter, Arbitration and Litigation Debtwire CEEMEA

Asli Orbay is a reporter working for Debtwire CEEMEA, with a focus on arbitration, litigation and distressed situations. Prior to joining Debtwire, Asli worked as a banking and finance lawyer for Clifford Chance in Istanbul. Asli holds an LLM in international economic and trade law and a she is currently a PhD candidate studying at Brunel University.

Asli Orbay Reporter, Arbitration and Litigation Debtwire CEEMEA

Asli Orbay is a reporter working for Debtwire CEEMEA, with a focus on arbitration, litigation and distressed situations. Prior to joining Debtwire, Asli worked as a banking and finance lawyer for Clifford Chance in Istanbul. Asli holds an LLM in international economic and trade law and a she is currently a PhD candidate studying at Brunel University.

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