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www.lw.com Restructuring and Insolvency in the Dubai International Financial Centre
The Dubai International Financial Centre (the ‘DIFC’) is a federal financial free zone which has been granted authority to self-legislate in civil and commercial areas. An amendment to the UAE Constitution and a resulting federal law concerning financial free zones have allowed the government of Dubai to create a legal framework based on best practices of leading jurisdictions in Europe, North America and the Far East. The laws of the DIFC (‘DIFC Law’) are enacted by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and under the UAE Constitution, are considered at the level of local legislation. DIFC Law provides a framework for the reorganisation and liquidation of insolvent companies. The DIFC regime remains largely untested as there has yet to be a major corporate insolvency within the jurisdiction. This note seeks to provide an overview of the legal framework within the DIFC, the various insolvency procedures contained therein and the key issues to be considered by company directors in an insolvency or potential insolvency scenario. Restructuring and Insolvency in the Dubai International Financial Centre 1 LEGAL FRAMEWORK 1.1 Overview The DIFC Insolvency Law (DIFC Law No.7 of 2004) (the ‘Insolvency Law’) sets out the procedures that result in the reorganisation or liquidation of an insolvent Company. The Insolvency Law provides for company voluntary arrangements, company receivership and both voluntary and involuntary winding-up procedures. The Insolvency Law is supported by the DIFC Insolvency Regulations (the ‘Regulations’) and Article 14 of the DIFC Code (the ‘Code’). The Regulations are enacted pursuant to Article 116 of the DIFC Companies Law (DIFC Law No (3) of 2006, the ‘Companies Law’) and Article 93 of the Insolvency Law. The Code was enacted for the purposes of consolidating, standardizing and harmonizing the laws applicable in the DIFC. Consolidation under the Code has not resulted in the amendment of any substantive provision of the Insolvency Law or the Regulations. The Code merely seeks to make the Insolvency Law easier to read and reference. To the extent that any conflict or inconsistency exists between the Code and the Insolvency Law, the terms of the Code shall prevail. The DIFC published a draft update of the Insolvency Law and Regulations for consultation purposes in November 2008. The consultation period ended on 13 December 2008 and we understand that, subject to the Ruler’s approval, the revised Insolvency Law and Regulations will be enacted shortly. The updated Insolvency Law and Regulations, if enacted in the form published for consultation purposes, would not materially change the analysis of the DIFC restructuring and insolvency regime as set out in this note. Latham & Watkins | Restructuring and Insolvency in the Dubai International Financial Centre 1
1.2 Jurisdictional issues and choice of law The Insolvency Law is applicable to any company under the jurisdiction of the DIFC and incorporated under the Companies Law (a ‘Company’). In addition, Part 6 of the Insolvency Law contains provisions dealing with ‘recognised’ and ‘foreign’ companies. Where a foreign company (being a Company incorporated in any jurisdiction other than the DIFC) is the subject of insolvency proceedings in its jurisdiction of incorporation, the DIFC court (the ‘Court’) shall, upon request from the court of that jurisdiction, assist the foreign court in the gathering and remitting of assets maintained within the DIFC. A recognised company (being a foreign company which is registered to carry on business in the DIFC) may be wound up in circumstances where it has been dissolved, deregistered or otherwise ceased to exist in its jurisdiction of incorporation. To the extent that there are any gaps in the Insolvency Law, it seems likely that the DIFC Court would consider foreign law when interpreting provisions of the Insolvency Law. DIFC Law (that is to say all of the laws in force in the DIFC rather than just the Insolvency Law) specifically provides for a hierarchy of applicable law for any civil or commercial matter as follows: (i) the laws in force in the DIFC; (ii) the laws of any jurisdiction other than that of the DIFC expressly chosen by any DIFC Law; (iii) the laws of any jurisdiction as agreed between the contracting parties; (iv) the laws of the jurisdiction that appears to the Court or the arbitrator to be the one most closely related to the facts and the persons concerned in the matter; and (v) the laws of England and Wales. 