On May 30, 2019, Dubai’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, signed DIFC Insolvency Law, Law No. 1 of 2019 (the “New Insolvency Law”) into law, thereby repealing and replacing DIFC Law No. 3 of 2009. The New Insolvency Law, and supporting regulations (the “Regulations”), became effective on June 13, 2019, and govern companies operating in the Dubai International Financial Centre (the “DIFC”).
A full analysis of the New Insolvency Law is beyond the scope of this post. However, there are many important provisions of the New Insolvency Law that will be very familiar to U.S. bankruptcy practitioners, as well as cross-border practitioners.
First, Part 2 of the New Insolvency Law provides procedures for creditors and shareholders to agree to a voluntary arrangement of a company’s affairs. The procedure for implementation of a proposed voluntary arrangement is relatively straightforward. The proposal is considered at two meetings: (1) a meeting of the company’s creditors; and (2) a meeting of the company’s shareholders. See Article 10(1). If the proposed arrangement is approved by both constituencies, no court involvement is required and the approved voluntary arrangement is binding on all creditors and shareholders. See Article 11.
This is not to say that the court has no involvement in a voluntary arrangement. For instance, during the approval process the directors of the company may apply for a moratorium for the company. See Article 8(1). The moratorium will have some of the attributes of the automatic stay imposed by Section 362 of the U.S. Bankruptcy Code (the automatic stay operates as an automatic injunction that halts actions by creditors, with certain exceptions, to collect pre-bankruptcy debts from a debtor). For instance, under the Regulations the moratorium precludes, among other things: (1) the filing of any petition for winding up of the company; (2) a landlord from exercising any right of forfeiture; (3) a creditor from taking action to enforce a security interest in the company’s collateral or to repossess the company’s goods; and (4) the initiation of other proceedings against the company. See Regulations at Article 4.5. Additionally, if the proposed arrangements approved by the creditors and shareholders differ, the court may determine which arrangement is to be taken as the approved arrangement. See Article 11(2). Further, the person appointed to carry out the voluntary arrangement (termed the “Supervisor”) may apply to the court for directions in relation to any matter arising under the arrangement. See Article 12(5). Creditors and any other person dissatisfied by the actions of the Supervisor can also seek relief from the court. See Article 12(4).
Importantly, the rights of a secured creditor cannot be negatively impacted by the voluntary arrangement, unless the creditor agrees:
Neither the Company nor its creditors may approve any proposal or modification which affects the right of a preferential creditor or a secured creditor of the Company to enforce his rights or his security, except with the concurrence of the creditor concerned. See Article 10(3).
A company can also apply to the court for approval of a rehabilitation plan in accordance with the provisions of Part 3 of the New Insolvency Law. It is here that the similarities between the New Insolvency Law and the U.S. Bankruptcy Code become most apparent.
For instance, similar to the automatic stay imposed by section 362 of the Bankruptcy Code, a moratorium is automatically imposed once the company advises the court that a rehabilitation plan will be proposed. See Article 15(2). The moratorium applies to all creditors and to the company’s assets wherever located, and is in place for a 120 day period. See Articles 15(2) and 16. Creditors can seek relief from the moratorium, and in considering an application for relief, the court will consider whether there is any imminent irreparable harm to the company in the absence of the moratorium in relation to the petitioning creditor, whether the creditor would suffer any significant uncompensated loss and whether the balance of harm to the creditor outweighs the interests of the company. See Article 19.
Similar to the rights provided by section 365 of the Bankruptcy Code, the Company may, during the moratorium period, assume, assign or reject executory contracts and unexpired leases. See Article 18(3). Before the company may assume a contract, it must provide adequate assurance that it, or its assignee, will cure any defaults and also provide adequate assurance of future performance. See Article 18(3).
The New Insolvency Law permits the Company to obtain secured or unsecured financing, and even provides for priming loans as long as adequate protection is granted to the pre-existing lien holder. See Article 31.
Similar to the concept of a debtor-in-possession, the directors of the company are authorized to continue managing the company’s affairs during the pendency of the rehabilitation plan. See Article 22(1). The directors can be removed when there is evidence of fraud, dishonesty, incompetence or mismanagement, in which case the court may appoint an administrator to manage the business assets of the company. See Article 22(2).
The company is required to separately classify secured creditors, unsecured creditors and shareholders for the purposes of voting on the rehabilitation plan. See Article 24(1). A class is deemed to accept a plan if at least three-quarters in value of the class agrees to the plan. See Article 25(3). Unimpaired creditors are deemed to have accepted the rehabilitation plan. See Article 25(4). Similar to the requirements for confirmation under section 1129 of the Bankruptcy Code, the New Insolvency Law requires that if there are impaired classes, one impaired class must vote to accept the plan, and also enforces a modified version of the absolute priority rule. See Article 27(d)(ii) & (g). Moreover, the law provides for cramdown over the objections of a dissenting class. See Article 27(f).
Recognition of Foreign Proceedings
Part 7 of the New Insolvency Law facilitates cross-border insolvencies involving foreign companies with assets in the DIFC. For example, the New Insolvency Law provides that the DIFC court will, upon request, assist a foreign court in “gathering and remitting of assets maintained within the DIFC” of a foreign company subject to a foreign insolvency proceeding. See Article 117(1). This provision is similar to the recognition concept under Chapter 15 of the Bankruptcy Code, pursuant to which a foreign representative may apply to a U.S. bankruptcy court for recognition of a foreign proceeding and the court may take action to protect the foreign debtor’s assets maintained in the U.S. from dissipation or entrust distribution of such assets to the foreign representative. The New Insolvency Law also allows for domestic and foreign insolvency proceedings of a foreign company to occur simultaneously, and even after the foreign company has been wound-up or dissolved under the laws of its place of incorporation. See Article 118(2).
Moreover, the UNICTRAL Model Law, with certain modifications, is expressly made applicable to foreign companies in the DIFC. See Article 117(3). The UNICTRAL provisions found in Schedule 4 to the New Insolvency Law closely mirror the provisions of Chapter 15 of Bankruptcy Code by, among other things: (1) providing for the recognition of a foreign insolvency proceeding; (2) limiting the jurisdictional reach of the DIFC court where a foreign representative applies for recognition; (3) providing for notice to known creditors outside of the DIFC; and (4) granting a foreign representative standing to initiate actions in accordance with Articles 129 to 138 of the New Insolvency Law. See Schedule 4.
The New Insolvency Law represents an important step forward towards aligning Dubai with international insolvency regimes. The enactment of the New Insolvency Law endeavors to improve predictability of outcome and uniformity of practice necessary to maintain the confidence of investors doing business in the DIFC.