Asset Tracing and Insolvency in the UAE

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In brief:

It can be challenging to trace assets in the UAE, due in part to the difficulty in obtaining information and the absence of a right of access to information for many types of individual and company entity
The existing insolvency regime is largely untested in the Courts
Enforcement of foreign insolvency judgments can be complex.

Local Rules on Asset Tracing

In general, UAE law makes asset tracing challenging, as there is no reliance on case precedent, no equivalent of Mareva injunctions (freezing orders), Anton Piller orders (search orders) or Norwich Pharmacal orders (disclosure orders). However, the UAE Penal Code, Civil Code and/or the Commercial Code, along with their accompanying procedural rules, can be used to obtain access to information covered by bank secrecy, to demand necessary information from public authorities or to gain permission to enter a property to seize movables.

The UAE Penal Code (and some individual Emirates' local regulations) has been the primary asset recovery tool for fraud carried out within the UAE in recent years, but there are no appropriate criminal provisions to deal with fraud regarding private company issues and/or foreign invested monies, as many relevant provisions of the Penal Code are applicable to civil servants rather than the private sector.

Access to corporate and financial information is not as easy as in some common law jurisdictions. There is generally no right to access for any corporate or financial information from an individual, a sole proprietorship or a limited liability company. There is very limited protection and information available to minority shareholders in UAE, whether in respect of a limited liability company or a free zone company. There are exceptions in the case of entities established in financial free zones.

Access to information from UAE public companies (audited accounts on an annual basis and compiled accounts on a quarterly basis) is also limited. Some Emirates have a system where the Chamber of Commerce (particularly in Dubai, Sharjah and Abu Dhabi) provides minimal information via the internet on the validity of an entity's licence and some management information. Private investigators (locally called "corporate researchers") are officially discouraged, although some well-known ones exist (but are subject to limitations on their activities). Discovery is very limited in UAE civil court proceedings.

The UAE does however have several bilateral and multilateral extradition treaties (including with the GCC, UK, India and Russia). Federal Law No. 39 of 2006 (the "International Judicial Cooperation Law" known as the "Extradition Law") sets out the requirements for extradition from the UAE.

Asset tracing can also be undertaken by using the local and federal court systems to apply for attachments or other interim orders, however it is difficult to follow illegal money which has entered the UAE into third party accounts, or registered real estate in third party ownership.

More transparency would be useful for the purposes of asset tracing. For example, the Commercial Register and the Land Registry are not currently made public, and only lawyers duly appointed by a relevant party can obtain any relevant information from such registries. Without a court order, it is difficult to obtain any information through official means.

Company Law Relevant to Asset Tracing and Recovery

The UAE Companies Law (Federal Law No. 2 of 2015) offers several types of corporate form for persons who wish to carry on business onshore (as opposed to operating in the free zones). Considerations when choosing the appropriate corporate form include whether or not the selected structure would provide a shareholder with a right of access to the company's accounts, books and records and the scope of such access.

The Companies Law contains provisions which hold the chairman, managing director/manager or directors of a company potentially jointly liable to indemnify the company, the shareholders and third parties for any damage sustained as a result of fraud, for misuse of their power or mal-management.

For example, under the Companies Law, no fictitious profits may be distributed to the partners or shareholders as the board of directors and/or manager or any similar body would be liable towards the partners, shareholders or creditors. There are similar provisions against shareholders who act in ways detrimental to the interests of the other shareholders and/or the company.

Rights of Creditors in National Insolvency Proceedings

The UAE Companies Law sets out the procedure for the dissolution of a company.

The Commercial Code, which applies to all "traders", sets out the UAE bankruptcy regime. The lack of a sophisticated law means companies trade on longer than they probably should. Accordingly, there tend to be few assets remaining once a company finally collapses.

It is important to note that the bankruptcy provisions in the Commercial Code may not apply to state-owned entities, as the Civil Procedures Law prevents seizure of "public or private assets owned by the state or any of the Emirates" and this could be interpreted to include bankruptcy proceedings.

The Commercial Code gives priority to the payment of wages employees accrued in the 30 day period prior to declaration of bankruptcy. Then certain preferred claims (rent due in respect of business premises and government taxes). Public funds used to cover the cost of the bankruptcy or liquidation procedures are also given priority status and are reclaimed out of the trader's estate ahead of all other creditors. Secured creditors are also considered preferred creditors with rights over the assets mortgaged or pledged (although there is no concept of a floating charge). However, the priority relationship between these preferred secured creditors and the above preferred non-secured creditors remains unclear. Unsecured creditors are considered ordinary creditors, and will be the last in the ranking of creditors.

While the federal laws in the UAE provide for court-led bankruptcy, corporate rescue and liquidation procedures, the legislation is largely untested in the UAE courts as there has yet to be a major corporate insolvency in the UAE.

In addition to the bankruptcy regime applicable to traders, there is a further civil regime in the UAE for individuals who fall outside of the scope of the definition of 'trader'. Professional consultant-type activities (doctors, lawyers, consultants, etc.) are not generally considered commercial activities and so the individuals involved are not considered traders. A civil trader who ceases to pay his or her debts may not be declared bankrupt under the Commercial Code, but will be subject to certain administrative restrictions instead.

International Insolvencies

There are no provisions in the local insolvency law for the recognition of insolvency proceedings commenced in other jurisdictions or for cooperation with the courts of other jurisdictions.

Any assets of an insolvent person located in the UAE are likely to require separate legal proceedings to secure them for an international insolvency. In essence, any foreign judgment or order with regards to an international insolvency will have to be enforced in the UAE, using the enforcement procedures available. No international order for receivership or similar is likely to be enforced in the UAE directly, as it will either be seen to be usurping the UAE's local jurisdiction or as an attempt to bypass federal laws.

It is, however, possible to apply for a precautionary attachment order and for subsequent validity proceedings based on foreign insolvency proceedings. However, once those international proceedings conclude, the foreign judgment would need to be enforced in the UAE against those attached assets and in the absence of a bilateral treaty, the options are to enforce the foreign judgment under the UAE Civil Procedure Code, or to bring fresh proceedings.

There also exist various bilateral treaties for the mutual cooperation in civil, commercial and criminal matters and these can be of assistance for international insolvencies.

[This was published previously in a different form as part of the contribution of Hadef & Partners to the FraudNet Compendium].