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Dubai World Restructuring Subject to Special Purpose Government Decree
23 December 2009
Dubai's announcement on 25 November 2009 that it would seek a standstill (the "Standstill Announcement") on the debt of Dubai World, a Government of Dubai holding company, whose principal business activities include the master developers Nakheel and Limitless, port operator DP World, and investment house Istithmar, caused a considerable impact across world markets and widespread comment amongst the world media.
Following the Standstill Announcement a number of significant events and further announcements have taken place, principal amongst these have been:
- Dubai World's announcement on 30 November 2009 that it would seek to restructure debt principally associated with its real estate interests amounting to approximately US$26 billion and that the restructuring exercise would not include non real-estate based companies, such as DP World and Istithmar;
- The repayment of the Nakheel sukuk amounting to US$4.1 billion (which fell due for repayment on 14 December 2009) following Abu Dhabi's US$10 billion finance injection; and
- The issue, on 14 December 2009, of Decree No. 57 for 2009 (the "Decree") by HH Sheikh Mohammed bin Rashid Al Maktoum, Prime Minister and Vice President of the United Arab Emirates ("UAE") and Ruler of Dubai, to enable the restructuring of the Dubai World group of companies.
The significance of the Decree, a commentary on its provisions and issues for consideration are more particularly set out below.
The Need for the Decree
Dubai World was established by a decree by the Ruler of Dubai in 2006. Dubai World was not established pursuant to the provisions of UAE Federal Law No.8 of 1984, the Commercial Companies Law, but neither was it established pursuant to the Laws governing Dubai freezones. Whether the UAE's insolvency laws, which are contained in the UAE Commercial Transactions Law (Federal Law No.18 of 1993), apply to Dubai World is therefore an open question. Legislation was needed to fill this gap, hence the Decree.
The Decree is a significant development in the restructuring of Dubai World's debt and financial obligations. It fills an important legislative gap in the application of the Dubai insolvency laws to Dubai World.
Primarily the Decree provides:
- a framework for the financial reorganization of the Dubai World group of companies by introducing a redacted and modified version of the Dubai International Financial Centre's ("DIFC") Insolvency Law (DIFC Law No.3 of 2009) and the DIFC Insolvency Regulations (collectively referred to as the "DIFC Revised Law"); and
- sets out a regulatory framework governing the reorganization of the Dubai World group of companies and applicable creditor claims.
The decision to use the DIFC's insolvency laws and regulations (which are fundamentally based on English insolvency law principles) as a base to form the DIFC Revised Law is an interesting one given that Dubai World is a corporation established outside of the DIFC. However, it is a clear sign that the Government of Dubai was keen to be seen to be using a system which represents international best practice and was familiar to international investors and creditors alike.
The Role of the Tribunal
The Decree establishes a tribunal to oversee the application of the DIFC Revised Law in respect of the Dubai World group of companies (the "Tribunal"). Under Article 9 of the Decree, the Courts of Dubai and the DIFC are prohibited from hearing or determining any demand or claim which is within the jurisdiction of the Tribunal. The Tribunal established by the Decree is comprised of three judges. The judges appointed by Article 2 of the Decree are all common law judges having insolvency and bankruptcy law experience in the DIFC courts. The appointed judges are:
- Sir Anthony Evans, DIFC Court Chief Justice and former England and Wales High Court Judge;
- Michael Hwang, DIFC Court Deputy Chief Justice and former Judicial Commissioner of the Supreme Court of Singapore; and
- Sir John Chadwick, DIFC Court Judge and former member of the England and Wales Court of Appeal.
The Tribunal replicates a number of attributes found in common law courts. Most notably these attributes are not common to civil law courts such as the Dubai courts. In particular the Decree introduces two common law principles which are worthy of note:
- the power to issue injunctions found in Article 3(2) of the Decree. Whilst it is possible to obtain forms of interim relief through the Dubai courts, such relief is only granted in very limited circumstances. In the courts of England and Wales, the issuance of injunctions, particularly in respect of insolvency proceedings, is more common. For example, the issuance of a freezing injunction to prevent the disposal of assets in an insolvency circumstance would be a tool open to a creditor in the English courts. Accordingly, it will be interesting to see how the Tribunal exercises this right (if at all) in favor of creditors; and
- the application of the principle of equity found in Article 4(6) of the Decree. The principle of equity has been developed by common law jurisdictions to permit a fair result within the confines of legislative provisions. Again, it will be interesting to see how the tribunal applies this common law legal concept in practice, given the provisions of the DIFC Revised Law.
Article 4 of the Decree requires that, in determining all claims, the Tribunal must consider DIFC Law, DIFC Law No (10) of 2004 Concerning the Court of the DIFC, legislation of the Emirate of Dubai (please note comments below), commercial custom, and the principals of justice and rules of righteousness. There is, however, no guidance or regulation in terms of the order of priority that the Tribunal must give each of these legal principals in determining claims brought under the Decree. Consequently, the actual impact of equity, for example, could be either important or negligible.
The Decree requires the Tribunal to follow the DIFC Court's procedural rules, which closely follow the Civil Procedure Rules of England and Wales. Furthermore, all decisions and orders of the Tribunal shall be final, irrevocable and not subject to any appeal or review.
Article 6 of the Decree provides that all judgments of the Tribunal shall be executed by a competent "execution judge", in the Dubai courts. The Decree is clear that such judge shall take no action to hinder or otherwise prevent the execution of the Tribunal's judgment.
Because Article 3(1)(a) of the Decree provides that "the tribunal has jurisdiction to...hear and decide any demand or claim against [Dubai World]", there is an argument that the Tribunal's jurisdiction would extend beyond matters that concern issues regarding the financial reorganization of Dubai World. On the face of the Decree it is not apparent if this was the intention. It will be interesting to observe whether the Tribunal will be willing to extend its jurisdiction beyond matters involving Dubai World group of companies and their creditors and encompass wider issues relating to Dubai World outside of the financial reorganization.
Similarly, Article 3(1)(b) could be read to expand the jurisdiction of the Tribunal. This Article provides that the Tribunal not only has jurisdiction over Dubai World but also over "any person related to the settlement of financial obligations of [Dubai World]". On the basis of this wording, there is an argument that jurisdiction might include claims against directors or employees of Dubai World in connection with activities leading up to the current date. This result would be in contravention with the provisions of the original decree establishing Dubai World, which provided that directors involved in the management of Dubai World operations would have no personal liability. Accordingly, as a matter of law, it would appear that this provision could not be used as a means of bringing individual liability claims against directors of Dubai World and its group companies. It will nonetheless be interesting to see if an attempt is made on this front, as on the face of it the Tribunal's jurisdiction does extend to such claims.
Terms of the Revised DIFC Law
Pursuant to the terms of the Schedule of the Decree, a significant number of amendments have been made to the underlying DIFC insolvency laws and regulations. These deletions/changes will result in significant differences in the implementation of the new law. The following is a general overview of these changes:
- the ability for the appointment by the Tribunal of a receiver over the assets of Dubai World or an administrative receiver over any group company or subsidiary member of Dubai World has been removed;
- Dubai World can only be wound up on the order of the Tribunal if a proposed Voluntary Arrangement has been rejected by the creditors under the provisions of the Decree;
- The process for Dubai World to obtain a moratorium from its creditors has been eased. Under the Decree (Part 2 of the Schedule), the board of Dubai World or any of its group of companies may notify the Tribunal of its intention to make a proposal to its creditors for a Voluntary Arrangement pursuant to the terms of Article 8 of the DIFC Insolvency Law, following which the Tribunal meets and an automatic moratorium applies;
- Dubai World and its directors are excluded from the DIFC's Insolvency Law's provisions on "Wrongful Trading" (Chapter 5, Part 5 – Protection of Assets in Liquidation, Article 79);
- the majority for approving a Voluntary Arrangement is lower than under the DIFC's Insolvency Regulations and creditors whose position is unimpaired by the Voluntary Arrangement will be deemed to have accepted the same; and
- the procedure for handling contracts (including leases) to which Dubai World is a party (Decree Schedule 2, Article 19) has been modified. In general, Dubai World has the right, subject to the approval of the Tribunal, to assume or reject any executory contract or unexpired lease of Dubai World. Furthermore, in general no counterparty to a contract or lease may amend or terminate such contract or lease on the basis of the Dubai World contracting party's insolvency proceedings save where such counterparty is excused by the applicable law of the contract or lease or where the contract is a loan. It should be remembered that specific legal advice should be taken in respect of any potential contractual arrangements in respect of the Decree.
Issues for Consideration
Despite the Decree, a creditor of Dubai World faces substantial uncertainty. Any Dubai World creditor looking to enforce certain rights may find that such enforcement will have to await further clarification from the Tribunal. For example:
Because creditors may initiate actions against Dubai World or any of its group of companies in courts outside of Dubai and Article 9 of the Decree specifically excludes the jurisdiction of the Dubai and DIFC courts, it is not clear if:
the enforcement of an overseas judgment would be subject to the Decree;
the Tribunal has the jurisdiction to enforce an overseas judgment; and/or
the Tribunal has the jurisdiction to effectively "re-open" an overseas judgment that it is asked to enforce.
- The Decree arguably does not overrule contractually agreed jurisdictional provisions in underlying contracts entered into by members of Dubai World, save for those governed by the Law of Dubai, as a result of the Tribunal's jurisdictional rights. Accordingly, an agreement which is subject to English law and jurisdiction should still be capable of enforcement in the English courts. However, the issue of how that English judgment will be enforced in Dubai remains unclear, save that the Decree does not on the face of it appear to have removed the right of the foreign judgment to be enforced through the Dubai courts. The question remains whether a Dubai court would enforce a foreign judgment against a Dubai state entity;
- There are no provisions in the Decree specifying how any overseas member or assets of the Dubai World group of companies will be handled, and the Revised DIFC Law offers little insight on this question.
- Whilst Dubai World was established under a Dubai Law Decree, the vast bulk of the Dubai World group of companies have been established under the UAE Federal Law. As such, it is unclear how the Decree and DIFC Revised Law relate to those activities and whether the UAE Federal Laws relating to insolvency have any force.
It is fair to conclude that the Decree has been welcomed by many as a regulatory framework under which there can be an orderly restructuring of Dubai World. Nevertheless, a number of outstanding questions relating to jurisdiction and application of related laws will need to be fully considered in the coming months. The introduction of a more transparent system (albeit untested) based on internationally recognized and respected legal principals judged by an esteemed judiciary is however a step in the right direction.