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UAE Bankruptcy: Not Frequently Asked Questions and Answers (NFAQ’s)

Posted on 7th March 2010 by Camille Paldi,

 

 


 1. What are the main shortfalls of the UAE’s existing bankruptcy laws?

It supposedly doesn’t cover companies issued by decree, however, this is not true.  Bankruptcy legislation in the UAE does cover all companies including companies issued by decree in the UAE.    One of the problems currently existing in the UAE is that foreign law firms don’t fully understand how UAE bankruptcy legislation operates and how bankruptcy legislation intertwines with the other laws of the UAE.  Furthermore, those declared bankrupt may not be able to leave the UAE during the bankruptcy proceedings…a frightening prospect for expatriates and which may deter UAE investment.

 

2. What did the Dubai World default show about the existing legislation?

That if a company is set up by decree, it may be able to circumvent the existing legislation in the UAE regarding bankruptcy, which is comprehensive and based on French Civil Code.  Although untested, parallel models are functioning effectively in Switzerland and France.  Why not give  the local courts a chance to test it out and allow judges to gain the experience needed to handle such complex issues?

Dubai World is a decree corporation, meaning it was established through a decree of the Ruler of Dubai.  The UAE bankruptcy legislation still covers such corporations, however, it was decided that the current UAE bankruptcy legislation was not sufficient to govern the bankruptcy of Dubai World.  Hence,  the Government Of Dubai issued the Decree No. 57 for 2009 Establishing A Tribunal to Decide the Disputes Related to the Settlement of the Financial Position of Dubai World and Its Subsidiaries, which provides a legal framework for the restructuring of the obligations of Dubai World and its subsidiaries in accordance with international best practices and DIFC law.

The Decree establishes a tribunal of three to five internationally recognized judges, which has the function of supervising the financial reorganization of Dubai World and its subsidiaries and which will be authorized to adjudicate disputes relating to restructuring of the debt of Dubai World and any of its subsidiaries.  In addition, the Decree permits the Chief Justice of the DIFC Courts to recommend to the Ruler of Dubai additional judges to be included in the Tribunal. 

Law to be applied:

DIFC Law No. 3 of 2009 Concerning the Law of Insolvency, according to the amendments stated in the Schedule to the Decree;

The Regulations Issued by the Board of Directors of the DIFC Concerning DIFCA Insolvency Regulation according to the amendments stated in the Schedule to the Decree;

DIFC Law No. 10 of 2004 Concerning the Court of DIFC, according to the amendments stated in the Schedule to the Decree;

Legislation in Force of the Emirates;

Commercial Custom;

Principles of Justice and rules of righteousness and equity. 

The government of Dubai decided to base the law of the Decree on the insolvency laws, rules and regulations of the DIFC because it determined that such laws, rules and regulations were comprehensive and reflected international standards. 

However, the government determined that the existing DIFC laws, rules, and regulations needed additional modifications to allow them to work effectively for the reorganization of  Dubai World.  According to Gulf News, the modifications included provisions to provide financing during the course of a reorganization, provisions enabling Dubai World and its subsidiaries to continue to benefit from existing contracts, and provisions enabling the formation of appropriate classes of creditors and provisions specifying the approvals required for a voluntary company arrangement.

The tribunal has jurisdiction to hear and decide any proceedings commenced against Dubai World, any of its subsidiaries or any person relating to the settlement of the financial obligations of Dubai World and/or any of its subsidiaries. 

The Decree will be available to Dubai World and any of its subsidiaries.  However, it is expected that only entities that require protection from creditors or require the assistance of the Tribunal to restructure their debts will actually file under the Decree. 

The Tribunal will issue its judgments by the majority votes of its Judges.  The judgments of the Tribunal are final, irrevocable and not subject to appeals.  All judgments may be executed and enforced by a competent court in the Emirate of Dubai and wherever else necessary. 

The Registrar of the DIFC Court will act as the registrar for the Tribunal.  The Registrar will maintain a publicly available register of all pleadings filed under the Decree.  (Gulf news, ‘Dubai Issues New Legal Framework to Deal with Dubai World Disputes, December 14, 2010.)

 

3. What are the pros and cons of the establishment of the Dubai World Tribunal?

The local law firms and judges of the UAE will not be able to  test their own bankruptcy regime and gain the required skills to handle bankruptcy issues of this size and scope for the future.

 

4. Should Dubai adopt DIFC bankruptcy legislation? What are the advantages and disadvantages of this?

No.  The Dubai bankruptcy provisions are sufficient to cover bankruptcy and are in fact written in a manner which works in conjunction with other existing laws in the UAE.  In addition to an entire chapter of the commercial code in the UAE being devoted to bankruptcy as well as provisions for bankruptcy in the Civil Code and Penal Procedure Law, the UAE has a solid legal system through which judgments are issued and enforced. 

For example, a person declared bankrupt in the UAE can have his or her assets attached and can be detained if there are reasons to believe that the bankrupt person is concealing his or her property.  Furthermore, the bankrupt person’s disposals prior to and following the bankruptcy declaration can be challenged by the group of creditors.  Other advantages include the ability to make deferred outstanding liabilities immediately payable and the ability to secure recovery of a portion of the outstanding debt instead of risking the loss of all recovery opportunities by allowing the debtor to dispose of his or her property unchecked. 

 

Link to:

DIFC Insolvency Law: http://www.difc.ae/laws_regulations/laws/files/Insolvency_Law.pdf

Decree No. 57 of 2009 (Dubai World Tribunal and Bankruptcy Law): http://blogs.thenational.ae/economy_blog/Decree%20No.57%20for%202009.pdf

 


Posted on 7th March 2010 by Camille Paldi


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