Author: afridi-angell

Dubai Development Authority – UBO requirements

The Dubai Development Authority (DDA) (previously known as the Dubai Technology and Media Free Zone Authority (TECOM) and the Dubai Creative Clusters Authority (DCCA)) is the regulator of entities licensed to conduct business in Dubai Internet City, Dubai Media City, Dubai Knowledge Park, Dubai Outsource City, and other clusters regulated by the DDA.

 

The Federal Cabinet Decision 10 of 2019 on the Implementing Regulation of Federal Decree-Law 20 of 2018 on the Criminalisation of Money Laundering and Combating the Financing of Terrorism and the Financing of Unlawful Organisations (the Cabinet Decision) requires licensing authorities such as the DDA to identify the ultimate beneficial owners (UBOs) of businesses (Free Zone Entities) licensed by them. In response to this requirement, the DDA recently issued its Circular 323 regarding UBOs.

 

The DDA now requires all free zone companies (i.e. FZ-LLCs) and parent companies of branches licensed by the DDA to disclose details of their UBOs. A template of a form in which the details are required to be disclosed has been issued by the DDA (the UBO Declaration Form).

 

Definition of a UBO

 

As per the DDA’s Circular 323, any individual who ultimately owns or controls 25 per cent or more of a Free Zone Entity, whether directly as a shareholder, or indirectly via control of companies, other entities or structures that control the Free Zone Entity, is an UBO. This definition of the UBO is broad enough to cover trust arrangements.

 

UBO information

 

The following information of a UBO is required to be disclosed to the DDA:

 

(i) Full name

(ii) Name of the company

(iii) Date of birth

(iv) Nationality

(v) Passport number

(vi) Detailed residential address

(vii) Percentage (%) shares in the free zone company/parent company of a branch licensed by the DDA

 

Note that the DDA may require submission of a passport copy, proof of residential address and other documents of a UBO.

 

Exception from providing UBO information

 

In case a Free Zone Entity is a subsidiary or a branch of: (i) a company listed on a stock exchange; (ii) a government or government owned entity; or (iii) an entity registered and licensed in the UAE (outside the DDA’s jurisdiction), the UBO information is not required to be submitted to the DDA. In such a case, the UBO Declaration Form is required to be submitted to the DDA stating that the Free Zone Entity satisfies one of the above conditions.

 

Deadlines

 

As per the DDA’s Circular 323, existing Free Zone Entities will be required to submit the UBO Declaration Form as part of their license renewal process at the next renewal date. New entities will be required to submit the UBO Declaration Form as part of the incorporation/licensing process.

 

If there are any changes in the UBOs of a Free Zone Entity, such a Free Zone Entity is required to notify the DDA of the changes.

 

Other licensing authorities in the UAE

 

Apart from the DDA, many other free zones/licensing authorities in the UAE such as Dubai International Financial Centre, Abu Dhabi Global Market and Dubai Multi Commodities Centre already require submission of details of ultimate beneficial owners. It is likely that more and more free zones/licensing authorities will issue similar requirements in due course. ■

New economic substance regulations in the UAE

A previous inBrief dated 30 April 2019 discussed a law recently enacted in the BVI, the Economic Substance (Companies and Limited Partnerships) Act, 2018, which introduced economic substance requirements in the BVI. This article will discuss a similar measure recently promulgated in the UAE.

 

UAE Cabinet Resolution 31 of 2019 Concerning Economic Substance Regulations (the UAE Economic Substance Regulations or the Regulations) was published in the Official Gazette on 30 April 2019 and came into effect the same day.

 

Background

 

The European Union’s Code of Conduct Group (a group responsible for EU’s taxation policy) maintains a blacklist of non-cooperative jurisdictions for tax purposes. In order to avoid being placed on such blacklist (or to attempt to get removed from the blacklist), jurisdictions such as the BVI, the Isle of Man, and the Cayman Islands, among others, have introduced legislation requiring entities established in such jurisdictions to demonstrate economic substance in their respective jurisdictions. The UAE was added to the blacklist in March of 2019, and the UAE Economic Substance Regulations were apparently promulgated in response to this development.

