Switching up the way that insolvency and bankruptcy is dealt with in the DIFC – a review of the new DIFC Insolvency Law

Middle East, UAE

On 13 June 2019 the new Insolvency Law(DIFC Law No. 1 of 2019) and the associated Insolvency Regulations 2019 (the “Law”) came in to effect in the Dubai International Finance Centre (“DIFC”) repealing and replacing the DIFC’s Insolvency Law of 2009 (the “Old Law”).

The Law replaces and enhances the existing insolvency and restructuring regime and is intended to balance the needs of all stakeholders in distressed and bankruptcy related situations whilst also streamlining the insolvency laws and regulations that operate in the DIFC, to achieve global best practice standards. His Excellency Essa Kazim, Governor of the DIFC, has said: “Ensuring that businesses and investors can operate across the region with confidence is crucial to our role in connecting the economies of East and West. We are committed to continuously enhancing our legislative infrastructure in order to give leading global institutions the certainty and access they need to capture the opportunities within the MEASA region, through Dubai.

The key changes in the Law include a new debtor in possession regime for insolvency procedures, a new administration process where there is evidence of mismanagement or misconduct, changes to the procedures for the winding up of a company, and the incorporation of the UNCITRAL Model Law on cross-border insolvency proceedings with certain modifications for application in the DIFC. In addition, the Law introduces new rules on the use of websites and remote attendance at meetings in order to bring the Old Law up to speed with the new technologies of today’s world.

The debtor in possession rehabilitation regime for insolvency procedures

The debtor in possession rehabilitation regime is supervised by the courts of the DIFC and protects an insolvent company, against both creditors and any insolvency steps that have been taken against it, for a 120-day moratorium period. The aim of this regime is to give the company some time to, if possible, come up with a ‘rehabilitation plan’ that will be a court approved arrangement with its creditors.

New administration processes

The Law introduces a new administration process where there is evidence of mismanagement, or misconduct. Where a debtor has filed an application for rehabilitation, as discussed above, the Law allows a court to appoint an independent administrator, where evidence of misconduct exists. The Law sets out the criteria for appointing an administrator, including that he/she must be a registered insolvency practitioner.

The appointed administrator will be authorised to manage the company’s affairs and business. He/she may request fees and indemnities from the DIFC court, in addition the DIFC court may make an order for the (1) approval of a rehabilitation plan; (2) the approval of a voluntary arrangement; or (3) for the approval of a scheme of arrangement under the Companies Law.

The UNCITRAL Model Law on cross border insolvency proceedings

The Law adopts the UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”), and is intended to encourage cooperation and coordination between multi-jurisdictional insolvency proceedings. The Model Law will apply where assistance is sought (1) in the DIFC by a foreign court, or foreign representative in connection with foreign proceeding, including an interim proceeding, pursuant to a law relating to insolvency in which the assets and affairs of the debtor are subject to control or supervision by a foreign court , for the purpose of reorganization or liquidation; (2) in a foreign state in connection with proceedings brought under the Law; or (3) a where there are foreign proceedings and proceedings under the Law, in respect of the same debtor, running in parallel.

The Law draws from international best practice and is a step in the right direction to allow global, and local companies to better handle cross-border insolvency matters where a party is incorporated in the DIFC. The Law provides tools to help both creditors and debtors and seeks to strike a fair balance between the protection given to creditors, and allowing debtors the opportunity to make arrangements to make the best of their situation.

For additional details on the new DIFC insolvency law, please contact a member of our team.

Article co-authored by Lyndsey Shaw.