The worldwide economic distress caused by the ongoing Covid-19 pandemic has certainly not spared the GCC region. The pandemic has exacerbated the region's pre-existing economic challenges, many of which date from the prior distresses that occurred ten years ago and were never fully remediated. This has led to a knock-on effect whereby many corporate interests including both debtors and creditors need to consider insolvency and restructuring options in order to mitigate the increasing risks.
In recent years, several GCC jurisdictions have enacted new bankruptcy laws which have provided avenues where distressed companies can approach and remediate an insolvency scenario.
These new laws seek to enable a paradigm shift as to how debt should be treated, from that of a "punishment culture" to a "rescue culture", in line with the practices of other international commercially prominent jurisdictions such as the US and UK. Additionally, these laws provide for a process in which the injection of new capital via strategic investment can be managed, while at the same time claims based on existing debt can be both managed and mitigated, using a set legal process.
A company that previously would face crippling legal challenges in restructuring might take advantage of the formalized bankruptcy framework in order to manage and complete the restructure. Likewise, an entity that cannot successfully be restructured may have an opportunity to liquidate under the newer bankruptcy law provisions, without its management facing penalties from the entities' unsatisfied obligations.
BSA's restructuring and insolvency experts based in the UAE, Saudi Arabia and Oman discuss the new Bankruptcy Laws in these jurisdictions and how the frameworks can assist companies in need of restructuring or liquidation, as well as potential risks and considerations when understanding the restructuring & insolvency process.
United Arab Emirates
The UAE enacted Federal Law No. 9 of 2016 (the 'UAE Bankruptcy Law' or 'Law'), as amended, in order to facilitate a robust and thorough insolvency regime. The key benefit of the UAE Bankruptcy Law is that it permits an insolvent company to continue its operations with civil claims being suspended, while it works out a possible restructuring plan. A court-appointed trustee will oversee the process. Additionally, the Law provides relief from the most onerous criminal penalties regarding dishonored cheques, which had previously been in force and were being imposed against the directors and officers of companies in debt.
Who does the Law apply to?
The Law applies to:
- UAE companies established under the Commercial Companies Law;
- Companies partly or fully owned by the UAE or individual Emirates' Government;
- Free zone companies that are not governed by existing bankruptcy laws (e.g.: not including the DIFC and ADGM);
- Individuals who are classified as a "trader" under Federal Law No. 18 of 1993 relating to commercial transactions;
- and Civil companies.
A new insolvency law - UAE Federal Law No. 19 of 2019 - was also enacted with regard to personal insolvencies.
Filings under the new Law
To date, there has not been a groundswell of filings under the Law. This is most likely due to market uncertainty as to how the Law will be applied in practice, as there are provisions which may create unacceptable risks to both creditors and debtors. There is also some doubt about the viability of the "rescue culture" which was envisioned upon the Law's enactment. Therefore, the UAE market has generally continued to adhere to the pre-existing process of debt management, where debtors and creditors will often attempt to resolve their situations via an unwieldy mix of litigation - often resorting to criminal charges as well as civil claims, protracted negotiations, and refinance of facilities by lenders, who themselves are under distress from growing portfolios of non-performing loans.
Understanding the reasons why the Law has, thus far, not received widespread application requires some discussion of the basics of how the Law is structured. The Law provides two separate processes for restructuring: the less formal Preventative Composition ('PC') and more involved entry into restructuring or liquidation if the restructuring is not viable. The Law is not without its perils and includes restrictions upon bad faith filings as well as those where the available assets do not reach a statutory level, both of which may leave the debtor's directors, managers, and potentially its shareholders, open to both criminal and civil liability.
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