On Monday 14 December 2009 the Dubai Financial Support Fund received a further US$10bn from the Abu Dhabi Government to be used to satisfy a series of upcoming obligations of Dubai World and its subsidiaries (“DWG”). The monies were used in part to pay off the Nakheel sukuk which matured on the same day. The markets in the region (and elsewhere) reacted positively with significant gains and Dubai's CDS spreads narrowed. That same afternoon the Dubai Government announced a new law (Decree No. 57). Sheikh Ahmad Bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee, said:
“today the Government of Dubai will announce a comprehensive reorganisation law, a framework that is based upon internationally accepted standards for transparency and creditor protection. This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations.”
Dubai World was established by special decree within “on-shore” United Arab Emirates. It is not incorporated under the UAE Federal Commercial Companies Law (Federal Law No. 8 of 1984) and therefore the UAE insolvency regime contained in the Commercial Transactions Law (Federal Law No. 18 of 1993) does not apply unless this is expressly stated. Decree No. 57 provides a process within which DWG or any company within DWG can be re-organised/restructured.
The Ruler of Dubai, Sheikh Mohammed Bin Rashid Al Maktoum, issued Dubai Decree No. 57 of 2009 (“The Decree”) on 13 December 2009 entitled “Establishing a Tribunal to decide the Disputes Related to the Settlement of the Financial Position of Dubai World and its Subsidiaries.” with immediate effect.
The Decree (Articles 2 and 4) appoints a Tribunal and empowers it to deal with all claims against DWG in accordance with (i) the DIFC Insolvency Law; the DIFC Insolvency Regulation, and the DIFC Court Law all of which have been specifically amended by the Decree; (ii) legislation in force in the Emirate of Dubai; (iii) commercial custom; and (iv) principles of justice, and rules of righteousness and equity.
The Decree does not state which law will take precedence in the event that there is a conflict between, say, DIFC Insolvency Law, Dubai law and/or commercial custom although the primary legislation should logically be the DIFC Insolvency Law. Whilst the Decree does not make express reference to the incorporation of UAE Federal Law it should come within legislation in force in the Emirate of Dubai.
The Decree has established a Tribunal composed of three DIFC common law judges (Sir Anthony Evans, the Chief Justice of the DIFC Courts and Chairman of the Tribunal, Michael Hwang, Deputy Chief Justice of the DIFC Courts and Sir John Chadwick, a world-renowned bankruptcy and insolvency specialist) (Article 2) whose decisions may be made unanimously or by majority (Article 5(3)). Sir Anthony has the right to recommend further appointments to the Tribunal up to a maximum of five members in total. The legislation appears to require that the Tribunal sits as a 3 member panel and is silent as to whether one member can sit alone. The Tribunal has jurisdiction to hear and decide any demand or claim submitted against (i) DWG and (ii) any person related to the settlement of DWG's financial obligations including its board and employees (Article 3(1)).
In complex restructurings the debtor company requires a standstill period within which it can seek to renegotiate with its creditors without fear that one creditor can derail the process. This requirement is recognized in jurisdictions with sophisticated insolvency legislation which include statutory provisions giving national courts the right to impose a moratorium. The Decree provides for an automatic moratorium once a DWG company makes a notification (see Automatic Moratorium section below).
The Tribunal has jurisdiction to issue interim and interlocutory orders and decisions (Article 3(2)). DWG is entitled to apply to the Tribunal to grant a temporary restraining order giving effect to the moratorium which may be sought pending the outcome of any hearing requested by DWG (Article 9(c) of Part 2 of Section 1 of the Schedule to the Decree). However, the powers of the Tribunal under Article 32 of the DIFC Court Law have been deleted thereby removing inter alia the power under that law to make interlocutory orders and injunctions (under Article 5 of Section 3). Therefore, save for the limited temporary restraining order powers, it is unclear as to the basis upon which the Tribunal would exercise its rights under Article 3(2), whether it would apply applicable legislation in force in on-shore Dubai and/or whether it will determine its own jurisdiction.
Hearings before the Tribunal shall be open to the public unless the Tribunal decides otherwise (Article 5(2)) and shall be conducted in English.
The decisions of the Tribunal shall be final, irrevocable and not subject to any appeal or review (Article 5(4)) and the Courts of Dubai (including the DIFC Courts) shall not hear or decide any demand, claim or other matter which is within the jurisdiction of the Tribunal by virtue of the Decree (Article 9).
The status of arbitrations is unclear under the Decree.
The Insolvency Legislation
The DIFC is a 110 acre site where the civil and commercial laws of the UAE have been disapplied and a set of common law based laws and regulations have been enacted. The DIFC Insolvency Law is based on English insolvency legislation (mainly the 1986 Insolvency Act). The Decree imports DIFC legislation and regulation (and the DIFC judges) but subject to some significant amendments influenced in part by US bankruptcy law and redactions. The amendments and redactions to the law and regulations are set out in a Schedule which prevails in the event of any inconsistencies (Article 3 of Section 1). The Schedule includes the following:
If DWG notify the Tribunal in writing that they intend to make a proposal to DWG's creditors for a voluntary arrangement, the Tribunal shall convene and an automatic moratorium shall immediately apply to all creditors, secured and unsecured and without their consent, in respect of the company or companies which made the notification and its/their assets wherever located from the time of the notification until the conclusion of proceedings or such earlier time as ordered by the Tribunal (Article 8 of Part 2 of Section 1). A creditor shall be precluded from exercising any right of set-off. The Tribunal is empowered to grant DWG relief without notice if required under the circumstances (Article 21 of Part 2 of Section 1) and it is therefore possible that one or more DWG entities will avail themselves of the Decree and that those entities would seek recognition of such proceedings in foreign jurisdictions (Article 12 of Part 2 of Section 1 and Article 21 of Section 2) before advertising the coming into force of the moratorium (as required by Article 29 of Section 2).
