International Restructuring Newswire
This issue features articles from four different countries of the Norton Rose Fulbright network.
The laws governing insolvencies of United Arab Emirates-domiciled companies have recently been overhauled, with the new UAE Bankruptcy Law coming into force on 29 December 2016 (the “Bankruptcy Law”). Historically, most corporate insolvencies in the UAE have been resolved through consensual restructuring of the debtor company’s liabilities, since market participants were reluctant to rely on legislation that was largely untested. The Bankruptcy Law is a major step forward and is influenced by features of a number of insolvency law regimes in other jurisdictions, as well as international insolvency law trends.
In general terms, the Bankruptcy Law streamlines and modernises UAE insolvency law and, places a new emphasis on the early restructuring of indebtedness for distressed companies. Certain of its features seek to destigmatise business failure and, therefore, it is to be hoped that it will serve as a catalyst for cultural change in the region that will lead ultimately to the promotion of a more robust legal framework for entrepreneurs and an improved climate for investors. Much will depend, however, on how the Bankruptcy Law is used in practice and the willingness and ability of businesses and practitioners alike to adapt to take advantage of the legislative changes.
A key limitation of the Bankruptcy Law is that secured creditors are not bound by proceedings commenced under it, such that security remains capable of being enforced (with the permission of the court, in the case of Protective Compositions (see below)) outside of those proceedings. This is likely to hamper the effectiveness of the Bankruptcy Law in practice and may limit the instances of debtors in large financing transactions seeking protection under the Bankruptcy Law.
Whereas the previous legislation applied only to “traders”, the Bankruptcy Law is wider in its potential application and captures all companies established under the Commercial Companies Law, most free zone companies (except for those free zone companies incorporated in free zones with their own comprehensive insolvency legislation such as the DIFC and ADGM), individuals trading for profit and licensed civil companies of a professional nature. However, the Bankruptcy Law does not apply to companies which are wholly or partly state-owned unless they have chosen to opt into the Bankruptcy Law by providing for its application in their company constitutions. This ambiguity also extends to companies incorporated by decree since these companies are typically owned directly, or indirectly through government-owned investment companies, by the government so the expectation would be that the Bankruptcy Law does not apply to such companies either unless they too expressly opt into it.
The Bankruptcy Law repeals certain previous insolvency-related criminal offences and expands the protective composition and bankruptcy procedures into two key court-driven procedures:
The tests for determining when a company is insolvent have been extended and clarified. As well as the cash flow test (which applies when a debtor is unable to pay its debts), the Bankruptcy Law also introduces an alternative balance sheet test (which applies when the debtor’s assets do not cover its current liabilities). Generally, the Bankruptcy Law requires a debtor to file for bankruptcy within 30 days of it becoming insolvent under either test or, alternatively, to apply for protection within that period. Whilst many of the criminal implications have now been repealed, a number of penalties apply to debtors who fail to take action within the prescribed period.
The Bankruptcy Law provides for a Financial Restructuring Committee (the “Committee”) to be formed. The Committee’s role is to oversee the management of restructuring procedures in order to facilitate consensual restructuring arrangements between a debtor and its creditors, where necessary with the help of one or more Committee-appointed experts. The Committee will also maintain a register of insolvencies, authorise expert fees and maintain an approved list of insolvency experts whose role is to assist the courts in assessing the grounds for, and implementing, the chosen insolvency procedure (as described in more detail below). The Committee is also given the authority to oversee the financial reorganisation of regulated financial institutions which would include commercial banks and insurance companies notwithstanding that the Bankruptcy Law may not apply to such companies (as to which, see above).
Early drafts of the Bankruptcy Law provided for a private out-of-court procedure for companies in financial difficulty but not yet insolvent, which is in line with international trends in insolvency law reform. Regrettably, such a procedure has not been included in the Bankruptcy Law as enacted, but it is to be hoped that the opportunity will be taken in future amendments of the Bankruptcy Law to introduce procedures enabling the reaching of consensual settlements without the need for court intervention.
The UAE legislative framework provides for the use of protective compositions or arrangements made between the debtor and creditors which are modelled loosely on the French safeguard procedure. Such schemes allow the debtor to avoid the consequences of an adjudication of its bankruptcy.
Preventive Composition is a debtor-led, court-supervised procedure available to a debtor who is i) in financial difficulties but not yet insolvent or ii) has been insolvent (under either of the tests mentioned above) for a period of less than 30 consecutive business days. The procedure aims to facilitate the rescue of a business by helping a debtor reach a settlement with its creditors.
