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April 2020

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Amendments to the Bankruptcy Laws in the UAE

Following the 2008 global financial crisis, the UAE has worked diligently to further regulate and support companies in financial difficulties. After a long period of anticipation, the UAE Bankruptcy Law (Federal Law Number 9 of 2016) came into effect on 29 December 2016 (the “Bankruptcy Law”). This legislation has overhauled how the law deals with businesses with debt burdens that they cannot pay. It has mapped out a process for the restructuring of debt owed to creditors, as well as drawing a line between the rights and duties of each party involved in the bankruptcy process.

Following a successful pilot phase of the legislation in action, the Bankruptcy Law has been amended to further refine the process and also expand the scope of application, culminating in Federal Decree-Law No. (23) of 2019 Amending Certain Provisions of the Federal Decree-Law No. (9) of 2016 on Bankruptcy, issued 5th September 2019 and which came into force in January 2020. The Bankruptcy Law applies to all companies established under the UAE Company Commercial Law, including most free zones except for the DIFC and ADGM.

We will review the most prominent and important amendments, as well as their effects for the parties involved in the application of the Bankruptcy Law:

  1. What we deem the most noteworthy update is Article (4) Paragraph (1) allowing any regulated company to apply to the Financial Restructuring Committee (FRC) to facilitate amicable agreements between the debtor and its creditors, with the assistance of one or more experts appointed by the Committee for this purpose, following the procedures stipulated in the Cabinet’s Resolution. Previously only financial institutions licensed in the UAE that were facing current or projected financial difficulties could apply to the FRC. This amendment now caters for a wider scope of the FRC’s remit and the applicability of the legislation to a broader range of business entities.
  2.  The revision to Article (24) now imposes on trustees the duty to prepare an inventory of the debtor’s known creditors for submission to the Court. The inventory shall additionally include a ‘determination of the creditors, holders of preferential rights and the nature of such rights.’ This is to establish the grading of creditors’ dues as early as possible and determine which creditors have a greater preference.
  3. The revision of Article (29) allows the Court to appoint one or more controllers from among the creditors who request such appointment, to supervise the implementation of the protective composition procedure. Where there are candidate creditors of ordinary debts, debts secured by a mortgage, or privileged creditors, at least one controller must be appointed for each group. This amendment ensures that creditors can monitor and observe the process applied by the law and ensure that the process is secure and transparent. Also, Article (43) Paragraph (1) stresses a comparable idea as it states that “upon the suggestion of a group of creditors or by the Court’s accord after consulting the trustee, the court may issue a decision to establish one or more committees of creditors who represent different categories of creditors.”
  4. Amendments to Article (32) paragraph (2) states that “the creditors of the debts secured by a mortgage may exercise their foreclosure rights if their debts are due, upon approval of the court. The court shall decide whether to grant such approval within ten (10) Business days from the date a creditor files an application with the court.”
  5. Article (45) previously stated only the voting rights of ordinary creditors were of consideration while voting on the draft Protective Composition Plan; this has now been amended to include privileged creditors whose debts have been accepted.
  6. Furthermore, amendments to Article (46) Paragraph (1) and (2) now allow secured creditors to officially file as a creditor, as well as all other creditors. This amendment increases secured creditors’ options and rights in circumstances of bankruptcy. The amended law states that secured creditors have additional rights to vote on a protective composition to the extent that the money they are owed exceeds the value of the security.
  7. Article (69) now allows mortgagees to be regarded as creditors when filing, subject to the debt exceeding the value of their security, as it states that (1) the creditor or the group of creditors with a debt of not less than AED 100,000 may apply to the Court to open the procedures and (2) the creditor whose debt is secured by a mortgage shall only submit an application.
  8. Lastly, point (e) of Article (189) of the revised law now states that debtors’ professional fees incurred under the bankruptcy proceedings, are to be treated as a priority debt, including legal fees incurred as a result of the bankruptcy proceedings. This amendment was made as a consideration to the effort and time-consuming process involved in the resolution of the complicated cases of bankruptcy. Additionally, point (b) and (c) in the same article include outstanding end of service gratuity and alimony debt to also be treated as priority debts.

The amended law has also included several procedural amendments:

  1. Notices of bankruptcy may now be served electronically;
  2. Creditor Committee Meeting invitations may now be recorded and made available electronically. Previously, invitations to these meetings could only be issued via publication in two widespread local daily newspapers;
  3. Amendments to Articles (42) and (103) now allow electronic means to be used to deliberate insolvency plans and vote thereon.
  4. An amendment to Article (73) states “the debtor may specify whether the application is for the purpose of restructuring, or for the purpose of adjudicating bankruptcy and liquidation. Also, he shall mention the justifications on which the application is based.” This amendment is a useful measure to allow the debtor to establish their intentions early in the proceedings.