 

Relevant Activities

 

The UAE Economic Substance Regulations apply to any Licensee, which is defined to mean any natural or juridical person licensed by the competent licensing authorities in the UAE to carry out a Relevant Activity in the UAE, including in free zones and financial free zones. The Regulations identify nine Relevant Activities:

 

• Banking Businesses

• Insurance Businesses

• Investment Fund Management

• Lease-Finance Businesses

• Headquarters Businesses

• Shipping Businesses

• Holding Company Businesses

• Intellectual Property Businesses

• Distribution and Service Center Businesses

Economic Substance Test

 

Under the Regulations, a Licensee engaged in a Regulated Activity must meet an Economic Substance Test in relation to each Relevant Activity carried on by such Licensee. This includes but is not limited to demonstrating that its State Core Income-Generating Activities are carried out in the UAE. The activities that constitute State Core Income-Generating Activities vary for each of the nine Relevant Activities.1

 

Under Article 6(2) of the Regulations, a Licensee meets the Economic Substance Test if it satisfies the following criteria:

 

(a) If the Licensee conducts State Core Income-Generating Activity in the State.

(b) If the Licensee is directed and managed in the State in relation to that activity.

(c) Having regard to the level of Relevant Activity, if there is an adequate2 number of qualified full-time employees in relation to that activity who are physically present in the State (whether or not employed by the Licensee or by another entity and whether on temporary or long-term contracts), or adequate level of expenditure on outsourcing to third party service providers, whose activities, employees, expenditure, and premises are in the State, and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.

(d) If there is adequate operating expenditure incurred by it in the State, or adequate level of expenditure on outsourcing to third party service providers whose activities, employees, expenditure and premises are in the State, and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.

(e) If there are adequate physical assets in the State or adequate level of expenditure on outsourcing to third party service providers in the State, for the activities of the Licensee.

(f) In the case of State Core Income-Generating Activity carried out for the relevant Licensee by another entity, if it is able to monitor and control the carrying out of that activity by the other entity.

Under Article 6(4), a Holding Company that derives its income from dividends and capital gains only is subject to a less stringent Economic Substance Test whereby such test is satisfied if the Licensee complies with all requirements to submit documents, records and information to the Regulatory Authority and has adequate employees and premises for holding and managing a Holding Company Business.

 

Regulatory Authority & Competent Authority

 

The Regulations stipulate that a Regulatory Authority will be delegated to regulate Relevant Activities in accordance with the Regulations. Such Regulatory Authority has not yet been identified. The Regulations stipulate that the Regulatory Authority will be appointed by the Cabinet pursuant to a further resolution.

 

The Regulations designate the UAE Ministry of Finance as the Competent Authority. The role of the Competent Authority is different from that of the Regulatory Authority. The Regulations stipulate that the Competent Authority shall issue guidance on how the Economic Substance Test may be met. The Competent Authority is also responsible for determining the form of certain reports to be filed by a Licensee pursuant to the Regulations. Each Licensee will report to the Regulatory Authority who in turn will share certain information with the Competent Authority.

 

Reporting Requirements

 

A Licensee engaged in a Regulated Activity has two periodic reporting requirements under the Regulations. Under Article 8(1) of the Regulations, a Licensee shall notify the Regulatory Authority annually of the following:

 

(a) Whether or not it is carrying on a Relevant Activity.

(b) If the Licensee is carrying on a Relevant Activity, whether or not all or any part of the Licensee’s gross income in relation to the Relevant Activity is subject to tax in a jurisdiction outside of the State; in all cases such Licensee shall provide the Regulatory Authority with all information and documentation required to be submitted by it pursuant to this Resolution or any further guidance or decision issued pursuant to this Resolution.

(c)  The date of the end of its Financial Year.

Under Article 8(2) of the Regulations, the foregoing annual filing shall be made at the time specified by the Regulatory Authority and in the manner approved by the Regulatory Authority. As noted above, the Regulatory Authority has not yet been identified, so the filing deadline is currently unknown.

Article 8(3) of the Regulations states that: “A Licensee that is carrying on a Relevant Activity and is required to satisfy the Economic Substance Test shall, no later than twelve (12) months after the last day of the end of each Financial Year of the Licensee, prepare and submit to the Regulatory Authority a report which report shall be submitted by the Regulatory Authority to the Competent Authority.” Article 8(4) stipulates that such report shall be in the form approved by the Competent Authority and shall include the following information with respect to the Licensee:

(a) The type of Relevant Activity conducted by it.

(b) The amount and type of relevant income in respect of the Relevant Activity.

(c) The amount and type of operating expenses and assets in respect of the Relevant Activity.

(d) The location of the place of business and, if applicable, plant, property or equipment used for the Relevant Activity of the Licensee in the State.

(e) The number of full-time employees with qualifications and the number of personnel who are responsible for carrying on the Licensee’s Relevant Activity.

(f) Information showing the State Core Income-Generating Activity in respect of the Relevant Activity that has been conducted.

(g) A declaration as to whether or not the Licensee satisfies the Economic Substance Test.

(h) In the case of a Relevant Activity being an Intellectual Property Business, a declaration as to whether or not it is a high risk intellectual property business. If the Licensee declares that it is a high risk intellectual property business, the Licensee shall provide the information under paragraph (i) to refute a determination made by the Regulatory Authority under Clause 3 of Article 7 of this Resolution.  

(i) In the case of a Licensee that is carrying on a high risk intellectual property business, the following additional information must be provided:

i. Information demonstrating that the Licensee does and historically has exercised a high degree of control over the development, exploitation, maintenance, enhancement and protection of the intellectual property assets by an adequate number of full-time employees, with the necessary qualifications, who permanently reside and perform their activities in the State.

ii. Business plan showing the reasons for holding the ownership in the Intellectual Property Asset in the State.

iii. Employee information, including level of experience, type of contracts, qualifications and duration of employment with the Licensee.

iv. Evidence that decision making is taking place within the State.

(j) Where a Relevant Activity is outsourced by a Licensee, the Licensee must demonstrate the following:

i. The Relevant Activity that is outsourced is a Core Income-Generating Activity being carried out in the State.

ii. The Licensee has adequate supervision of the Relevant Activity outsourced.

iii. The Licensee shall submit to the Regulatory Authority a report containing information in relation to the level of resources employed by the third party service provider to which the Relevant Activity is being outsourced, demonstrating that the service provider’s activities, employees, operating expenditures and premises in the State are adequate in relation to the level of the outsourced Relevant Activity.

 

The Regulatory Authority may require a Licensee to provide such additional information, documents or other records as shall be reasonably required in order to make a determination as to whether the Economic Substance Test has been met.

 

Penalties

 

Failing to meet the Economic Substance Test carries an administrative penalty of a fine between AED 10,000 and AED 50,000 in any Financial Year. Failing to meet the Economic Substance Test again the following Financial Year carries a fine of not less than AED 50,000 and not more than AED 300,000.

 

Failure to provide information required under Article 8 of the Regulations (i.e., the reporting requirements discussed above), or providing inaccurate information, carries a fine between AED 10,000 and AED 50,000.

 

Implications

 

Historically, jurisdictions such as BVI and the Cayman Islands have been major destinations for shelf companies (companies with little or no physical or economic presence in the jurisdiction of incorporation). The UAE has not been not been a major hub for shelf companies because, with limited exceptions (such as Jebel Ali offshore companies), businesses in the UAE are required to have physical offices and licenses to do business locally. Moreover, the UAE authorities have historically cooperated willingly with foreign official investigations into tax evasion, money laundering, and other offenses, and furthermore have implemented significant domestic measures. To us, it therefore appears that the European Union’s pressure on the UAE to implement economic substance legislation was misdirected. In any event, it will not have the same impact in the UAE as it will in countries that have been major hubs for offshore shelf companies.

 

Nonetheless, for Licensees that were originally established in the UAE to hold assets in other jurisdictions without a significant economic presence in the UAE, the Economic Substance Regulations will have significant ramifications. Compliance with the Regulations may require substantial restructuring of business operations.