2 INSOLVENCY PROCEDURES 2.1 Company Voluntary Arrangements 2.1.1 Commencement Directors of a Company may make a proposal to its members and its creditors for a scheme of arrangement of its affairs (a ‘Voluntary Arrangement’). In such circumstances, the directors will appoint a DIFC registered insolvency practitioner as ‘nominee’ to act in relation to the Voluntary Arrangement and supervise its implementation. The directors must provide the nominee with a proposal that must include information on a wide-range of matters including: assets that will be included in the Voluntary Arrangement; any security provided by the Company; the manner in which it is proposed to deal with liabilities; creditors (preferential, secured and unsecured); and whether the directors are aware of any transactions which would be classified as preferences, transactions at an undervalue or invalid security interests (see §3.4 below) if the Company were to go into liquidation. The directors must also provide the nominee with a certified statement of the Company’s affairs. The nominee will then summon a meeting of the Company’s creditors to consider the directors’ proposals and choice of nominee. The Voluntary Arrangement will be accepted if 75% or more in value of the creditors present and voting (in person or by proxy) on the resolution vote in favour. If approved, the Voluntary Arrangement will bind all creditors who had notice of, and were entitled to vote at the meeting (whether or not they were present or represented). It is not possible to approve a proposal which affects the rights of any preferred or secured creditors without their prior approval. 2.1.2 Implementation of proposals Upon approval, the nominee shall be appointed as the ‘supervisor’ for the purposes of implementing the steps of the Voluntary Arrangement (unless a majority in value of creditors present at the creditors’ meeting resolves to appoint an alternative supervisor(s)). In implementing the proposals, the supervisor may apply to the DIFC Court for directions in relation to any particular matter arising under the Voluntary 2 Latham & Watkins | Restructuring and Insolvency in the Dubai International Financial Centre
Arrangement or may apply to the DIFC Court for a winding-up or receivership order in respect of the Company. Any of the Company’s creditors or any other person dissatisfied by any act, omission or decision of the supervisor may apply to the DIFC Court for a confirmation, reversal or modification of the supervisor’s actions. The supervisor is required to keep detailed accounts and records of his actions and dealings, including records of all receipts and payments of money. At least once every 12 months the supervisor must send a report detailing such actions, receipts and payments to the Court, the Registrar of Companies, the Company, the Company’s creditors bound by the Voluntary Arrangement and the members of the Company. Within 28 days of completing the implementation of the Voluntary Arrangement, the supervisor shall send a notice to the Court, the Registrar of Companies and all of the Company’s creditors bound by the proposals confirming that the Voluntary Arrangement has been fully implemented. Attached to such notice shall be a final report of the supervisor detailing all receipts and payments made by him in connection with the Voluntary Arrangement and explaining any departure from the original proposals. Upon receipt of said notice and report by all parties, the supervisor shall be permitted to vacate office. 2.1.3 Moratorium (a) Application Directors of an ‘eligible company’ (see 2.1.3 (b) below) may instruct the nominee to apply to the Court for an order granting a moratorium. Such application can be incorporated into the Voluntary Arrangement proposal document and should be supported by a statement of the directors as to why the moratorium would benefit the general body of the Company’s creditors together with any other relevant documentation. (b) Eligible Companies Regulation 3.4.2 excludes certain Companies from applying for a moratorium, the most relevant of which are: any Company already subject to any insolvency procedure; any Company which has incurred a liability under an agreement of US$20,000,000 or more; or any Company which is party to certain secured or structured capital market arrangements. (c) Effects If the Court grants the application for a moratorium, then within the jurisdiction of the DIFC and during the period in which the moratorium is in force: no petition may be presented for the winding up of the Company; no meeting of the Company may be called except with the consent of the nominee or leave of the Court; no resolution may be passed or order made for the winding up of the Company; no administration application may be made or no administrator or administrative receiver may be appointed in respect of the Company; no landlord or other person to whom rent is payable may exercise any right of forfeiture in relation to any premises let to the Company except with leave of the Court; no other steps may be taken to enforce any security over the Company’s property, or to repossess goods in the Company’s possession under any hire purchase agreement, except with leave of the Court; and no other proceedings and no execution or other legal process may be commenced or continued, and no distress levied, against the Company or its property except with leave of the Court. There are certain additional effects of a moratorium, most notably in respect of the Company’s ability to apply for credit, make disposals and make payments during the period in which the moratorium is in force. The additional effects are set out in Regulation 3.7. but not discussed further in this note. Latham & Watkins | Restructuring and Insolvency in the Dubai International Financial Centre 3
2.2 Receivership
2.2.1 Appointment and powers
In circumstances where a creditor of a Company appoints a person to sell any part
of the Company’s property or assets and use the proceeds of sale to discharge the
Company’s debt(s) to that creditor, such appointed person is referred to as a ‘receiver’.