An application for Preventive Composition can be made only by the debtor or ordered by the court. The procedure will not be available where the debtor has already entered into such a procedure within the past year, or the debtor has already entered bankruptcy proceedings. The composition application must include detailed information on the debtor, including an overview of its financial situation, assets, employees, creditors and debtors, copies of financial books and statements, proposals for preventive composition and selection of a trustee to carry out the procedure. A shareholders' resolution approving the application for Preventive Composition must also be submitted.
A court-appointed expert will then prepare a report on the financial position of the debtor, determining whether the necessary conditions have been met, including whether the debtor has the funds to cover the costs of the procedure. If the court accepts the debtor’s application, the debtor will be placed under the supervision of a court-appointed expert – or trustee – and all bankruptcy proceedings, other claims and enforcement actions relating to the debtor are automatically stayed. Creditors with specific security are required to obtain court approval in order to make, or continue to make, claims against the trustee in relation to the specific assets over which they hold security. Once appointed, the trustee will publish the court’s decision and invite creditors to submit their claims within 20 working days.
The procedure allows the debtor an initial period of 45 working days from publication of the court’s decision to submit a draft preventive composition plan (this period may be extended by application to the court). The draft plan should outline the debtor’s proposals along with the likely chances of success and a timeline for implementation which must not exceed three years (although the period may be extended for another three years with majority creditor approval).
Once the plan has been reviewed by the court and permission has been granted to convene creditors' meetings, the plan is then voted on by creditors. All creditors whose debts have been accepted by the court may vote. For the composition to be approved, a majority of creditors must vote in favour of the arrangement, provided that such majority represents at least two-thirds of the total debt by value.
Where the relevant threshold is achieved, all unsecured creditors (secured creditors are not allowed to vote unless they have relinquished their security) will be bound by the composition whether or not they participated or took part in the vote for the adoption of the composition. Secured creditors will only be bound by the composition if they relinquished their security rights and expressly voted in favour of it.
During the composition period, the debtor retains the right to continue running the business under the supervision of the trustee who, if required, has wide ranging powers to act on behalf of the debtor in relation to preservation of assets, dealing with claims and any other actions required to achieve the purpose of the procedure.
Other useful tools under the composition procedure include:
These additional tools are clearly influenced by equivalent provisions in US insolvency law.
Failure to comply with the terms of the composition may lead to nullification and an order by the court to convert the proceedings to bankruptcy and liquidate the debtor’s assets. Further, the composition may be annulled for any fraud by the debtor. Otherwise, the composition ends once the debtor has honoured all of its obligations.
Under the Bankruptcy Law, bankruptcy is split into two limbs:
An application for a bankruptcy declaration can be made by:
A debtor is required to file for bankruptcy if it has ceased payment of due debts for over 30 consecutive business days due to financial difficulties or where the debtor’s assets are insufficient to cover due liabilities at any time.
Once the bankruptcy application is submitted, a court-appointed expert will then prepare a report on the financial position of the debtor, which must include their opinion on whether restructuring would be possible and whether the debtor’s assets are sufficient to cover the costs of the process. The court will then decide whether to approve the application and start bankruptcy proceedings if all necessary conditions are met.
If the court decides to initiate proceedings, the debtor will be placed under the supervision of a court-appointed expert who will take control of the management of the company and is granted wide ranging powers in relation to preservation of assets, dealing with claims and any other actions required to achieve the purpose of the procedure. All bankruptcy proceedings, other claims and enforcement actions relating to the debtor are automatically stayed. Creditors with specific security are required to obtain court approval in order to make, or continue to make, claims against the trustee in relation to the specific assets over which they hold security. Once appointed, the trustee will publish the court’s decision and invite creditors to submit their claims within 20 working days.
The trustee is then given time to prepare and submit to the court a report on the debtor’s business including his assessment of either restructuring or selling the debtor’s business in case of liquidation. If the trustee believes there is a reasonable prospect of restructuring the debtor’s business, a restructuring plan should also be prepared for submission to the creditors. The creditors are then given an opportunity to comment on the report ahead of a court hearing to be attended by the trustee, the debtor and creditors. At this hearing the court will examine the report and decide whether to initiate either restructuring proceedings or liquidation. The court will only initiate restructuring proceedings if the debtor expresses a willingness to continue the business and the court believes there is a possibility for the debtors business to be profitable again within a reasonable period.
If restructuring proceedings are initiated, a final restructuring report must be prepared and voted on by creditors. For the restructuring to be approved, a majority of creditors must vote in favour of the arrangement, provided that such majority represents at least two-thirds of the total debt by value. The procedural aspects described above in respect of Prevention Composition process are also applicable to restructuring proceedings, however, the deadline for implementation of a restructuring is longer (five years which may be extended for another three years with majority creditor approval).
