Given the absence of any mandatory set-off rights on insolvency in the current UAE Bankruptcy Law, the application and effectiveness of netting provisions in financial market contracts made with a UAE counterparty has historically been uncertain.
On May 30, 2019, Dubai’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, signed DIFC Insolvency Law, Law No. 1 of 2019 (the “New Insolvency Law”) into law, thereby repealing and replacing DIFC Law No. 3 of 2009. The New Insolvency Law, and supporting regulations (the “Regulations”), became effective on June 13, 2019, and govern companies operating in the Dubai International Financial Centre (the “DIFC”).
The DIFC has introduced a new Insolvency Law (Law No. 1 of 2019) (‘New Insolvency Law’) as a means of enhancing and facilitating a more efficient and effective bankruptcy regime within the free zone. The New Insolvency Law was enacted on 30 May 2019 and came into force on 6 June 2019.
Rather than a wholesale overhaul of the existing law, new concepts have been introduced to provide debtors and creditors a larger toolkit to deal with insolvency situations. We examine three of these new concepts below.
1. Debtor in Possession Regime – Rehabilitation
The UAE Government recently passed legislation that substantially simplifies the procedure for obtaining a payment order.
Payment orders may offer an efficient method to obtain ex parte judgement against a debtor. They are frequently used when claiming amounts arising from bounced checks or other commercial instruments.
In March of 2019, an Emirati limited liability company (the “LLC”) had restructured its debts under the Bankruptcy Law; Federal Decree-Law No. 9 of 2016 which was first published in the Official Gazette on 29 September 2016 and came into force on 29 December 2016.
Under Chapter 4 of the Bankruptcy Law the Bankruptcy Circuit of the Abu Dhabi Primary Court oversaw the restructuring of the LLC under which had been operating in the contracting industry since 2008 and had debts exceeding eighteen times its paid-up capital.
The UAE has issued by Decree Federal Law No. (10) of 2018 on Netting (theUAE Netting Law), with the aim of strengthening the regulatory framework for the settlement of obligations arising from qualified financial contracts. Parties to a contract previously relied on Article 183 of Federal Law No. (9) of 2016 on Bankruptcy (the Bankruptcy Law) to settle debts agreed to under a contract, provided that it is within the context of insolvency and that such contract does not fall within the claw-back provisions (Article 168 of the Bankruptcy Law).
In yet another example of the Dubai International Financial Centre (DIFC) making its company and insolvency law even more versatile, the DIFC has introduced a mechanism which will operate in a similar manner to a scheme of arrangement under English law. The law came into effect on 12 November 2018.
Key terms
The New UAE Netting Law
Netting is a standard mechanism used in banking and financial markets for the settlement and payment of competing rights or interests between counterparties. This occurs through an agreed process of termination and evaluation of such rights or interests and consolidation to one single (or ‘net’) payment from one party to another, minimising the overall credit and settlement risk.
Introduction
When a limited liability company goes into liquidation, its creditors are faced with considerable uncertainty, not least over their rights to securities on loans made to the defaulter. In such cases, a number of questions arise, including the following: