As many Japanese contractors are exposed to the financial crisis in Dubai, this month our Construction Disputes Avoidance Newsletter focuses on an important recent development concerning Dubai World. At the same time as announcing that the Nakheel sukuk due for repayment on 14 December would be repaid in full, the Dubai government stated that it would pass a reorganisation law for the Dubai World group in case that group is unable to achieve an acceptable restructuring of its remaining obligations. The details of that new law have now been released in the form of Dubai Decree No. 57 for 2009 (the Decree).
The Decree is significant in two respects:
- it creates a framework for the financial reorganisation of the Dubai World group which is based on an amended version of the insolvency law and regulations of the Dubai International Financial Centre (DIFC), the laws of which would not ordinarily apply to the Dubai World group;
- laims are to be determined by a special tribunal established to oversee the restructuring and which will operate in accordance with common law principles.
This is a bespoke process that will operate outside of both the Dubai and DIFC insolvency and restructuring laws. All interested parties should welcome this development: DIFC's insolvency laws are based on international best practice and the tribunal is comprised of three highly respected judges.
Dubai World is a corporation established by special decree within the mainland United Arab Emirates. It is not incorporated in any of the designated free zones which have been carved out of the legal system of the UAE in certain respects, including the DIFC which is a legal "island" applying its own commercial and civil laws to entities established in the DIFC and activities carried on within it.
Because it is established by special decree and is not incorporated under the UAE Federal Commercial Companies Law (Federal Law No. 8 of 1984), the UAE insolvency regime contained in the Commercial Transactions Law (Federal Law No. 18 of 1993) does not apply to Dubai World unless this is expressly stated. The Decree is intended to fill the gap in relevant legislation by defining the process which will govern the financial reorganisation of the Dubai World group, and empowering a specially created tribunal to oversee that reorganisation.
How the tribunal is constructed and the procedures it will apply are key considerations for creditors of the Dubai World group in the event that Dubai World or any of its subsidiaries fail to reach bilateral agreements with creditors to reschedule their debt or settle outstanding trade payments. The operation of the tribunal (as well as the law it applies) must be seen as fair and transparent for the international creditor base to have confidence in it.
The following points are of particular interest in relation to the composition and powers of the tribunal:
- the tribunal will apply a number of identified laws and legal principles, including in particular the DIFC's insolvency law and regulations as amended by the Decree. The Decree does not expressly state that those laws and legal principles should be applied in a specific order or priority, but the intention is that the DIFC's insolvency law (as amended) will be the principal legal framework for the Dubai World group's financial reorganisation. The decision to apply the DIFC's insolvency law was made on the basis that it represents international best practice. In addition, DIFC laws feel familiar to international investors and creditors as they are based on English law, and are promulgated in English rather than Arabic;
- consistent with the application of DIFC law, the tribunal comprises three highly respected common law judges of the DIFC Court: Sir Anthony Evans (the Chief Justice of the DIFC Court and a former High Court Judge of England and Wales), Michael Hwang (Deputy Chief Justice of the DIFC Court and former Judicial Commissioner of the Supreme Court of Singapore) and Justice Sir John Murray Chadwick (a DIFC Court judge and former member of the Court of Appeal of England and Wales). Most notably, Sir John Chadwick is a lawyer with a specialism in insolvency and bankruptcy law;
- the tribunal has a number of features which are more familiar to common law courts (in particular, the courts of England and Wales) than to civil law courts such as the Dubai courts:
- the tribunal is empowered to issue injunctions. Injunctions are remedies developed by common law courts which, in general terms, either compel or prevent the performance of an act. Whilst it is possible to obtain forms of interim relief in the Dubai courts (such as precautionary attachment orders to prevent a party from disposing of property while a dispute is ongoing), these can only be obtained in limited circumstances. Certainly, the Dubai courts do not have the same wide-reaching powers that are available in most common law courts. In England and Wales, for example, the courts frequently grant freezing injunctions to prevent parties from disposing of assets in certain specified circumstances, including in support of claims relating to insolvency;
- the tribunal is empowered to apply principles of equity, a concept developed by common law courts to allow them to achieve a fair result, albeit within the confines of the relevant legislative framework. In this respect, equity is identified as the last of the legal principles which the tribunal is empowered to apply. Although, as noted above, there is no express order of priority between the legal principles specified in the Decree, we anticipate that the tribunal will only apply equitable considerations where it can do so consistently with DIFC insolvency law;
- the tribunal will apply the procedural rules of the DIFC Court (as may be amended by the tribunal). Those rules are closely based on the Civil Procedure Rules applied by the courts of England and Wales;
- the decisions of the tribunal are final and binding and are not subject to any appeal, either in the Dubai courts or in the DIFC Court;
- the tribunal's decisions can be enforced through an execution judge in the Dubai courts. Enforcement is clearly intended to be an automatic process: the Decree makes it clear that the execution judge cannot take any action that will hinder enforcement;
- the tribunal has power to decide claims against not only Dubai World entities, but also against any person related to the settlement of the Dubai World group financial obligations, which expressly includes directors of those entities. This may therefore cover any claims made in connection with theconduct of the business in the period leading up to the current financial difficulties. However, it should be noted that the decree which established Dubai World provides that no director may, in the course of managing Dubai World and its operations, be liable towards third parties for any act or omission taken in connection with such management. Therefore, third party claims against directors of Dubai World are excluded as a matter of law;
- the tribunal is expressed to have jurisdiction to "hear and decide any demand or claim submitted against . . . [Dubai World], including hearing and deciding any demand to dissolve or liquidate [Dubai World]". Therefore, the tribunal is empowered to hear any claim against Dubai World, with a demand to liquidate being but one example. This is a very broad jurisdiction. It potentially extends to claims which are not connected with the Dubai World group financial reorganisation, although there must be a question over whether the tribunal would accept jurisdiction over such unconnected claims.
Amendments to the DIFC insolvency law
The DIFC insolvency law and regulations which will be applied by the tribunal have been amended by the Dubai government. The Dubai government has stated that the modifications are needed to allow the laws to work effectively for a reorganisation involving an enterprise as large and complex as the Dubai World group, including:
- providing for an automatic stay or moratorium;
- allowing the tribunal to approve priority financing during the course of the reorganisation;
- enabling the Dubai World group to continue to benefit from existing contracts;
- enabling the formation of appropriate classes of creditors; and
- specifying the approvals required for a voluntary company arrangement.