On 14 December 2009, the same day on which Nakheel, a Dubai World subsidiary, was due to make payment under its 2009 sukuk, the Government of Dubai announced that it had received support from the Government of Abu Dhabi and the UAE Central Bank and would pay the US$4.1 billion due. It also announced that it had secured funding of an additional US$5.9 billion to be used to meet “interest expenses and working capital [of Dubai World] through April 30, 2010 – conditioned on the company being successful in negotiating a standstill”. The announcement stated that an aim of the Government of Dubai would be to apply some of these funds to satisfy trade creditors and contractors within the Emirate.
The Government of Dubai also announced a new legal framework “based upon internationally accepted standards for transparency and creditor protection” that would “be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations”.
The basis of the new legal framework is set out in Decree No. 57 for 2009 Establishing a Tribunal to Decide the Disputes Related to the Settlement of the Financial Position of Dubai World and its Subsidiaries (the Decree).
The Decree is an unusual step and has been implemented in a novel way. The importation of international concepts and processes will be welcomed by many. It is also possible that some creditors may question the constitutional status of the Decree given that it does not use existing UAE Federal insolvency laws, which may otherwise have applied to a restructuring of Dubai World and its subsidiaries.
The key features of the Decree are:
- The creation of a new tribunal (the Tribunal) chaired by Sir Anthony Evans, a former judge of the English Court of Appeal and the current Chief Justice of the Dubai International Financial Centre (DIFC) Court. Also named are two other DIFC judges: Deputy Chief Justice Michael Hwang SC, a well-known international arbitrator, and Sir John Chadwick, another former English appeal court judge with considerable expertise in insolvency law and practice.
- The Tribunal is to have exclusive powers in relation to demands and claims against the Dubai World Group and in respect of its liquidation or restructuring. It will also have the power to issue interim orders, including injunctions, although the ability to enforce injunctions granted under existing UAE law may be an area of uncertainty.
- The Tribunal will apply the provisions set out and referred to in the Decree, which in effect create a new ad hoc insolvency regime for the Dubai World Group. The regime draws heavily from DIFC insolvency law rather than insolvency legislation already in place within the UAE. Whereas the UAE and Dubai apply civil law, the DIFC is a separate common law jurisdiction within Dubai. Much of DIFC law is based on English law and that of other common law jurisdictions. The Decree is a Dubai law and not a DIFC law, although the Decree makes clear that the proceedings are to be seated in and supported by the facilities of the DIFC Court.
- Proceedings before the Tribunal will take place in English and, to the extent possible, in public.
- The new regime has a facility for an automatic moratorium. The moratorium commences upon a debtor corporation notifying the Tribunal that it intends to put forward proposals for a voluntary arrangement. No notice need be provided to creditors ahead of a notification being made. There are extensive provisions, imported from the DIFC Insolvency Regulations, that protect the assets of the debtor corporation during this period. These have been extended to include, unusually in the context of international insolvency frameworks, a prohibition on any creditor exercising set-off rights. As a prelude to a notification, the debtor corporation is required to appoint a “leading restructuring practitioner” as a nominee for the supervision of the proposed voluntary arrangement. Another unusual feature of the moratorium is that, upon notice to the creditors, the Tribunal can extend the moratorium to an affiliate of the debtor corporation “or other entity” if it is equitable to do so, even if that other company is not itself seeking a voluntary arrangement.
- After giving notification to the Tribunal, the debtor corporation has the exclusive right to propose a voluntary arrangement. The period of exclusivity in which to formulate proposals lasts for an initial period of 120 days. The debtor corporation will then have a further 180 days to attempt to agree the proposals with its creditors. If agreement cannot be reached within the 180-day period, the period can be extended by application to the Tribunal for further periods of up to 90 days at a time. The debtor corporation retains its exclusive right to formulate and put forward voluntary arrangement proposals throughout this entire period.
- Subject to the approval of the Tribunal, the debtor corporation has control over the definition of the various possible classes of creditors and the voting mechanisms by which the creditors or classes of creditors may vote on the approval of the debtor corporation’s voluntary arrangement proposals. Proposals that are approved are binding on all creditors within that class, irrespective of whether they participated in the process. The Tribunal may approve an arrangement provided that it is satisfied that any dissenting creditor has received as much value as they would otherwise have received in a winding-up of the debtor corporation.
- The voting provisions are complex. If any voluntary arrangement proposals are approved by a two-thirds majority in value of an affected class of creditors present and voting, then the proposals will be binding on that class. However, the provisions also provide that the Tribunal will have the power to sanction a voluntary arrangement if at least one impaired class votes in favour of the arrangement. The implication seems to be that, provided one impaired class voted in favour of a proposal, an arrangement could bind all impaired classes even if those other classes did not vote in favour of the proposal.
- Upon the expiry of the exclusivity period, the creditors of the debtor corporation may submit their own voluntary arrangement proposals. There are no time limits specified for the agreement of these alternative proposals and competing proposals may be submitted by different interested creditors.
- Any proposal approved by the creditors must be submitted to the Tribunal for final approval to ensure that it is not “unfairly prejudicial” to any class of creditors or the general body of creditors as a whole, and also to ensure that it does not run contrary to principles of good faith.
- The members of the Dubai World Group can only be wound up by the Tribunal, and only where a voluntary arrangement proposal has failed and the Tribunal finds that it is in the interests of the corporation and its creditors to proceed with the winding-up.
- Although principles of “debtor-in-possession” financing have not been adopted in full, there are provisions that permit members of the Dubai World Group to borrow funds on a secured basis during the period when a voluntary arrangement proposal is being considered, such security ranking equally with existing security. Additional secured debt must be authorised by the Tribunal, which will require there to be adequate protection for the existing secured lenders. However, it is possible that existing security may be diluted to procure new secured borrowing.
- The Tribunal can determine a procedure for the submission of proofs of debt and set a deadline or claims bar date. Creditors should be aware that any claims not submitted by the deadline will be deemed extinguished. Unless extended with the approval of the Tribunal, the deadline for submission of claims shall be 60 days after the debtor corporation’s notification that it intends to put forward proposals for a voluntary arrangement.
- There are complex provisions by which a debtor company can assume or reject certain contracts or unexpired leases, subject to the approval of the Tribunal.
- The Decree incorporates by reference only part of the provisions of DIFC Insolvency Law which relate to fraudulent trading, preferences and other creditor protections. There is some ambiguity as to the relevant date for the purposes of a challenge to any antecedent transactions.
The appointment of a credible tribunal to oversee and administer an insolvency framework in a transparent manner is to be welcomed. The introduction of internationally recognised insolvency principles is a significant step forward. However, the Decree does not contain all creditor protections as is often the case. The period of exclusivity afforded to the Dubai World Group in which to agree a proposal is lengthy. Whilst there are provisions for creditors to apply to the Tribunal to truncate those periods, they require creditors to show good cause or bad faith. The ability of creditors and creditors’ committees to influence the formulation of proposals is also unclear. The exclusion of rights of set-off is unusual and may prove to be unworkable in practice. The success of the scheme will depend to a large degree on the open co-operation of all interested parties.