Driving Growth Through Restructuring In The UAE
By David Stark
Posted: 14th September 2012 09:43Expectations are high that the Middle East will soon enter a second phase of significant restructurings across both corporate and government related entities. The main driver behind this expectation of a ‘second round’ of restructurings is the significant levels of short to medium term loan maturities in the region (US$100 billion by the end of 2015) coupled with a depressed Merger & Acquisition (M&A) market and asset prices.
A number of the significant restructurings completed in recent years have been predicated on planned asset disposals to fund future debt pay down. With suppressed M&A activity and low asset prices (particularly real estate assets), certain entities across the GCC and globally are at risk of facing the need for further refinancing in view of significant upcoming debt amortisations as this second wave of restructurings is expected to impact the UAE in the midterm and consequently the proposed new UAE insolvency regime is critical to how these refinancing challenges will be addressed.
2009 and Beyond
Post the furore that surrounded the public announcement in 2009 that Dubai World couldn’t repay its lenders and needed to restructure US$25 billion of debt the spotlight was quickly focused on the mechanisms any restructurings would rely on to deliver a fair and successful outcome to the various stakeholders involved. In the case of Dubai World and its subsidiaries, being a company formed by royal decree rather than a ‘traditional’ corporate entity, the government of Dubai was able to establish a special tribunal under ‘Decree 57’ to hear matters that related to Dubai World. But, what about the rest of the nation’s corporates that had more traditional beginnings and had been formed under UAE corporate law (i.e. excluding those established in the various ‘free zones’ that are subject to that free zone’s regulations)?
The immediate answer was that the existing legal framework was ill equipped to deal with modern restructurings and turnaround/insolvency situations. There is no dedicated insolvency law but rather the governing framework around insolvency is set out in the UAE Commercial Companies Law (under UAE Federal Law No (8) of 1984) and the UAE Commercial Code (under UAE Federal Law No (18) of 1993). However, despite its age, the UAE’s insolvency regime is relatively untested and there is significant uncertainty around its application and any outcomes from the process. To date there have only been a handful of cases and based on the limited data available they can take five years to resolve.
As such, unless consensual deals can be agreed between the parties there is often very little certainty that can be gained around the potential outcome that would result from pursuing formal avenues. This can be of particular concern to international lenders and global institutions that are familiar with the higher degrees of certainty that processes across Europe and the US can provide around outcomes. This could therefore cause a knock on effect and potentially limit investment in to the region given the uncertainty over the lender’s or investor’s ability to exit.
Further, without this insolvency ‘back stop’ position drawn in the sand, how can the parties get comfortable that they are getting the best outcome for the institutions they represent? This is a question that still leads to restructurings in the region often being a long drawn out process as each side can block progress without the worry of formal proceedings being instigated.
That said, it should also be noted that more recently, creditors such as some of the Dubai Group lenders have resorted to threating to evoke the current rules in order to force a restructuring despite the inherent uncertainty in cases where the debtor appears to be relying on the current confusion to delay proceedings. Other lenders, such as those that provided facilities to FAL Oil, have also sought recourse in the courts rather than relying on consensual restructurings.
The UAE Government’s Response
In order to address these concerns the UAE federal government has proposed a new, stand alone, insolvency legislation which will work in tandem with corporate and other laws to marshal the formal insolvency proceedings of both corporate entities and individuals. This law is based upon concepts found in UK and US laws as well as other jurisdictions that have mature insolvency regimes and at the same time encapsulates local values and Islamic principles to the extent possible.
Focusing on corporate insolvencies, these proposed changes set out a number of options for the distressed debtor, namely Financial Reregulation, Preventive Composition of Bankruptcy and Bankruptcy. There have also been laws drafted to deal with insolvent individuals.
Financial Reregulation can be described as an out of Court agreement between the debtor and his creditors which is achieved with the help of an assistant. The closest comparable to this in UK law would be an out of court Company Voluntary Arrangement (“CVA”) where a mutual binding agreement is reached between a debtor and his creditors.
Preventative Composition of Bankruptcy is a pre-insolvency restructuring process overseen by the Court and an independent supervisor. This is a debtor in possession procedure which appears to be similar to the US Chapter 11 procedures, whereby the primary purpose is to facilitate the survival of the company as a going concern by offering protection from creditor action whilst continuing to trade under the supervision of an independent party and exploring options to preserve the business.
Bankruptcy is the final process available to insolvent businesses and is controlled by the Bankruptcy Supervisor, rather than the debtor. The process provides for either the restructuring of the business or the liquidation of its assets
The draft law also covers topics such as new finance in insolvent situations, rights of set-off and voidable transactions. One important aspect that will still need to be resolved is how cross border cases within the GCC are administered and how the various restructuring laws and insolvency regulations will interact.
Focussing on delivering a workable law could turn out to be one of the pillars of the future growth of the UAE with the government looking to develop its reputation as an open place to invest and do business. Support from the IMF, WTO and UNICITRAL by way of recognition of a sound, workable and enforceable local recovery culture would only serve to further enhance the UAE’s reputation.
Of course, the question on everybody’s lips is ‘when?’ Will it be in time to help navigate another round of restructurings or will corporates and their stakeholders once again have to rely on the existing framework? Whilst various dates has been discussed and there are drafts of the law currently being reviewed by various government departments, official announcements have quoted 2012 or 2013 as the period when the law will come into force. However, given how the government is striving to ensure that they get it right first time and don’t have to issue significant subsequent amendments it is conceivable that it may be delayed beyond these dates and have changed from its current form.
In the meantime, should the impending round of restructurings materialise before a law can be enacted, they will continue to be carried out under the burden of requiring consensus across the stakeholders leading to protracted, and hence costly, restructurings.
David Stark joined Deloitte in 1993 and in 2011 transferred from the UK – where he was a partner – to Dubai in order lead Deloitte’s Restructuring Advisory Services practice in the Middle East region. Over the last 17 years he has gained a broad range of international restructuring experience including leading the restructurings of Nakheel and Limitless in the UAE and advising several large family corporates in the GCC both in the fields of performance improvement and debt restructuring.
David Stark can be contacted by phone on +971 50 658 4057 or alternatively via email at firstname.lastname@example.org