A creditor may only appoint a receiver if it has been granted specific power to do so in an
instrument executed by the Company (i.e. a credit agreement). Where the property over
which the receiver is appointed consists of all or substantially all of the undertaking of the
Company, the receiver shall be referred to as an ‘administrative receiver’. The powers of
an administrative receiver are set out in Part 3 and Schedule 2 of the Insolvency Law. Most
significantly, an administrative receiver has the power to:
● take possession of the property and assets of the Company;
● sell or otherwise dispose of the property of the Company;
● raise or borrow money and grant security over the property of the Company;
●d
o all acts and execute in the name and on behalf of the Company any deed,
receipt or other document; and
●d
o all such other things as may be necessary for winding up the Company’s
affairs and distributing its assets.
An administrative receiver may dispose of charged property in circumstances where the
Court is satisfied that such disposal is likely to promote a more advantageous realisation
of the Company’s assets than would otherwise be effected. The Court may, by order,
authorise the disposal of such property as if it were not subject to any security interest.
Any such order will be conditional upon the proceeds of disposal being applied towards the
discharge of the secured debt(s).
2.2.2 Reporting obligations and resignation
Within 3 months of his appointment, an administrative receiver shall circulate a report
to all of the Company’s creditors detailing the events leading up to his appointment, the
disposal (or proposed disposal) by him of any property of the Company, the carrying on (or
proposed carrying on) by him of any business of the Company, the amounts of principal
and interest payable to debenture holders and preferred creditors, and the surplus (if any)
likely to be available for the payment of other creditors. Following the circulation of such
report, the administrative receiver shall summon a meeting of the Company’s unsecured
creditors on not less than 14 days’ notice to discuss the content of the report.
An administrative receiver is also under an obligation to circulate accounts detailing all
receipts and payments made during the course of the receivership. Such accounts are to
be distributed to the Companies Registrar, the Company, the person who appointed the
administrative receiver and the Company’s creditors at least every 12 months, and in any
event, within 2 months of the receiver vacating his position.
An administrative receiver may resign and vacate his office by giving not less than 7 days’
notice to his appointee, the Company and the Company’s creditors. In addition, a receiver
can be removed from office at any time by order of the Court.
2.3 Winding-up
The winding-up of a Company may be either voluntary or compulsory. A voluntary winding-
up is instigated by the Company and may proceed either as a members’ voluntary winding-
up or a creditors’ voluntary winding-up. A compulsory winding-up is instigated by the Court.
4 Latham & Watkins | Restructuring and Insolvency in the Dubai International Financial Centre2.3.1 Voluntary winding-up
A Company may be wound up voluntarily:
● in accordance with its memorandum and articles of association (e.g. upon
expiry of a prescribed term or upon completion of the Company’s stated
objectives);
● if the Company’s shareholders resolve that it should be wound up voluntarily; or
● if the Company’s shareholders resolve that it cannot by reason of its liabilities
continue its business.
A voluntary winding-up is deemed to commence on the passing of the shareholder
resolution approving the winding-up. The Company shall, from the dates of
commencement, cease to carry on its business (however, the corporate status and
corporate powers of the Company shall not be extinguished until the Company is
liquidated). Any transfer of shares or alteration in the status of the Company’s members
made after the commencement of a voluntary winding-up shall be deemed void unless
sanctioned by the liquidator.