DWG are required to appoint immediately before making a notification a Nominee (Article 10 of Section 1) who is a leading restructuring practitioner (Article 11 of Section 1) to supervise the proposed voluntary arrangement (Article 12 of Section 2), although, the requirement for the individual to be a qualified insolvency practitioner has been removed. DWG is authorised to continue to manage its affairs notwithstanding the commencement of a voluntary arrangement proceeding (Article 15 of Section 1).
Once notice has been given DWG has an exclusive period of 120 days within which to propose a voluntary arrangement (Article 9 of Section 2) and can request an extension of a further 180 days. There is also a right to ask the Tribunal to grant it further periods of time of up to 90 days at a time (Articles 9 and 10 of Section 2). Only after such period(s) have expired may a creditor put forward its proposal (Article 12 of Section 2).
DWG has control over the definition of the various possible classes of creditor (Article 13 of Section 2) subject to the approval of the Tribunal. The Schedule contains complex voting rights. The usual DIFC Insolvency Law 75 per cent by value majority has been reduced to two thirds (Article 14 of Section 2) and provided that at least one impaired class of creditors has voted to accept the voluntary arrangement it appears that all creditors will be bound (once the voluntary arrangement is sanctioned by the Tribunal) regardless of whether they took part in the approval process (Article 14 of Section 1 and Article 15 of Section 2). Upon DWG's request the Tribunal may establish procedures for the submission of proofs of claim. Unless the Tribunal extend the time limit all creditors must submit their proofs within 60 days of DWG notifying the Tribunal of their intention to make a proposal to the creditors for a voluntary arrangement. If a proof is not submitted within the time limit the claim shall be forever barred and extinguished (Article 23 of Section 2).
The unsecured creditors can become members of a creditors committee and DWG will meet the reasonable costs and expenses of such a committee. However, each member is deemed to have undertaken fiduciary duties to the creditors and to have consented to the jurisdiction of the Tribunal (Article 24 of Section 2).
If the voluntary arrangement is rejected the Tribunal may wind up DWG unless the Tribunal finds that it is in the interests of DWG and its creditors for the Tribunal to decline to do so (Article 13 of Section 1). The Schedule makes clear that only the Tribunal has the right to wind up DWG (Article 33 of Section 2).
With the approval of the Tribunal DWG can borrow funds, can obtain secured or unsecured credit and incur secured or unsecured debt which has priority over unsecured debt (Article 17 of Section 2).
The Schedule contains lengthy provisions relating to DWG, subject to the Tribunal's approval, assuming or rejecting contracts and unexpired leases.
Other points of note
Two of the most notable deletions to the DIFC Insolvency Law are (i) wrongful trading (Article 24 of Section 1) (this is usually a key concern to the board of a company which is or is likely to become insolvent), and (ii) the definition of "insolvency" (Article 31 of Section 1) (this may impact on a creditor's ability to bring a claim in respect of a transaction at an undervalue or a preference as the time periods within which claims run are referable to the insolvency of the company and the clearest definition of the meaning of insolvency has been deleted).
The Decree provides a framework for the restructuring of DWG and introduces a number of international standards and concepts which would not otherwise have been readily available within Dubai. As such it is an innovative approach. However, in order to have an orderly voluntary arrangement process there needs to be further clarity as to how creditor claims will be dealt with and if there are a large number of disputed claims how one Tribunal will effectively manage the process to resolve such disputes and value such claims for voting purposes.
Dubai Government statement of 14 December 2009
Here is the full statement from the Government of Dubai:
“The Government of Dubai, acting through the Supreme Fiscal Committee (“SFC”), today announces a set of actions in relation to Dubai World: Sheikh Ahmad Bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee said:
"Like other global financial centres, Dubai has faced recent market challenges driven by global economic slowdown and severe real estate market correction. Recently, Dubai World announced that it might not be able to commercially support its obligations. Since that time, the Government of Dubai has worked closely with the Abu Dhabi Government and the UAE Central Bank addressing and assessing the impact of Dubai World on the UAE economy, banking system and investor confidence.
The following provides a comprehensive set of actions:
First, the Government of Abu Dhabi and the UAE Central Bank have agreed to provide important support. Specifically, the Government of Abu Dhabi has agreed to fund $10 billion to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World. As a first action for the new fund, the Government of Dubai has authorised $4.1 billion to be used to pay the sukuk obligations that are due today.
The remaining funds would also provide for interest expenses and company working capital through April 30, 2010 - conditioned on the company being successful in negotiating a standstill as previously announced.
In addition, the Government of Dubai is particularly focused on addressing the concerns of Dubai World trade creditors within the Emirate of Dubai. To help address these concerns, today the Government of Dubai is announcing that the remainder of the funds provided will be used for the satisfaction of obligations to existing trade creditors and contractors. Discussions with affected contractors will begin in short order.
Next, the central bank is also prepared to provide support to local UAE banks.
Finally, today the Government of Dubai will announce a comprehensive reorganisation law, a framework that is based upon internationally accepted standards for transparency and creditor protection. This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations.
Today’s actions, taken together, demonstrate our strong commitment as a global financial leader to transparency, good governance, and market principles.
There will certainly be challenges periodically, just as there are challenges in other major financial centers around the globe. We believe today’s actions will best serve the interests of all stakeholders.
We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices.
Dubai is, and will continue to be, a strong and vibrant global financial center. Our best days are yet to come. The Government of Dubai remains committed to its high standards and its obligations. We are confident in our economic model, and we are confident in the long-term health and outlook for our economy.
The actions taken today are consistent with our market development, and we believe they are the actions that will best serve the interests of all stakeholders.”