In a nutshell, the Bankruptcy Law has been better adapted to the current market conditions through the latest amendments, and further regulates and facilitates the process between debtors and creditors to make the business environment in the UAE more investor-friendly and transparent.

If you need any help in understanding the impact of this law on your business, please contact Dina Assar at da@adglegal.com

Restructuring in the Era of COVID-19

Keeping the Harbingers of Doom at Bay
By Roberto Cornetta

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.” 1

The current pandemic has meant that some companies may be going insolvent rapidly, despite the efforts of many governments to stem the tide.

In such distressed situations, stakeholders (debtors and lenders) seek to protect their position and provide a stable platform for the company. However, such a crisis also presents opportunities. Indeed, as Churchill reportedly said, “never let a good crisis go to waste”. While businesses are facing financial difficulty, it is an opportune time to consider alternative business streams, potential reorganization and new markets. Consider already the number of manufacturers who have quickly converted to producing much-needed medical supplies.

The road from financial tension to a more severe, expensive and risky crisis can be fast and slippery. Therefore, the golden rule when there is a global shortage of liquidity is to act rapidly as soon as symptoms of a crisis emerge.

Debt restructuring is just one example. As with any complex problem, the key is to conduct a robust analysis of the causes of the distress, both external and internal factors, and to identify and explore all recovery options. In fact, the analysis may well demonstrate that the effects of COVID-19 have simply exposed pre-existing fractures. Note for example that UK clothing brands Oasis and Warehouse have blamed the pandemic for going into administration, when in fact they were in trouble before it began. At the same time, the clothing chain Next has been overwhelmed with orders on reopening its online shopping facility and is seeing a recovering share price. Any plan for recovery must, therefore, take into account any underlying weaknesses and present sustainable solutions.

A comprehensive analysis should involve a consideration of factors such as:

  • Whether there is enough funding to keep operating while a solution is being developed and implemented
  • Whether to start a more aggressive program of collections
  • The most sustainable capital/debt structure
  • How to reconcile all stakeholder positions to implement the new debt/capital structure
  • How to ensure the business is supported through its recovery, e.g. with temporary cash in the form of privileged loans or third-party capital injection
  • Whether the business may take advantage of existing pre-insolvency rules
  • Negotiating with large suppliers regarding financing e.g. vendor finance, anticipated payment with discounts etc.
  • Negotiating payment terms to align with loan installments and customer payments

Additionally, while analyzing existing facility agreements with lenders and potential structuring, the following should be considered:

  • Applying for a moratorium at least until execution of the restructuring plan and the disbursement of new liquidity
  • Proposing more flexible covenants to reduce default risk, e.g. in respect of debt to equity ratios, grace periods etc
  • Exploring alternatives to shareholder guarantees, for example by channeling customer revenues directly to lenders and/or by renegotiating interest rates.

Our team have previously advised numerous public and private companies and Private Equity funds on restructuring measures, from debt restructuring to alternative capital raising, bond restructuring, separation of business units, sales of non-core businesses, and reorganization.

We work with a number of financial institutions, other lenders and borrowers, financial advisory firms, fund managers and others, in order to assist them to combat the effects on all stakeholders.

Our experience in this area includes construction, telecoms, medical and other sectors. We are able to provide strategic advice and assist with:

  • Devising action plans for the pre- and post-financial restructuring process
  • Litigation, debt recovery and enforcement strategies
  • Internal and external investigations
  • Litigation financing options

Should you require any assistance or simply wish to discuss options, please contact Roberto Cornetta at rco@adglegal.com.

Roberto Cornetta is a Partner in Al Dahbashi Grays’s Dubai office. Roberto teaches in distressed debt at LIUCC University, Milan. He has a track record of over 20 years advising companies in complex national and transnational debt restructuring. Roberto has also advised large corporations and banks on bond restructuring, securitization, de-listing and reorganization, and issues of director’s liability.

1 Ernest Hemmingway’s character, Mike Campbell in “The Sun Also Rises”

Can Cases Still be Filed in Dubai Courts During COVID-19 Restrictions?

You are all aware that the current situation with Covid 19 has caused the UAE government to impose measures to contain the outbreak. Given most of the official authorities are either working remotely or closed, people ask what the status of the courts is.

