Middle East - Developments in Restructuring

Transcription

1 8 Clifford Street London W1S 2LQ F: Middle East - Developments in Restructuring 1. MIDDLE EAST RESTRUCTURINGS AND REFORM OF INSOLVENCY LEGISLATION 2 2. THE FEDERAL LAWS OF THE UNITED ARAB EMIRATES AND ONGOING REFORM 2 3. THE NEED FOR THE INSOLVENCY REFORM 3 4. DUBAI AND THE DIFC 4 5. KUWAIT 5

2 Page 2 1. MIDDLE EAST RESTRUCTURINGS AND REFORM OF INSOLVENCY LEGISLATION 1.1. In recent years the Gulf States have enjoyed a sustained period of economic development which has led to an influx of both capital and labour into the region. The region s vast sovereign wealth funds have, together with more traditional investors, invested huge sums in developing the region. In the good times, the boom in the region brought significant investment in construction, real estate, infrastructure and transport sectors However, the consequences of the global financial crisis of 2008 and, to some extent, the Arab Awakening have been dramatic on the region. The consequences include a number of high profile restructurings, insolvencies and, as a natural consequence of these events, disputes. The rapid growth and subsequent pressure points put a tremendous amount of strain on the region s legal sector resulting in a number of proposals for legal reform. The vast sums involved have on operated to exacerbate the issues. As might be expected Dubai has been at the forefront of both restructurings (for example Dubai World) and reform (for example the formation of the Dubai International Financial Centre). 2. THE FEDERAL LAWS OF THE UNITED ARAB EMIRATES AND ONGOING REFORM 2.1. The federal laws of the United Arab Emirates (the UAE ) provide a basic framework for the reorganisation, liquidation and bankruptcy of insolvent companies and individuals. The significant increase in the number of businesses approaching the zone of insolvency has however sharpened the focus on the options available to financially distressed or insolvent companies under existing bankruptcy regimes. A common theme across the Middle East has been one of limited use and understanding of formal insolvency procedures Whilst the Federal Laws of the UAE (including Commercial Companies Law (Federal Law No.8 of 1984) (the Companies Law ) set out a procedure for the reorganisation and liquidation of an insolvent company that may ultimately result in the dissolution of a company the laws remains largely untested. The most relevant trigger under the Companies Law relates to a substantial loss of capital, however many of the principles as to bankruptcy, stay or proceedings and appointment of trustee will be familiar Given the uncertainty and/or lack of knowledge surrounding the application of the region s existing legal frameworks, financially troubled corporate entities and their creditors have sought, and will likely continue to seek, consensual out-of-court reorganisations before turning to formal legal mechanisms While the Federal Laws apply in each of the individual Emirates, there are a number of designated free zones within the UAE to which the UAE insolvency regime applies unless exempted. One such free zone is the Dubai International Financial Centre (the DIFC ), considered further below A partial revision to the Federal Laws was announced on 25 March 2015 when the UAE Commercial Companies Law (UAE Federal Law No. 2 of 2015) was issued (the New Law ). The New Law marks the culmination of six years of legislative process during which there has been much debate about which aspects of the existing companies legislation should change, particularly around foreign ownership restrictions Whilst bankruptcy reforms are still to be implemented, the New Law provides for: 2

3 Page 3 a) Conversion of debt to equity - the share capital of a company is to be increased through the capitalisation of the company s cash debts, pursuant to certain rules to be issued by the Emirates Securities and Commodities Authority. The New Law explicitly provides that debts owed by the company to the Federal Government of the UAE, any of the Emirates, public authorities or establishments, or banks or finance companies constitute cash debts. b) Pledges of shares (quotas) the New Law expressly provides that quotas can be pledged to other shareholders or third parties. This will make it easier to raise debt financing, by giving lenders a strengthened security package. Where a creditor proceeds with the enforcement of its rights but fails to agree on the conditions and mechanics of sale of the pledged shares, such pledged shares shall be disposed of by public auction following a request to the competent court. The shareholders will have the right to buy back the shares from the winning bidder within 15 days of the public auction, on the same terms and conditions. 3. THE NEED FOR INSOLVENCY REFORM 3.1. As noted above, the international markets generally do not perceive the procedures set out in the existing UAE legal framework to be sufficient to provide companies with an opportunity to restructure and reorganise as a going concern through an efficient, transparent and open process In early 2012, the UAE distributed a draft new Federal insolvency and bankruptcy law that seeks to create new alternatives for companies in the UAE to implement a restructuring without the consent of all creditors. The draft law aims to facilitate corporate rehabilitation by introducing transparency and predictability via internationally recognised best practices. Some of the key features of the draft law are: a) An ability to implement a restructuring based on consent of majority of creditors without consent of all individual creditors. b) A broad moratorium or stay on action by creditors, including secured creditors. c) The opportunity for a debtor to obtain new financing with priority in payment and security over existing debts, including secured debts, subject to a court finding the interests of existing secured parties are adequately protected, based on debtor-in-possession or DIP financing under the United States Bankruptcy Code. d) The option for a debtor to terminate leases and contracts, akin to the assumption or rejection of contracts under the United States Bankruptcy Code Its enactment, should it come, will represent a dramatic step in the development of insolvency and restructuring practice in the Middle East and a leading example of the reform efforts ongoing across the region Whilst the recent announcement from Sheikh Mohammed bin Rashid, Prime Minister and Ruler of Dubai that the draft insolvency law has been approved by the Cabinet is seen as step in the right direction, there is still a long way to go. That said, the news that the draft law contains provisions regarding the decriminalisation of bounced cheques will be met with great relief by anyone doing business in the UAE. 3