If the passing of the resolution to wind up the Company is preceded by a statutory
declaration of solvency sworn by a majority of the Company’s directors then the winding-
up will proceed as a members’ voluntary winding up. If a majority of the Company’s
directors are unable to swear such a statutory declaration then the winding up will proceed
as a creditors’ voluntary winding-up. A valid declaration of solvency must be sworn within
the 5 weeks immediately preceding the date of the passing of the resolution to wind up
the Company and confirm that, having made full enquiry into the Company’s affairs, the
directors (or majority of directors) have formed the opinion that the Company will be able
to pay its debts in full as they fall due for the following 12 months. Directors who make the
declaration without having reasonable grounds to do so commit an offence and are liable
to a fine of up to US$20,000.
2.3.2 Members’ voluntary winding-up
A Company, in a general meeting, will appoint one or more liquidators for the purpose
of winding up the Company’s affairs and distributing its assets. Upon appointment of a
liquidator, the directors’ powers will cease except to the extent that the liquidator sanctions
their continuance. Upon completion of the winding-up, the liquidator shall produce a report
detailing the liquidation process and how the Company’s property and assets have been
disposed of to be presented to the members of the Company in a general meeting.
2.3.3 Creditors’ voluntary winding-up
A Company shall call a meeting of all of its known creditors to be held no more than 14
days after the date on which the winding-up resolution is passed by the shareholders. The
Company shall also propose a person to act as liquidator. However, if the creditors resolve
to nominate a different person at the creditors’ meeting, the creditors’ choice shall prevail.
Once the liquidator is appointed, the creditors’ voluntary winding-up procedure mirrors that
of a members’ voluntary winding-up.
2.3.4 Compulsory winding-up
A Company may be wound up by the Court if:
● the Company has resolved that it is to be wound up by the Court;
● the Company is unable to pay its debts;
● a Court ordered moratorium has expired and no Voluntary Arrangement has
been approved;
Latham & Watkins | Restructuring and Insolvency in the Dubai International Financial Centre 5● the Court makes such an order pursuant to any provision of DIFC Law; or
● the Court is of the opinion that it is just and equitable that the Company should
be wound up.
A Company will be deemed unable to pay its debts if a statutory demand for a sum in
excess of US$2000 remains unpaid 3 weeks after receipt, any judgment in favour of a
creditor is unsatisfied, or it is otherwise proved to the satisfaction of the Court that the
Company is unable to pay its debts as they fall due. A Company will also be deemed
unable to pay its debts if it is proved to the satisfaction of the Court that the value of the
Company’s assets is less than the value of its current liabilities.
The Company, its directors or any creditor can petition the Court for a winding-up
order. The Dubai International Financial Centre Authority may also present a petition
if it considers it in the best interests of the DIFC to do so. Any disposition, attachment,
sequester or appropriation of the Company’s property, transfer of shares or alterations to
the status of its members occurring after the commencement of compulsory winding-up
proceedings shall be deemed void unless the Court orders otherwise. In circumstances
where the Court is satisfied that one of the conditions set out above is met it will issue a
winding-up order in respect of the Company. From the date of the winding-up order, any
ongoing action or proceeding against the Company shall be automatically stayed and no
action or proceeding may be commenced without leave of the Court and subject to such
terms as the Court may impose.
The Court will appoint a liquidator whose objective is to ensure that the assets of the
Company are collected or otherwise secured, realised and distributed to the Company’s
creditors. The liquidator has the power to do all things that are necessary for the winding-
up of the Company and distributing its assets, and is entitled to access the Company’s
accounts, books and records.
Creditors are required to prove their debts in a compulsory winding-up in writing to the
liquidator. Secured creditors must also provide details of their security interest. A creditor
may only participate in the winding-up if it has lodged a proof of debt and the claim
has been admitted, and its debt is liquidated and ascertained (unless an exemption is
applied and an estimated value is submitted). Secured creditors may only participate in
the winding-up in respect of the balance due to them from the Company after deducting
the value of the security held, and failure to disclose the security interest results in the
secured creditor being required to surrender his security interest (unless the Court
permits otherwise). If a secured creditor realises his security interest, he may prove for
the balance of his debt or he may prove for the whole if he surrenders his security interest
for the benefit of the creditors. A creditor has 21 days in which to appeal against the
liquidator’s decision to accept or reject a debt.