The Chief Justice decided to postpone all court hearings and pause non-urgent proceedings such as normal commercial and civil cases, however for the critical divisions such as the Public Prosecution and the Summary Courts, it is business as usual.

Many mistakenly believe that all legal actions shall be on hold until the courts return to normal working hours, consequently losing their right of litigation. We would like to confirm that the below legal actions are still active and do not require the client’s attendance before the Court.

Legal Notices

You may now proceed with any activity that needs to go through the Notary Public online, i.e. Power of Attorneys, legal notices and signing any undertakings. All you need to do is to submit all documents to the Notary Public by email, pay the fees and then a video call will be arranged with the Notary to complete the notarization process.

Payment Order Application

This type of application does not require any attendance before the Court. Once you send the legal notice as mentioned above, you can file the Payment Order application using the Court’s website and a decision shall be issued within 48 hours without any other process. No service or summons, attending in person or hearing is required.

Precautionary Attachment

If you fulfil the requirements of Article (111) of the Regulations of the Civil Procedure Code, you can draft your Statement of Claim and submit it in an online application to the Court, along with the necessary documents. A decision shall then be issued within 48 hours. Again, neither a hearing or any court attendance is required.

Enforcement

Similar to the above, you can lodge an enforcement file and follow the enforcement process, including the investigation and the attachments of your opponent’s assets, through the Court website without the need to attend personally.

We actually recommend that you proceed with your legal actions today (if they fall within the above scope) for two main reasons:

– Courts will be overwhelmed with work once the curfews are lifted and business is back to normal, and

– Costs are less, as lawyers are able to action these processes in a more time-efficient manner.

If you have any queries or require any legal assistance, please contact us on info@adglegal.com

Pressure on UAE Contractors to Re-Price Projects: Hostages to Fortune?

It has been reported that UAE contractors will have to go through the price negotiation process again, as project promoters insist on re-pricing contracts because of the changed circumstances (Gulf News: ‘UAE construction sector told to re-price projects’, 11 April 2020).

The current lockdown and coronavirus-related health and safety requirements on construction projects are certainly contributing to general anxiety over the bottom lines of contractors and developers. Among other things, there is additional time spent complying with on-site precautions, such as distancing and increased frequency of cleaning and the off-site transportation of workers. All the while, ordinary running expenses of maintaining the workforce and other mandatory expenses are still being incurred.

Employers are also increasingly nervous about the post-coronavirus world; in Dubai alone, the 2020 growth forecast (Fitch Ratings) has been revised down to -2.3%, from 3.8%, and Expo 2020 has been delayed until 2021.

While it has been suggested that employers will be looking to contractors to ‘sharpen their pencils’ and reflect the so-called ‘new reality’ post-coronavirus, there is a significant cause for concern that this is a short-sighted approach. There is good reason to argue that the current imperative to reduce prices is unsustainable in the medium term:

  • Despite the ‘double-shock’ of enormous drops in global fuel demand during the outbreak, together with excess supply, oil prices are on the road to recovery. While some analysts are of the view that the recent deal for production cuts are too little, too late for an immediate-to-short term recovery, others claim that the storm clouds for oil prices will dissipate once lockdowns are lifted. The lag effect could prove positive for world economies, helping to fuel a faster rebound after the virus subsides.
  • Commercial and industrial activity appears to be picking up, as suggested by the recent increase in refinery utilisation in China, and their copper and steel inventories are beginning to fall. While it is right to approach such reports with some scepticism, if the pandemic is brought under control relatively soon, trade and output will inevitably rebound, even though a return to the pre-virus trajectory is not likely to be immediate.
  • The UAE Central Bank has announced an AED 100 billion stimulus announcement, with virtually all other GCC countries adopting similar measures. This stands to affect individuals and SMEs, and ought to cushion the fall in activity. The boost on morale and confidence has been immediate, however, the wider growth benefits are unlikely to be seen until the health crisis subsides.
  • On the infrastructure side, while the effects of the stimulus on public spending are unlikely to be seen until the pandemic subsides, a spike in government infrastructure spending packages may be utilised as a part of the economic response. For example, if countries in the MENA region were to adopt a similar approach to the US, which has announced (with apparently bi-partisan support) a USD 2 trillion package only one week after the USD 2 trillion public stimulus relief package.

Additionally, demands for price reductions based on reduced materials costs, are questionable. According to sources reported by Gulf News, UAE contractors say they are seeing no shortages of key building materials, even those coming in from China, and the prices of key materials too – cement, steel products – are as steady as they have been for some time.

