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The new Dubai International Financial Centre (DIFC) insolvency law that came into force on June 13 has many similarities with the 2009 law it is replacing, but also some significant differences that the centre’s leaders hope will provide a better outcome both for financially stressed companies and the companies to which they are indebted.
For instance, companies that secure the support of up to 75 percent of its debtors (by value) can still enter into a company voluntary arrangement (CVA) to reschedule debts. The new law allows for creditors who are owed money to petition to wind a business up, as well as offering formal administration and receivership processes.
The main difference, however, is the adoption of a new ‘debtor in possession’ regime known as rehabilitation. This allows the managers of a business that finds itself facing financial strain to work with a restructuring professional on a turnaround plan which, if approved by a court, allows them to remain in charge to oversee it, as opposed to managers being removed once an administrator or liquidator is appointed.
“The basic gist of what's happening with legislation in the insolvency world is that it's becoming more debtor-friendly,” said Jacques Visser, chief legal officer of the DIFC Authority – the body responsible for setting policy for Dubai’s International Financial Centre.
“Previously, it was pretty much creditor-friendly,” he told Zawya in an interview held at the centre earlier this month.
Essentially, he said, the new DIFC Insolvency Law has provisions that are closer to Chapter 11 bankruptcy proceedings in the United States. Visser said that in the wake of the global financial crisis of 2008 “people saw the value in a debtor-in-hand type of process, where you can actually pre-empt a lot of the insolvency-related issues”.
A company which gains the green light for a rehabilitation is essentially granted a 120-day moratorium period protecting it from winding-up claims by creditors, and from ‘ipso facto’ clauses in contracts that automatically terminate existing commercial agreements in the event of a company being placed into administration.
Adrian Cohen, a partner at Clifford Chance – a global law firm that advised the authority on the drafting of the new law – said there was currently “a strong reform agenda” regarding insolvency law reform taking place around the world.
‘Second chance’
“It's not something that's just happening in the GCC, it's happening at a European level. A European directive has just been introduced which requires all EU member states to introduce legislation which conforms with certain principles - that includes a focus on rehabilitation and restructuring and away from traditional insolvency proceedings. So, debtor-in-possession composition procedures is where the focus is on preservation of enterprise value and giving people a second chance.”
Visser is keen to point out that there are a number of safeguards within the new regime to protect creditors. For instance, creditors and shareholders are split into different categories, and a plan needs the approval of at least 75 percent of creditors in all categories.
Any plan put to the courts also has to demonstrate that creditors should expect to receive at least as much through a rehabilitation process as they would through a formal winding-up of the company.
Dissenting creditors can also petition courts to reject a rehabilitation plan if they can demonstrate suitable cause – such as any evidence of misconduct or of ‘bad faith’ by managers when proposing a plan. In such cases, a court can appoint an administrator to run a company or order a winding-up.
A court-appointed administrator could also allow for a restructuring plan to proceed but on the basis that they retain oversight of its implementation.
Visser says that one significant advantage of a rehabilitation plan over existing insolvency processes is that it makes it easy for companies to attract additional investment to fund a turnaround plan.
“You can afford priority rights to new money coming in, which is always a problem under (existing) schemes or CVAs.”
Mark Brown, a banking and finance partner at law firm Al Tamimi & Company, said that under a rehabilitation process “creditors get the benefit of a more certain regime – they know if a counterparty goes into rehabilitation exactly what the process will be”.
“Having the process should also incentivise debtors to take action before it is too late, which may cause greater loss to the creditors,” he said in an emailed response to questions from Zawya.
David Pang, a senior counsel at law firm Bracewell, said the 120-day moratorium should work in favour of both debtors and creditors, as it “allows the distressed company 'breathing space' to get its affairs in order, thus giving the creditors a better chance of getting paid.”
The other major change to the law is an adoption of the UNCITRAL (United Nations Commission on International Trade Law) Model Law. This effectively means that the foreign representatives working on global insolvency cases gain recognition within DIFC.
“UNCITRAL builds into the hardwiring of the legislation that DIFC will work with other jurisdictions; it will recognise the insolvency office holders coming from other jurisdictions and enable them to make use of the DIFC legislation,” says Clifford Chance’s Cohen.
Visser describes it as a “cross-border, cooperative scheme”.
Cohen believes that the new law will be beneficial in terms of DIFC’s attractiveness as an investment location, pointing out that part of the World Bank’s ratings for ease of doing business focuses on good insolvency practices.
“No-one goes into business to lose money, but it does encourage investment if people have a sense that there is a predictable, orderly process if things don't go the way they intended,” he says.
Visser cautions, however, that assessing the impact of the new law could take time.
“So it's not something that will happen overnight, but if you then look at what we've done in the role of insolvency and debt restructuring professionals in this debtor-in-hand process... it actually creates a lot of scope for professionals in that area to seriously start looking at this jurisdiction,” he said.
(Reporting by Michael Fahy; Editing by Seban Scaria)
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