2.3.5 Power to disclaim onerous property
In a creditors’ voluntary winding-up or a compulsory winding-up, the liquidator may
disclaim the following ‘onerous property’: (i) any unprofitable contract; and (ii) any other
property of the Company that is not readily saleable or is such that it may give rise to
a liability to pay money or perform any other onerous act. A liquidator in a members’
voluntary winding-up may not disclaim property.
3 DIRECTORS’ DUTIES AND PROTECTION OF ASSETS
3.1 Directors’ general duties
The Companies Law requires that directors and other officers of Companies, in exercising
their power and discharging their duties, act honestly, in good faith and lawfully, with a
view to the best interests of the Company; and that they exercise the care, diligence
and skill that a reasonably prudent person would exercise in comparable circumstances.
6 Latham & Watkins | Restructuring and Insolvency in the Dubai International Financial CentreDirectors must not act outside the power of the Company and must act within the limits of
their powers imposed by the Company’s memorandum and articles of association.
Directors also owe fiduciary obligations to their companies under DIFC Law. Many
of these fiduciary duties overlap with the general Companies Law duties of directors
described above but others extend these duties to cover additional matters, including a
duty to avoid conflicts of interest, a duty not to misuse Company property, a duty of loyalty
to the Company and a duty of confidentiality.
Failure to comply with directors’ duties may result in an individual director being liable to
civil penalties under DIFC Law including personal liability and disqualification.
3.2 Fraudulent and wrongful trading and delinquent actions
The Insolvency Law defines fraudulent trading as carrying on a business ‘with intent to
defraud creditors of the Company or creditors of any other person, or for any fraudulent
purpose’. Any person who is knowingly a party to carrying on a business in such a
manner may be guilty of the offence of fraudulent trading.
The offence of wrongful trading occurs when a Company is in insolvent liquidation and at
some time before the commencement of the winding-up of the Company one or more of
the directors of the Company ought to have known that there was no reasonable prospect
of the Company avoiding insolvent liquidation.
The Insolvency Law also recognises and imposes sanctions on fraudulent behavior in
anticipation of a winding-up. Any past or present director or other officer of the Company
who, within the 12 months immediately preceding the commencement of the winding-up,
has committed one of the following acts in each case with the intention of defrauding the
creditors of the Company or concealing the state of the Company’s affairs will be guilty of
a delinquent action:
● c oncealed any part of the Company’s property to a value of US$200.00 or
more or concealed any debt due to or from the Company;
● fraudulently removed any part of the Company’s property to a value of
US$200.00 or more;
● c oncealed, destroyed, mutilated or falsified any book or paper affecting or
relating to the Company’s property or affairs;
●m
ade any false entry in any book or paper affecting or relating to the
Company’s property or affairs;
● fraudulently parted with, altered or made any omission in any document
affecting or relating to the Company’s property or affairs; or
●p
awned, pledged or disposed of any property of the Company which has been
obtained on credit and has not been paid for (unless such act was carried out
in the ordinary course of business).
Transactions in fraud of creditors, material omissions from statements relating to a
Company’s affairs and false representations to creditors are also considered to be
delinquent actions.
3.3 Remedies against delinquent directors
Any director or officer of a Company guilty of fraudulent trading, wrongful trading or any
other of the delinquent actions set out above risks Court sanction. The Court may, on
application by an aggrieved person (including a liquidator or administrative receiver)
make any order as it sees fit in relation to the delinquent director or officer including one
or more of the following:
Latham & Watkins | Restructuring and Insolvency in the Dubai International Financial Centre 7●a
n order to return or pay to the Company any money or other property of the
Company which has been misapplied or retained or become accountable for;
●a
n order to compensate the Company in respect of any misfeasance or
breach of any fiduciary or other duty relating to the Company;
●a
n order to make such contributions to the Company’s assets as the Court
thinks proper; or
● an order requiring the director / officer to do, or not to do, any act or thing.
