UK: The Restructuring And Corporate Recovery Market In The UAE

Last Updated: 8 April 2013
Article by Neale Downes

Here Neale considers some aspects of the restructuring and recovery market and the potential impact of the new insolvency regime for the UAE.

The restructuring and insolvency market has evolved radically over the last few years. How have you seen the market change recently in your jurisdiction?

The "market" in the UAE and indeed, the wider GCC is, in reality, one historically more focused on and active in the restructuring, rescheduling and workout arena. The occurrence of significant true insolvencies – ie receivership, administration or liquidation (or local equivalents) – is actually quite rare or, at least, not something which tends to be regularly in the public eye.

The successive shocks of the global financial crisis, the ensuing liquidity crunch and then the bursting of what had become a real estate bubble, left many UAE based companies (some of which are very significant entities) wrestling with debt mountains and multiple obligations to multiple creditors which, ultimately, they were unable to service.

Nevertheless, in the vast majority of cases, those debtors have been able to put in place initial standstill arrangements and then, by way of often tortuous but largely consensual processes, to agree various means by which those obligations could be restructured, deferred, be the subject of "haircuts", be re-collateralised and/or otherwise put back on a footing, designed to achieve a hopefully, substantial payout to creditors.

However, the journey along that restructuring path has led to frequent and vocal criticism of the local laws, particularly the opaqueness, paucity and lack of fitness for purpose in a 21st century business environment, of the UAE's insolvency law.

Hence, in many respects, the real evolution of insolvency law in the UAE is only just beginning. That process has been driven by a realization that an improved legal regime and greater certainty of the application of that law, will be of benefit to both creditors and debtors.

What do you think are the advantages and disadvantages of a restructuring programme as opposed to insolvency?

The UAE's new insolvency law is in draft form and is expected to be issued in 2013.

The new law is intended:

  • to be less draconian than the existing legislation:
  • to move away from the perceived stigma attaching to businesses or individuals that get into financial difficulties:
  • to provide new and quicker reorganization and rehabilitation processes, which will be implemented and overseen not by the "slow-moving" courts but by an independent commission:
  • and ultimately, to be more "debtor friendly".

As to the new processes for "financial reorganisation" (for companies in difficulty but not insolvent) and "protective composition" (allowing debtors to reach a compromise avoiding formal insolvency), they have clear parallels and similarities with a number of Western concepts such as administration in the UK and Europe and Chapter 11 of the US Bankruptcy Code.

On the one hand, it seems sensible that companies which have genuinely viable and inherently good quality businesses should not be driven into insolvency, by what may be relatively short term financial difficulties. Indeed, many of the companies in the UAE that did default or came near to defaulting had good quality assets in their portfolios. However, in many instances (for example with real estate or private equity holdings) those assets were either illiquid or simply not producing sufficient income in a bear market.

Fire sales of those assets – whether agreed or on enforcement and even if possible - would likely have achieved very poor levels of realisation, thus ultimately producing a result favouring neither the debtor seller nor its creditors.

A managed process to allow breathing space to such debtors and in which their obligations are either temporarily suspended (eg through a statutory moratorium) and/or deferred or rescheduled, will hopefully allow such businesses to get back on an even and financially healthy footing and mean they can eventually repay all (or substantially all) of their borrowings.

However and particularly from the banks' perspective, care needs to be taken not to allow the pendulum to swing too far in the favour of debtors. Management must take ultimate responsibility for its stewardship of a business. The US, in particular has seen companies bounce in and out of Chapter 11, sometimes on multiple occasions.

A sensible balance must be drawn between saving "good" businesses that may be affected by macro-economic factors outside stakeholders' control and providing banks and other institutions that provide credit with proper and effective recourse, in default situations.

That means not only having clear and workable insolvency laws and regulations but also having a system of civil and commercial law generally which is transparent and comprehensive and in particular, a robust system within which collateral can be obtained, registered or otherwise perfected and when necessary, effectively enforced.

What legal challenges and complexities arise when dealing with insolvency and restructuring in your jurisdiction? How can you assist clients in navigating/solving these challenges and complexities?

It is probably fair to say that the legal systems in Dubai and the wider Middle East are not yet as sophisticated or well-developed as those, for example, of the US, UK and continental Europe. Certain of the laws were drafted many years ago and have simply failed to keep up with the rapid pace of development of the markets, legal structures and increasingly complex and esoteric financial products. This is not a criticism but rather a largely unavoidable facet of operating in what are, in many respects, still emerging markets. Such laws as do exist can be opaque and difficult to interpret and very often, simply do not address or provide guidance as to how to deal, in practice, with the issues that arise.

The problems faced by debtors, creditors, their lawyers and other professional advisers are compounded by the fact that many of the projects and transactions undertaken in what was a booming market, are very large, complex, funded on a multi-source and multi-tranche basis and are cross-border in nature – at least, in so far as they typically involve participants from multiple jurisdictions.

The process of trying to put together the deals in the first place often pales in comparison to the complexity of trying to unravel, restructure or "repair" the deal when it goes wrong, as one grapples with the application and interpretation of intertwined systems of law or what lawyers refer to as "conflicts of law".

Most large financings will involve core documentation governed by English (or sometimes New York) law but guarantees and collateral will be governed by local law and if one is really "lucky", that structure will also be wrapped or overlaid by the need to observe and comply with the principles of the Islamic Shari'ah.

In the context of successfully advising clients as to how to navigate this legal minefield, it is probably a trite comment but there is, as ever, no substitute for hands-on, extensive experience of how to get deals done in the region, coupled with a detailed knowledge and understanding of how the law is applied – ie practical application, as well as what the black letter actually says.

Can you talk about any recent cases you have been involved in?

In the last 2-3 years, I have worked on the administration of a bank in Bahrain, in providing advice to an Islamic investment bank which ultimately applied for Chapter 11 bankruptcy protection in the US and on the rescheduling and/or restructuring of numerous financings, both conventional and Islamic, including several sukuk restructurings.

Most were complex and drawn-out processes and in many instances, the process of negotiations between debtors, lenders and other stakeholders has been fractious, ill-tempered and trying.

Whilst a clear, effective and comprehensive system of insolvency laws and regulations in Dubai and UAE will never be a panacea to all ills, it will hopefully significantly streamline the process of rehabilitation or, as appropriate, ultimate liquidation and also reduce the cost – in terms of resources, time and money – involved in such processes.

How do you see this practice area progressing over the next 3-5 years?

In some respects, we are at ground zero, as the new laws have yet even to come into force, let alone be applied, in practice, to "real" situations.

Whilst one might actually think that the new law will not need to be applied too frequently over the coming years, such confidence is probably likely to be mis-placed.

For whilst Dubai itself appears to be witnessing a modest, gradual and, dare one say, more prudently managed return to happier and somewhat more stable financial times, the broader, global and macro-economic climate is generally depressed and the outlook seems to be decidedly shaky, not least in the Eurozone and the UK and with the US grappling with the "fiscal cliff".

Further major, global shocks cannot be discounted. Indeed, they seem depressingly likely.

Dubai and the UAE, as we have seen, are not immune to such downturns and each will bring its new crop of companies in distress and in decline.

Hence, the chances are that the lawyers' work is not yet done when it comes to interpreting, applying and advising clients on the insolvency laws of the UAE!

This article is based on an interview first published in the January edition of The Lawyer Monthly magazine.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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