The DIFC modernises Insolvency Law as its status soars
by Josh Kemp and Dennis Varghese
The new Insolvency Law (DIFC Law No. 1 of 2019) (the “New Law”) and its expanded set of Insolvency Regulations came into effect on June 13, 2019. The New Law replaces the 2009 Insolvency Law and aims to modernise the insolvency regime by simplifying cross-border insolvency proceedings and improving the balance between all stakeholders in situations of distress and bankruptcy. With the DIFC soaring up the rankings of the Global Financial Centres Index – now in 8th position as of September 2019 – the new regime only serves to bolster the DIFC’s reputation amongst the world’s best.
We take a look at the key changes below.
Cross-Border Insolvency Coordination
Part 7 of the New Law adopts the United Nations Commissions on International Trade Law (UNCITRAL) Model Law to facilitate cooperation between insolvency proceedings taking place within the DIFC and in foreign jurisdictions. Similar to the concept of recognition under Chapter 15 of the US Bankruptcy Code, the Model Law will apply where assistance is sought: (1) in the DIFC by a foreign court or foreign parties, in relation to foreign insolvency proceedings; (2) in a foreign state in connection with proceedings under the New Law; (3) in relation to parallel proceedings (in respect of the same debtor) in the DIFC and a foreign court; or (4) where foreign creditors or other interested persons in a foreign state have an interest in requesting the commencement of, or participating in, a proceeding under the New Law.
Introducing Rehabilitation Plans
Part 3 of the New Law introduces the concept of Rehabilitation. Distressed companies in the DIFC are now eligible to apply for Rehabilitation by submitting a Rehabilitation Plan to the Court which aims to restructure the business to ensure the company can meet its debts.
Rehabilitation is only available to a company if it is or is likely to become unable to pay its debts and there is a reasonable likelihood of a successful Rehabilitation Plan being reached between the company and its creditors and shareholders.
The process is as follows:
1 The company appoints one or more insolvency practitioners (“Nominee”).
2 The directors notify the Court, through the Nominee, that they intend to make a Rehabilitation Plan proposal to the company’s creditors and shareholders.
3 Unless the Court orders otherwise, an automatic 120-day moratorium will take effect (“Moratorium”). Key features of the Moratorium are:
- restrictions on actions to be taken against the company, e.g. prohibitions against submitting a petition for wind-up, or enforcing a security interest, among other restrictions.
- that it applies to all creditors, whether secured or unsecured, irrespective of consent, and extends to the company’s assets wherever located.
- the company may still enter into new contracts provided it offers adequate assurances to the contracting party as to curing defaults and future performance.
- the directors remain in control of the company (subject to exceptions discussed below).
4 Creditors may apply to the Court to obtain relief from the Moratorium. Relief is discretionary, and the court will balance the potential for imminent irreparable harm to the creditor as against that of the company.
5 The directors produce the proposed Rehabilitation Plan for it to be considered by the company’s creditors and shareholders. The proposal must, among other things:
- separately classify secured creditors, unsecured creditors and shareholders, and set out the notice period and voting procedures for the proposal;
- explain the effect of the Rehabilitation Plan; and
- explain any potential alternative outcomes for creditors and shareholders if the proposal is not sanctioned by the Court.
6 The Court will convene a directions hearing, at which it will either approve, reject or modify the notice and voting procedures in the proposed Rehabilitation Plan.
7 Creditors and shareholders will then meet and vote on the Rehabilitation Plan in accordance with the Court’s directions. Notably:
- all members of a class are deemed to accept a plan if at least 75% in value of the class agree with the plan;
- creditors unimpaired by the plan are deemed to accept it.
8 If any creditors or shareholders consider that the Proposal submitted by the company is unfairly prejudicial, it has not been proposed in good faith or, has violated the voting procedures approved at the Directions Hearing, that party may apply to the Court to challenge the proposal.
9 The Court will hold a Post-Plan Hearing to determine whether to approve or reject the proposal. The Court will sanction the proposal if it finds that, among other things:
- it complied with the New Law and is proposed in good faith;
- it is not unfairly prejudicial to each class of creditors and shareholders;
- either (A) all classes of creditors have voted to accept the Proposal (or are deemed to accept it) or (B) at least one class of creditors which would be impaired by the proposal approves it; and
- no creditor or shareholder is worse off than they would have been in a winding-up of the company.
Additionally, the Court may sanction new finance during the Rehabilitation process, whilst ensuring that existing secured creditors are protected.
10 If at the Post Plan Hearing, the Court rejects the proposal, the Court shall immediately proceed to take steps to wind-up the company.
In cases where there is evidence of fraud, dishonesty, incompetence, or mismanagement or offences under Part 6, Chapter 7, against the company or its management, directors, officers, the Court may appoint an Administrator that will take over management of the company’s business and its assets.
The New Law adopts a more expedited winding-up procedure, including a more rapidly convened creditors’ committee, and dissolution procedures.
The new cross-border cooperation provisions seek to streamline multi-jurisdictional insolvency proceedings and bring the DIFC closer in line with the most sophisticated insolvency regimes. The changes are expected to produce a more favourable environment for trade and investment by allowing local and foreign companies to better handle cross-border insolvency matters where a party is incorporated in the DIFC.
The new Rehabilitation scheme attempts to balance the interests of all stakeholders in respect of distressed companies and represents an enhanced set of insolvency tools to maximise returns. These developments form part of a regional wave of insolvency reform, including in the UAE and Saudi Arabia, as these jurisdictions have sought to modernise their insolvency legislation to encourage the development of a debtor-led recovery culture. The amendments are also in line with developments across Europe, and particularly in the UK, which is currently in consultation to introduce similar laws.
Although it is perhaps too early to judge whether the use of the New Law matches expectations, a modernised regime will do the DIFC no harm as it seeks to enhance its reputation alongside the world’s leading financial centres.