3.4 Voidable transactions
3.4.1 Transactions at an undervalue
The Insolvency Law provides that where a receiver or administrative receiver is
appointed, or where a Company goes into liquidation or a provisional liquidator is
appointed, and where the Company has at a ‘relevant time’ (see §3.4.3 below) entered
into a transaction with any person at an undervalue, the DIFC court may, on application
of the receiver, administrative receiver, liquidator or provisional liquidator, make an order
to set aside the transaction. Transactions at an undervalue include gifts and transactions
where the Company either receives no consideration or receives consideration the
value of which is significantly less than the value of the consideration provided by
the Company. The Insolvency Law provides a defence in circumstances where the
Company that entered into the transaction did so in good faith and for the purposes of
carrying on its business and where there were reasonable grounds for believing that the
transaction would benefit the Company at the time of entry into the transaction.
3.4.2 Preferences
Where a Company has given a preference to a person at a ‘relevant time’ (see §3.4.3
below) such ‘preferred’ transaction may also be set aside. A Company is considered
to have given a preference to a person where: such person is one of the Company’s
creditors or a surety or guarantor for any of the Company’s debts or other liabilities;
the Company does anything or suffers anything to be done that, in either case, has
the effect of putting that person into a position that, in the event of the Company going
into insolvent liquidation, will be better than the position he would have been in if that
thing had not been done; and provided that the Company was influenced to give the
preference by a desire to put such third party in a better position than if that thing had
not been done.
A Company that has given a preference to a person connected with the Company
(otherwise than by reason of being its employee) at the time the preference was given
is presumed, unless the contrary is shown (for example, by receiving additional material
consideration therefore), to have been influenced in deciding to give it by a desire to put
such person in a better position than it would have been had the act or sufferance not
occurred.
8 Latham & Watkins | Restructuring and Insolvency in the Dubai International Financial Centre3.4.3 ‘Relevant time’
The ‘relevant time’ for the purposes of transactions at an undervalue and preferences is:
two years prior to the onset of insolvency in respect of transactions at an undervalue and
preferences involving connected persons; six months prior to the onset of insolvency in
respect of preferences involving unconnected persons; and in the case of transactions at
an undervalue and preferences, at any time between the presentation of an administration
petition and the making of an order.
3.4.4 Voidable security interests
The Insolvency Law provides that a security interest in all or substantially all of the
Company’s property is invalid where: the security interest is created in favour of a person
connected with the Company and was created after a date two years before the onset
of insolvency; or the security interest is created after a date one year before the onset of
insolvency and the Company was either at the date of the creation, or became pursuant to
the transaction in respect of which the charge was created, unable to pay its debts as they
fell due; or the security interest was created after the commencement of a company voluntary
arrangement. However, this provision does not invalidate a security interest to the extent of
the value transferred to the Company or liabilities of the Company released as a result of the
transaction giving rise to the grant of the security interest.
4 RANKING OF CREDITORS
The DIFC Preferential Creditor Regulations apply to any Company to which the Insolvency
Law applies. The combined effect of the Insolvency Law and the Preferential Creditor
Regulations ensures that, in the winding-up of a Company, its ‘preferential debts’ shall be
paid after the expenses of the winding-up in priority to all other debts that are unsecured
or secured by an interest over all or substantially all of the assets and undertakings of the
Company. ‘Preferential debts’ are categorised as follows:
●a
ny sum owed by the Company which is a contribution to a pension scheme on
behalf of the Company’s employees or any end of service gratuities;
● r emuneration of Company employees for a period of up to four months preceding
the date of the appointment of a provisional liquidator or the winding-up order in
the case of a compulsory winding-up; or the passing of the resolution approving
the winding-up in the case of a voluntary winding-up;
● any payments due in lieu of notice; and
● compensation in respect of accrued holiday entitlement.
