Tom Montagu-Smith, barrister, XXIV Old Buildings
Opinion: Dubai moves to establish insolvency legislation model
12 April 2010
Dubai boasts some of the modern wonders of the world: the world’s tallest building, the world’s largest shopping mall, and the Palm and the World - two offshore island developments to which, until recently, was to be added the Universe.
However, real concerns surfaced in November 2009, when Dubai World approached its creditors for a six-month standstill, pending the restructuring of $26bn (£17.01bn) of debt. Concerns were compounded when the Dubai government announced it would not guarantee the group’s debts as had originally been understood. The position was eased by a $10bn bail-out from Abu Dhabi, but confidence has receded again with persistent rumours that creditors will need to take a cut of between 20 and 40 per cent.
Dubai World and its subsidiaries are responsible for much of the investment in infrastructure that has spurred recent growth in Dubai, but its interests extend across the globe. DP World, for example, is the world’s third-largest port operator and purchased P&O for £3.9bn in 2006.
Dubai has never had a particularly robust insolvency regime to deal with embattled corporations. A recent Hawkamah study concluded that, on average, it takes 5.1 years to close a business in the UAE and recoveries run at around 10 cents on the dollar. One of the most effective enforcement strategies has been for loan providers to take a personal cheque, as bouncing a cheque remains a criminal offence. By contrast, the Dubai International Financial Centre (DIFC), a financial free zone with its own laws and civil court system, has in place a modern insolvency regime derived from UK and US legislation.
As a company established by decree, Dubai World was not subject to any insolvency laws. On 14 December 2009, Dubai issued Decree 57. This established a tribunal consisting of three DIFC judges with jurisdiction to hear and decide any claims brought against Dubai World, its subsidiaries, officers and employees.
With some amendments, the decree retrospectively applied DIFC insolvency legislation to the affairs of Dubai World, giving the tribunal jurisdiction to supervise the restructuring and any insolvency. With UAE insolvency legislation under review, it may well be that the DIFC model will be applied further afield.
While the creation of the tribunal has been generally well received, critics have pointed to a number of shortcomings in the decree. It purports to give the tribunal jurisdiction to hear all claims against the corporation, which would appear to override arbitration clauses and even pending arbitrations. It applies to all ’subsidiaries’ of Dubai World, but no list is provided and the term is not defined. The tribunal is comprised of three judges of the DIFC Court who have other duties and would be overwhelmed if they were required to adjudicate a flood of claims.
It is anticipated that Decree 57 will be supplemented shortly to resolve some of these difficulties. While a matter of speculation at this time, it seems unlikely there is any intention to interfere with arbitration agreements. The tribunal may also be permitted to delegate some of its powers, thereby resolving any problems of capacity. Other issues, such as how orders relating to foreign companies will be received outside the UAE, may be more problematic.
The civil jurisdiction of the tribunal looks to be in demand, but it is not easy to predict the extent to which the insolvency regime will be called upon. The amendments introduced by Decree 57 appear to be geared towards rescue. Despite this, rumours persist that some entities could be allowed to fail, with all eyes turning to Nakheel, the embattled property developer responsible for the Palm, the World and the Universe. Until it happens, however, it is hard to imagine Dubai would allow one of its stars to fall from the firmament.
Tom Montagu-Smith was one of the draughtsmen of the rules of the DIFC Court and is currently drafting the rules of the Dubai World tribunal. He appeared for the objectors in opposing the purchase of P&O by DP World.