4 Page 4 4. DUBAI AND THE DIFC 4.1. The DIFC a) As referred above, the DIFC is a federal financial free zone which has been granted authority to legislate in civil and commercial areas. b) The DIFC Insolvency Law sets out the procedures that result in the reorganisation or liquidation of an insolvent company. The law provides for company voluntary arrangements, company receivership and both voluntary and involuntary winding-up procedures. It is applicable to any company under the jurisdiction of the DIFC and incorporated under the Companies Law (a 'Company'), and there are provisions dealing with recognised and foreign companies. c) Voluntary Arrangement - Directors of a Company may make a proposal for a voluntary arrangement of its affairs. In such circumstances, a DIFC registered insolvency practitioner, known as a 'nominee', would be appointed in order to supervise the company. The nominee will then summons a meeting of the company's creditors, where the voluntary arrangement will be approved if 75% or more of the creditors voting on the resolution vote in favour. Upon approval, the nominee shall then be appointed as the supervisor. Any person dissatisfied by any act, omission or decision of the supervisor may apply to the DIFC court to act on the supervisor s decisions. Once the implementation of the voluntary arrangement has been completed, and a report has been circulated, the supervisor shall be permitted to vacate office. In certain circumstances, directors of an eligible company may instruct the nominee to apply to the Court for an order granting a moratorium. d) Receiver - a receiver can be appointed by a creditor if it has been granted specific power to do so in an instrument executed by the company. A receiver has, amongst others, the power to take possession of the property and assets of the company and sell or otherwise dispose of that property. e) 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 or a creditors winding-up. The winding up will proceed as a members voluntary winding up if a statutory declaration of solvency is sworn by a majority of the company s directors, and if not, the winding up will proceed as a creditors voluntary winding-up. A compulsory winding-up, which is instigated by the court, can be petitioned by the company, its directors or any creditor, and also the DIFC. A liquidator is appointed in all cases of winding-up. Case Studies 4.2. Dubai World a) Dubai World is an international conglomerate encompassing over 200 subsidiaries operating in, amongst others, the real estate development, private equity, retail, hospitality and shipping sectors. b) In November 2009, Dubai World announced its intention to seek a standstill on its debt repayment obligations, amounting to approximately $24bn spread amongst 95 international financial institutions. The global financial crisis hit Dubai in Q4 2008, resulting in a crash in the Dubai property market that saw a 47% decrease in the valuation of real estate in the 12-month 4

5 Page Dry Docks World period from Q to Q4 2009, and prompting the November 2009 standstill announcement. By the summer of 2011, Dubai World had successfully restructured their debts on an out-of-court basis, in each case, with the consent of 100% of financial creditors. A key factor that enabled execution of one of the most complex and large-scale corporate restructurings in recent history was the creation of a bespoke insolvency system (known as Decree 57 of 2009) based upon international standards recognised by Dubai World s international creditors. Decree 57 also created the Dubai World Tribunal (a Tribunal of the Dubai Court but administered and staffed by judges of the DIFC Courts) which continues to hear all claims brought by and against Dubai World and its subsidiaries. Dry Docks World was the biggest ship builder in UAE which went through a $2.2bn restructuring in 2012/13. Dry Docks made use of the Dubai World Tribunal, to obtain a stay on creditor action and restructured its debt in a recovery plan approved by the majority of creditors despite the opposition one well-known US fund which had tried to enforce its debt in Dubai and seize assets elsewhere, including Singapore. 5. KUWAIT 5.1. Kuwaiti investors were particularly aggressive during the good times; buoyed by the inflow of petrodollars and cheap credit they acquired trophy assets across the world. However, when the market slowed it suffered more than most and the financial crisis exposed that a number of its entities had toxic loans and illiquid assets Kuwait is also considering bringing in a new law that will bring its bankruptcy and insolvency legal regime closer to Chapter 11 of the United States Bankruptcy Code ( Chapter 11 ). The proposed Law on Bankruptcy (the Draft Law ) is currently being reviewed by the Department of Legal Opinions & Legislation of the State of Kuwait The Draft Law will move Kuwait away from a system which places a focus on liquidation and into a system which focuses on restructuring The current bankruptcy regime in Kuwait is governed by Articles 555 to 800 of the Kuwait Law of Commerce (No. 68 of 1980) (the Current Law ). Under the Current Law, bankruptcy proceedings begin when the debtor, a creditor, the court or the public prosecutor initiate proceedings in the Kuwaiti courts with a petition. When a debtor is adjudged bankrupt, it can no longer manage or dispose of its assets Kuwait is now considering bankruptcy and insolvency legislation that will give debt stricken and failing businesses the opportunity to rehabilitate under court protection, rather than be liquidated and shutdown. Similar to Chapter 11, the Draft Law will allow Kuwaiti businesses the opportunity to continue their business activities and pay their debts to creditors through a court approved reorganisation plan. 5

6 Page 6 Case Study 5.6. Global Investment House ( GIH ) a) GIH is an investment company incorporated in 1998, and falls under the regulation of the Central Bank of Kuwait. GIH was one of several Kuwaiti investment firms hit hard by the crisis. It used short-term debt to invest heavily in local real estate and stocks whose values later slumped. b) In late 2008 and early 2009 GIH was hit by cash flow problems affecting its operations in several countries and subsequently defaulted on its loans. In July 2014 GIH reported that it had completed a $1.7bn restructuring plan, the second at GIH since the global financial crisis. Under the plan, GIH separated its core fee business from other parts of the company which were spun off into special purpose vehicles ( SPV ). c) GIH created two SPVs under the plan. One holds company assets, along with debt, worth $1.3 bn. The other took part in a capital increase for the parent company, in which GIH offered million Kuwaiti dinars ($429 million) of new shares to creditors, leaving them owning 70 percent of the investment firm. 6