Naturally, much depends on the duration of the protective measures. According to analysts, on the assumption that the pandemic eases in the second half of 2020, there should be a marked rebound in growth, albeit a return to pre-virus levels is not expected until late 2021, but the uncertainties surrounding these forecasts are extremely high. If a longer lockdown period is required, that prediction must be pushed back.

There is a significant risk to contractors agreeing on any price reduction that is fixed during this period of uncertainty. As we have seen in the past, undue focus on the (temporary) burden of un-utilised overheads and a so-called imperative to ‘keep busy at all costs’ may result in increased future losses and business failure.

Should you need help with the terms of any renegotiation, advice on how to approach a contractor for a price reduction, or if you are a contractor faced with such a demand, please contact Josh Kemp on jk@adglegal.com.

Written by Josh Kemp

New Commercial Courts In Abu Dhabi

Al Dahbashi Gray has recently obtained a judgment issued by the newly established Abu Dhabi Commercial Court (Commercial Court). The Commercial Court was formed by Decision No.28/2019 on 4 September 2019 and comprises of minor, major and appeal chambers. The Commercial Court is completely independent and exclusive from the Abu Dhabi Court of First Instance.

It should be noted at the outset that prior to the establishment of the Commercial Court, all cases in Abu Dhabi were registered as ‘commercial’ without much attention being paid towards the commercial or civil nature of the cases. For simplification purposes, commercial cases relate to disputes between businesses while civil cases involve individuals.

Al Dahbashi Gray represented the Defendant and obtained a favourable judgment on its behalf. The Court dismissed the case for lack of jurisdiction and ordered the case to be transferred to the relevant Abu Dhabi First Instance Court due to the civil nature of the case. This judgment confirms that the Commercial Court has only jurisdiction over commercial disputes.

The Decision No 28/2019 further confirms that the Commercial Court shall have jurisdiction over disputes, motions, and cases arising in connection with the application of the following laws (even if the transaction is civil for one party and commercial for the other):
– Commercial Transactions law
– Commercial Companies Law
– Commercial Agencies Law
– Emirates Securities & Commodities Authority and Market
– Copyright Law
– Industrial Property Protection Law for Patents and Industrial Designs
– Transactions and Electronic Commerce Law
– Consumer Protection Law
– Competition Regulation Law
– Bankruptcy Law
– Central Bank Law
– Foreign Investment Law
– Maritime Trade Law
– Air Transport Law and Rules

Furthermore, the scope of Commercial Court’s jurisdiction will cover enforcement of foreign judgment or arbitral awards provided such judgments or awards are of commercial nature.

Accordingly, it is now imperative for law firms and/or litigants to ensure that they register their cases before the appropriate court systems. Registering a civil case with the Commercial Court would most likely be dismissed resulting in needless time and costs spend on litigation.

If you need any help in understanding the changes and the potential impact of the recent amendments, please contact us on info@adglegal.com.

COVID-19 Employment Law Update: Common Questions Answered for the UAE

We have been receiving a flood of employment-related enquiries since the outbreak of COVID-19, and the situation is changing almost on a daily basis. We have set out below our answers to some of the most frequent questions we have been asked.

  1. What are the employer’s obligations with regards to the safety of their employees?
  • Employers operating under the UAE Labour Law, DIFC and ADGM laws must provide their employees with ‘adequate means of protection’ and must ensure the health, safety and welfare of their employees.
  • To control the spread of the virus, we recommend employers to carry out risk assessments and take precautionary measures, such as holding educational seminars and actively encouraging their employees to work from home.
  • We also recommend employers to circulate up-to-date information on best hygiene practice and provide any equipment to facilitate this, such as hand sanitizers and facemasks.

 

  1. Can employees be terminated due to COVID-19?
  • In our experience, UAE Courts will only consider termination to be valid if a) the employee is guilty of one of the specified violations listed in Article 120 (which, amongst others, includes violations such as disobeying safety instructions issued by an employer, defaulting on the terms of the employment contract, and revealing any confidential information to competitors) of the UAE Labour Law or b) if the employer has documentary evidence to prove the employee is a poor performer.
  • Therefore, termination merely due to COVID-19 itself will be considered arbitrary (and therefore unlawful) under Article 122 of the UAE Labour law, as it does not relate to the employee’s work performance. However, since many businesses are currently facing financial difficulties, it is unclear whether courts will consider termination due to economic or financial downturn to be a valid reason for termination. We will have to wait and see how the courts deliberate on this.
  • In addition, on 26 March, the UAE issued a resolution (Ministerial Decision No. 279/2020 (the Resolution)) for all private sector employers to register their employees on the Virtual Labour Market (VLM) which enables jobseekers to search for jobs in the UAE. More information on VLM can be found here.
  • Furthermore, employers will need to settle their employee’s dues as outlined in the relevant law and employment contract before finalising their termination.
  • Comparably, DIFC and ADGM laws allow employers to terminate employment contracts without cause if they provide sufficient notice. The notice period may vary depending on the terms of the employment contract.