Latham & Watkins | Restructuring and Insolvency in the Dubai International Financial Centre 9SCHEDULE 1 QUICK REFERENCE GUIDE
Heading Key Issues
Legal Framework
Relevant Legislation - DIFC Insolvency Law (DIFC Law No.7 of 2004)
- DIFC Companies Law (DIFC Law No. 3 of 2006)
- DIFC Insolvency Regulations
- DIFC Preferential Creditor Regulations
- DIFC Code (Article 14)
NB: The consideration of ‘foreign laws’ pursuant to Article 8 of the DIFC Law on the
Application of Civil and Commercial Laws (see §1.2 above)
Insolvency Procedures
Company Voluntary Commencement - directors propose scheme of arrangement of Company’s affairs to its creditors
Arrangements - ‘nominee’ appointed to supervise implementation of the voluntary arrangement
- ‘nominee’ must be a registered insolvency practitioner recognised by the DIFC
Creditor Approval Thresholds - 75% or more in value of those present and voting (in person or by proxy)
- if approved, arrangement will bind all creditors who had notice of the meeting
and were entitled to vote
- rights of preferential and secured creditors shall not be affected without consent
Role of Registered - summon creditors’ meeting
Insolvency Practitioner - supervise the implementation of the voluntary proposal
- apply to the DIFC Court for directions, a winding-up order or receivership
- keep accounts and records of receipts and payments during the procedure
- report to the Court, Company Registrar, Company and the Creditors
- register completion of the voluntary arrangement and circulate final report
Moratorium Application - directors of an ‘eligible company’ instruct nominee to apply for Court order
- application must contain a statement from directors as to how a moratorium
would benefit the Company’s general body of creditors
Eligibility - Regulation 3.4.2 list certain categories of ‘excluded companies’:
- any Company subject to any insolvency procedure
- any Company which has incurred a liability of US$20,000,000 or more
- any Company party to certain secured and/or structured capital market
arrangements
- any Company which is a debtor under a financial collateral security interest
- any Company subject to the clearing rules of an authorised market institution
- any Company defined as an ‘Authorised Person’ which effects insurance
contracts, accepts deposits, holds investments, investment entities for
account holders or holds money to which DFSA rules regarding the holding
of client money apply
Consequences - no proceedings may be taken against the Company
- no resolution or petition for winding-up may be presented
- no application to appoint a receiver or administrative receiver may be made
- no security enforcement steps may be taken
- Company’s ability to grant security, borrow money, dispose of property and
make payments is also affected
Receivership Commencement - where a creditor of a Company in distress has been granted the specific
power to do so, it may appoint a receiver or administrative receiver to collect
and sell any party of the Company’s property or assets and use the proceeds
of sale to reduce the debt due to that creditor
Receiver -v- - a ‘receiver’ is appointed in relation to specific property / assets
Administrative Receiver - an ‘administrative receiver’ is appointed in relation to all or substantially
all of the undertaking of the Company
10 Latham & Watkins | Restructuring and Insolvency in the Dubai International Financial CentreSCHEDULE 1 QUICK REFERENCE GUIDE
Heading Key Issues
Receivership Powers of an Administrative - take possession of the property and assets of the Company
Receiver - sell or otherwise dispose of the property and assets of the Company
- raise or borrow money or grant security therefor
- do all acts and execute on behalf of the Company any deed or other document
- do all such other things necessary for the winding-up of the Company
- dispose of charged property with Court’s consent
Reporting Obligations - within 3 months of appointment a report must be circulated to the company’s
creditors detailing the events leading up to the appointment, the disposal or
proposed disposal of any Company property, the proposed carrying on of any
Company business, sums payable to secured and preferred creditors and any
surplus available to pay other creditors
- administrative receiver shall then summon a creditors’ meeting on not less
than 14 days’ notice to discuss the report
- continued obligation to circulate accounts detailing all receipts and payments
made during the receivership, at least every 12 months and within 2 months
of the receiver vacating his position
Resignation - on service of not less than 7 days’ notice to the appointing creditor
- Court can order removal at any time
Winding-up Voluntary Winding-up - commences on the date of Company resolution approving the winding-up
- from date of commencement Company ceases to carry on its business
- any transfer of shares after commencement date is void
- a solvent winding-up = Members’ Voluntary Winding-up
- an insolvent winding-up = Creditors’ Voluntary Winding-up
- liquidator appointed to wind up company’s affairs and distribute its assets