The court can order the insolvent winding-up of a business if:
Unlike composition or restructuring, where the focus is on rescuing the debtor’s business, the aim of liquidation is to terminate the corporate existence of the company.
A liquidation is undertaken by one or more court-appointed liquidators. Once the liquidator is appointed, all the powers and authorities of the company's board of directors vest in the liquidator. These powers include the ability to raise or defend legal actions, ascertaining the company's assets and liabilities, taking into possession the accounts and books of the company, selling property of the company and generally taking all steps necessary for the protection and preservation of the company's assets and rights.
Once appointed, the liquidator is required to notify all creditors and to invite them to present any final claims (which have not already been notified in accordance with the bankruptcy application above) within 10 days from the date of notice.
The liquidator is required to liquidate all the debtor’s assets and distribute the proceeds amongst the creditors according to the new order of priority under the Bankruptcy Law. Secured creditors will be paid according to the amount of their security prior to any unsecured creditors.
If the liquidated assets of the company are not sufficient to meet at least 20% of its total debts, the court may compel the board of directors, jointly or severally, to pay all or some of the company’s debts where it is shown that they are liable for the company’s losses. The court is also able to compel directors to contribute payments where it is shown that they have acted improperly within the two years prior to the date of the liquidation order.
Once the liquidator has made the final distribution, the court will issue a decision to close the proceedings. The liquidator is then required to publish a notice including a list of creditors whose debts were accepted, the amounts of those debts and any unsettled amounts.
The Bankruptcy Law retains much of the previous regime of civil and criminal liabilities which apply when the conduct of directors, general managers and shadow directors has contributed to the company’s failure. Significantly, though, the failure to file for bankruptcy within the 30-business day time period no longer incurs criminal liability on the part of the directors. However, the Bankruptcy Law introduces a regime for the disqualification of directors (similar to that which applies in the UK) and failure to file within the prescribed timeframe may constitute a ground for disqualification of the director(s) concerned from the management of a company in the UAE, for a period up to 5 years and/or the levying of fines.
The Bankruptcy Law clarifies by means of a claims waterfall which claims obtain priority in a Preventive Composition, bankruptcy and liquidation, and also identifies a class of creditors with privileged debts who may obtain priority over all other creditors (including secured creditors). These privileged debts include judicial fees or expenses (including the fees of court-appointed officials such as trustees and experts), amounts owed in respect of employees’ salaries and certain other employee benefits, and amounts owed to governmental authorities.
In common with most civil law systems, the UAE civil code allows for the set-off of associated debts. However, the Bankruptcy Law does not address insolvency set-off in detail and simply provides that set-off is permitted between a creditor and a debtor if it was contractually agreed prior to the insolvency, but it is not allowed in respect of debts which become payable after commencement of the relevant insolvency procedure. It also permits a creditor to submit a claim for post-insolvency set-off in respect of the debtor’s insolvent estate, but equally a creditor is also required to pay into the insolvent estate if the sum is owed by the creditor to the insolvent party. In light of this, the expectation is that the provisions of the UAE civil code relating to set-off will still apply to any analysis of insolvency set-off; in particular the creditor and debtor will need to owe each other an obligation of the same type and description and it must be ’equally due’ and of ‘equal strength and weakness’. However, the court will still have wide discretion to incorporate any agreement on set-off arrangements into any restructuring plan approved in accordance with the procedures outlined above.
Under the Bankruptcy Law, judicial proceedings are suspended once the court has accepted an application for Preventive Composition or formal restructuring within bankruptcy. This should also apply to criminal proceedings relating to, for instance, bounced cheques. Any claim in respect of a bounced cheque would be treated in the same way as any other unsecured claim against the debtor and, if a restructuring plan is approved in accordance with the procedures outlined above, any judicial proceedings would remain suspended until the restructuring plan has been fulfilled in accordance with its terms or otherwise annulled or suspended.
The Bankruptcy Law is a welcome development for the UAE’s insolvency regime. The success of the new regime will depend ultimately on how effectively it is used in practice. Heavy reliance on the local court systems and court-appointed experts means that it will be vital to implement good support structures and training for the judiciary. The fact that secured creditors are not bound by proceedings commenced under the Bankruptcy Law may limit its effectiveness in large financing and projects transactions. Nevertheless, the Bankruptcy Law represents a move towards a more flexible and internationally-aligned approach which should assist businesses in the UAE work through financial difficulties and, where possible, avoid liquidation.
This issue features articles from four different countries of the Norton Rose Fulbright network.
The energy storage industry is not a completely new industry and there have been short lived booms before.