 

  1. Does an employee have the right to work from home?
  • The UAE’s recent decisions to enforce strict measures to contain the spread of COVID-19 on a 24/7 basis means that only employees that work in certain sectors will be permitted to attend the workplace (Exempted Sectors). Some of the vital Exempted Sectors are healthcare, telecommunications, media and banking & finance (a full list of the Exempted Sectors can be found here).
  • Unless an employee works in one of the Exempted Sectors, they must work from home.
  • Employers (that fall under the list of Exempted Sectors) can decide which of their employees attend the workplace. However, there are guidelines for employees to prioritise working from home (e.g. pregnant women, older employees, and employees with chronic diseases).

 

  1. Can an employee be forced to take their paid annual leave?
  • Yes, provided employees have enough leave balance available.
  • UAE Labour Law, DIFC and ADGM laws employers have the right to compel employees to take annual leave and determine the date of its commencement.
  • DIFC and ADGM require employers to give 7-days’ notice before doing so. This is not a requirement under the UAE Labour Law.

 

  1. What happens if an employee is infected or becomes ill?
  • As per the UAE Labour Law, DIFC and ADGM laws, COVID-19 will be treated in the same manner as any other sickness, in terms of payment.
  • The Labour Law stipulates that an employee is entitled to 90 calendar days of sick leave. The first 15 days are payable at full pay, the next 30 at half pay and the remaining 45 days are unpaid.
  • DIFC and ADGM laws provide employees with a maximum of 60 business days of sick leave. The first 10 days are payable in full, the next 20 days half pay and the remaining days as unpaid.
  • While these are minimum requirements under each of the jurisdictions, an employer may provide more generous entitlements.

 

  1. Can employers compel employees to take unpaid leave?
  • The UAE’s recently issued Resolution (279/2020) gives employers effected by COVID-19 the option to take the following gradual steps as precautionary measures, in their respective order:
  1. Working remotely
  2. Paid annual leave
  3. Unpaid leave
  4. Temporary salary reduction
  5. Permanent salary reduction (approval required from the Ministry in accordance with the normal procedures)
  • As discussed in Q3, employees that do not fall under the list of Exempted Sectors are required to work from home.
  • Furthermore, the Resolution applies only to non-UAE national employees and is applicable only during the duration for which the precautionary measures are in place in the UAE. It is also applicable only to onshore companies who are subject to the MOHRE regulations.
  • The newly issued Resolution does not provide any guidelines for the duration of unpaid leave. Therefore, our advice to employers is to try to minimise the impact on employees as much as possible. We recommend employers to place their employees on unpaid leave, only if they are actually facing losses and not just decrease in profits.

 

  1. Can an employer make salary reductions?
  • The UAE’s recent Resolution affirms that employers who wish to temporarily reduce salaries during the period of precautionary measures may draft a “temporary supplement” to the employee’s employment contract. More information on this can be accessed here.
  • If the employer wishes to introduce permanent salary reductions, it must obtain permission from the Ministry. This step must only be taken if all the other four steps (as mentioned in Q6) have been exhausted and in accordance with the normal rules of changing labour contracts.
  • DIFC and ADGM employers need to consider that non-payment of salary may result in the penalties specified under respective employment laws, which may be severe.

Final Comments

Employers need to be careful to strike the correct balance between protecting its workforce and business continuity, while simultaneously preventing undue panic.

The key takeaways are:

  1. There should be regular and consistent communication in place between employers and employees and employers should ensure employees understand the rules as they are evolving.
  2. The employer must continue to undertake risk assessments on an ongoing basis to both minimise the spread of the virus and ensure the smooth functioning of the business.
  3. Employees should review their employment contracts to be mindful of its provisions in the event they are terminated or placed on sick/annual leaves.
  4. Employers need to be aware of the restrictions on their ability to reduce salaries, force leave and to terminate employees.

To assist clients to navigate this crisis, we have set up a Special Purpose Hub enabling clients and potential clients to contact a member of the team to obtain preliminary or in-depth advice. Enquiries can be sent to covidqa@adglegal.com

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