Compulsory Winding-up A Company can be wound up by the Court if:
- it is unable to pay its debts (statutory demandSCHEDULE 1 QUICK REFERENCE GUIDE
Heading Key Issues
Delinquent Actions Any of the following actions committed with the 12 months immediately preceding the commencement of a
winding-up with intent to defraud creditors or conceal the state of Company affairs:
- c oncealing any Company property to a value of $200 or more or concealing any debt due to or from the
Company
- fraudulently removing any part of the Company’s property to a value of $200 or more
- c oncealing, destroying, mutilating or falsifying any book or paper affecting or relating to the Company’s property
or affairs
- making any false entry in any book or paper affecting or relating to the Company’s property or affairs
- fraudulently parting with, altering or making any omission to any document affecting or relating to the
Company’s property
-p awning, pledging or disposing of any property of the Company which has been obtained on credit and has not
been paid for (unless such act was carried out in the ordinary course of business)
Transactions in fraud of creditors, material omissions from statements relating to a Company’s affairs and false
representations to creditors are also considered to be delinquent actions.
Remedies Against Court may make any order as it sees fit including one or more of the following:
Delinquent Directors -a n order to return any money or other property which has been misapplied, retained or become accountable for
-a n order to compensate the Company in respect of any misfeasance or breach of any fiduciary or other duty
- an order to make such contributions to the Company’s assets as the Court thinks proper
- an order requiring the director / officer to do, or not to do, any act or thing
Voidable Transactions
Transactions at an - gifts and transactions where the Company either receives no consideration or receives consideration the value
Undervalue of which is significantly less than the value of the consideration provided by the Company
- there is a defence in circumstances where the Company that entered into the transaction did so in good faith
and for the purposes of carrying on its business and where there were reasonable grounds for believing that
the transaction would benefit the Company at the time of entry into the transaction
Preferences - a Company is considered to have given a preference to a person where: such person is one of the Company’s
creditors or a surety or guarantor for any of the Company’s debts or other liabilities; the Company does
anything or suffers anything to be done that, in either case, has the effect of putting that person into a position
that, in the event of the Company going into insolvent liquidation, will be better than the position he would have
been in if that thing had not been done
- provided that the Company desired to put such third party in a better position than if that thing had not been
done (desire assumed if beneficiary is a connected person)
Relevant time - two years prior to the onset of insolvency in respect of transactions at an undervalue and preferences involving
connected persons
- six months prior to the onset of insolvency in respect of preferences involving unconnected persons
- at any time between the presentation of an administration petition and the making of an administration order
Voidable Security A security interest in all or substantially all of the Company’s property is invalid where:
Interests - the security interest is created in favour of a person connected with the Company and was created after a
date two years before the onset of insolvency; or
- the security interest is created after a date one year before the onset of insolvency and the Company was
either at the date of the creation, or became pursuant to the transaction in respect of which the charge was
created, unable to pay its debts as they fell due; or
- the security interest was created after the commencement of a company voluntary arrangement
Ranking of Creditors
The following ‘preferential debts’ are paid after the expenses of the winding-up in priority to all other debts that are
unsecured or secured by an interest over all or substantially all of the assets and undertakings of the Company:
-a ny sum owed by the Company which is a contribution to a pension scheme on behalf of the Company’s
employees or any end of service gratuities;
- r emuneration of Company employees for a period of up to four months preceding the date of the appointment
of a provisional liquidator or the winding-up order in the case of a compulsory winding-up; or the passing of the
resolution approving the winding-up in the case of a voluntary winding-up;
- any payments due in lieu of notice; and
- compensation in respect of accrued holiday entitlement
12 Latham & Watkins | Restructuring and Insolvency in the Dubai International Financial CentreLatham & Watkins | Restructuring and Insolvency in the Dubai International Financial Centre 13
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