At the start of this year, there were some significant changes impacting the Dubai Multi Commodities Centre (DMCC) legal framework. Dr Laura Voda and Ifrah George explain how the increased flexibility they provide may aid companies facing a post COVID-19 economy.
WHAT'S HAPPENED AND WHY?
"In recent years, growth in the Dubai Multi Commodities Centre (DMCC) a freezone set up to facilitate trade international trade in commodities including everything from gold, diamonds and precious metals to tea, food and industrial materials has been particularly impressive," states Dr Laura Voda. "So perhaps it is not surprising that there have been a number of recent legislative changes impacting this freezone."
"The first was the introduction of new Company Regulations which came into force on 2 January 2020, repealing and replacing the freezone's former Company Regulations (DMCC Regulation No. 1/2003)," Dr Laura Voda continues. "The aim of which was to update the company law structure operating in the Centre in order to help bring it into line with international best practices and make it easier for companies to establish themselves there and operate more transparently so as they can grow."
"However, that has not been the only change impacting the Centre, as a new Law was then issued in February 2020, Dubai Law No. 3/2020 on the Dubai Multi Commodities Centre (DMCC) which has repealed the Dubai Decision on the establishment of Dubai Multi Commodities Centre dated 01/05/2002; and Dubai Regulation No. 4/2002," states Voda.
"Under the Law, the Dubai Multi Commodities Centre Authority (DMCCA) and its competencies have been clearly defined," Voda adds. "Changes include a clarification that the DMCCA is responsible for managing and developing the DMCC and for administering and supervising its activities and operations." "The Authority are now responsible for providing support to registered entities in the Centre and for developing rules and regulations which are in line with the Centre's objectives. It will also be responsible for a range of activities including licensing and regulating construction work in the center, regulating liquidation and bankruptcies there including procedures, and restructuring and set-off rights, the reaching of amicable solutions in labour disputes, and the regulation of real and virtual commodities markets there."
Relevant Changes in the Current Economy
"The main change with the DMCC's new Company Regulations is that they allow more flexibility for companies who wish to set up in the Centre, as there has been a revision of the company law framework there," Voda states. "These changes were made in part to align the DMCC but also to give companies there more flexibility in the way they undertake their activities and more options which should help them to be better protected from a market downturn such as the one currently being experienced as a result of COVID-19," Voda states.
"Branches of foreign companies which have been established in the Centre are also now subject to the new Regulations which means the onshore Federal Companies Law, Federal Law No. 2/2015 will be not relevant to them."
"Another significant change has been the introduction of the concept of a dormant company; under Regulation 172," Voda explains. "This may help in the current economic climate, as companies are able to voluntarily request to suspend their commercial license for 12 months or longer if approved by the Registrar but during this time, the company may not conduct their business activities until the license suspension has been lifted by the Registrar. It is also important to note if they do this they must also cancel any existing visas and leases and the company's bank accounts must be closed or suspended."
"In addition, if the company has more than one license," Voda adds. "All of their licenses are suspended and managers can no longer continue their appointment. Although the director(s) and the company secretary are allowed to continue as officers of the company, and the Registrar or the Authority is also allowed to issue additional rules in this area."
"Another change which may be significant in the current economic climate, are that the new Regulations mention various methods of winding up companies in the Centre," Voda states. "These provisions include circumstances where the Centre Company is undergoing a solvent winding-up, summary winding-up, insolvent winding up, or involuntary winding-up under Regulation 93."
"It is also stated in the new Regulations that Federal Decree-Law No. 9/2016 (the UAE Bankruptcy Law) will apply to businesses in the Centre".
"The new Regulations also include provisions outlining officer rules and regulations covering Centre directors, secretaries and managers and their duties and obligations. There are also new requirements which specifically deal with the employment of a manager for a Centre entity and their roles and functions are defined under Regulation 55."
"Other changes include more detailed provisions on dividends, specifically on restrictions and unlawful distribution which are found in Regulation 47 and 48."
"Under Regulation 8.3 of the Companies Regulations, DMCC entities can either implement the model template Articles which are laid down by the DMCCA and are called the Standard Articles," Ifrah George states. "However, there is now additional flexible as if an entity wants to adopt their own customised articles, to add protection or liability, or for other contractual purposes, they can do so, as long as they provide a legal opinion to the Registrar of Companies in line with Regulation 8.4."
"Although, it is important to note under Regulations 8.5 if, at any time, the Registrar informs a Centre company that their Articles contain a provision which is considered contrary to or inconsistent with the new Regulations, they will have to revise these Articles within a mandated time frame and in the way, the Registrar may direct," George adds.
"Another significant change involves minimum share capital," George notes. "Under the previous company regulations, minimum share capital of 50,000 AED per shareholder was required and the Authority reserved the right at their discretion to state the minimum issued share capital requirements. However, under the new Regulations, although the DMCC Registrar can still state a minimum share capital level for companies in line with Regulations 26.2, companies also now have the right to decide and issue different types of classes of o shares if they consider this necessary for their activities."
"This is a step forward because previously the share capital of the company was only confined to one class of shares, which were ordinary shares," George adds. "This means there is now more flexibility on equity structure. It should, however, be noted that these rights and classes must be specified in the company's Articles of Association."
"The current economic conditions may see more companies looking to establish in additional jurisdictions and in this context. Regulations 90 to 92 of the New Companies Regulations, allows a foreign entity which wishes to transfer from their current jurisdiction and continue operating within the Free Zone to do so providing they comply with the applicable regulations, rules and policies issued by the Centre and have obtained all the necessary authorisations required under the laws of their original jurisdiction to make such an application for consent to the Registrar," George notes. "Non-DMCC entities may also apply to the Registrar for consent to transfer to the Centre's jurisdiction, subject to completing relevant regulatory requirements."
"However, if the Registrar refuses to approve an application of this type, they do not have to give reasons and their decision cannot be appealed or reviewed," George adds.
ACCOUNTS AND AUDITORS
"The new Regulations, also include more explicit provisions on DMCC company's accounts and auditors," Voda states. "Their accounts must be prepared in line with the International Financial Reporting Standards (IFRS). Further details have also been provided on company accounts and record-keeping preservation by DMCC companies, in line with Regulations 72.2."
"Regardless of whether the company is a taxable or non-taxable entity, they must keep records for at least five years from the end of the applicable period and, in addition those operating in the real estate sector, must keep these records for least 15 years from the end of the calendar year which they relate to."
"In addition, an auditor who been registered by DMCCA in line with Regulation 76.3 must also be appointed," Voda notes. "Companies also now have six months after the end of their financial year in which to submit their audited financial statements to the Authority."
"Companies will need to creating and establish appropriate systems and internal procedures to enable their compliance with these requirements as auditors have a duty to disclose any breaches of company activity".
WHAT'S THE IMPACT?
"The new Regulations have been introduced to make it easier for existing entities to change over to the new standards, with minimal disruption."
"The introduction of these new legislative changes will provide a simpler way for companies to conduct their activities and incorporate in the DMCC by providing a flexible approach, " George explains. "In addition, they have provided the DMCC Authority with the appropriate standing and financial and administrative rights which they will need to regulate activities there."
"There will be no urgent changes required by companies which are already operating in the Centre unless their existing Articles are found to be inconsistent or conflict with the new Regulations," George states. "However, existing companies will need to make sure they are adhering to the new compliance provisions and make any necessary changes before the end of the 24-month transition period". The new Regulations have been introduced to make it easier for existing entities to change over to the new standards, with minimal disruption," George adds.
This article was published on Lexis Middle East Law Alerts (June/July 2020), both in print and digital version.
Originally published 7 June 2020
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