 

Next Steps

 

All businesses licensed in the UAE should carry out an assessment to determine if they are subject to the Economic Substance Regulations and businesses that are subject to such Regulations should begin taking steps to ensure compliance. The timetable for compliance is currently unknown given that the Regulatory Authority has not yet been appointed but it would be prudent to start taking steps to comply as soon as possible. ■

*****
1 The definition of State Core Income-Generating Activities for each of the nine Relevant Activities is set out in Article 5 of the Regulations.
2 The Regulations stipulate that the Guidance to be issued by the Competent Authority may include guidance regarding the meaning of “adequate”.

New UAE regulatory policy for the Internet of Things

Along with the prediction that the continued growth of the Internet of Things (IoT) will transform our everyday lives and how we do business, we can also anticipate that the increased number of connected devices will bring about additional challenges, including greater security and privacy-related risks. In light of these challenges, the UAE Telecommunications Regulatory Authority (the TRA) has recently laid the groundwork for regulating IoT by introducing a regulatory policy (the IoT Policy) and a set of regulatory procedures (IoT Procedures) that give the TRA control and oversight over IoT services in the UAE while also setting forth some data protection-related principles. It is important that those that provide IoT services to the UAE market understand their obligations under the TRA’s IoT Policy going forward.

 

What is IoT?

 

When we speak of IoT, we generally refer to the network of everyday physical objects or devices connected to the Internet, which are able to communicate with other devices and collect and exchange data through software, embedded electronics, sensors and other forms of hardware. These devices can be consumer-based, such as wearables, cars, speakers, and smart home devices and appliances, as well as industry-based objects, such as intelligent medical devices, security systems, and machinery and robots used in factories.

 

In the IoT Policy, IoT is broadly defined as “a global infrastructure for the information society, enabling advanced services by interconnecting (physical and virtual) Things based on existing and evolving interoperable information and communication technologies”.

 

Who is Subject to the IoT Policy?

 

The IoT Policy is applicable to all individuals, companies, public authorities, and other legal entities concerned with IoT within the UAE. This includes IoT Service Providers that are located in the UAE as well as foreign-based IoT Service Providers providing services remotely to the UAE market.

 

The TRA defines an IoT Service Provider as any individual, company or public authority that “provides an IoT Service to users (including individuals, businesses and the government) that will comprise the provision of IoT-related service/solutions”. In addition, an IoT Service is considered to be any “set of functions and facilities offered to a user by an IoT Service Provider”, other than IoT-specific Connectivity (which is generally the type of activity that is provided by a network service provider). The TRA’s wide-reaching definition of IoT Service Provider and IoT Service would likely capture traditional IT providers offering IoT related services or solutions to businesses located in the UAE as well as foreign companies bringing IoT related products to the market, such as cars and smart home devices and appliances.

 

Requirements under the IoT Policy

 

The following are some of the principal requirements under the IoT Policy:

 

Registration and Local Presence. All IoT Service Providers must register with the TRA and obtain a registration certificate. To obtain a registration certificate, the IoT Service Provider is required to have a local presence or an appointed representative physically present in the UAE to be responsible for communicating with the TRA and law enforcement agencies. It also must have registered its IoT Service with the TRA pursuant to the IoT Procedures.

 

Mission Critical IoT Service. If an IoT Service is characterised as Mission Critical (i.e., any service that if it fails, may result in an adverse impact on the health of individuals, public convenience or safety or national security), then the IoT Service Provider is required to meet additional requirements stipulated by the TRA, including maintenance of subscriber information.

 

Soft SIMS. The TRA requires prior approval for the use of Soft SIMs. A Soft SIM refers to a collection of software applications and data that perform all of the functionality of a SIM card, but does not reside in any kind of secure storage. Rather, the Soft SIM is stored in the memory and processor of the communication device.

 

Type Approval. Any Radio and Telecommunications Terminal Equipment (RTTE) as defined in the TRA’s type approval policy that is to be sold, offered for sale or connected to any Telecommunication Apparatus within the UAE, requires a type approval from the TRA. In addition, if the RTTE collects any data or information or is capable of providing IoT Service, then it must also meet additional requirements set forth in the IoT Policy.

 

IoT-specific Connectivity. Any person that intends to provide IoT-specific Connectivity must contact the TRA to obtain a license, and the TRA will conduct a case-by-case assessment to consider whether awarding such a license is necessary subject to the Telecommunications Law (Federal Decree Law 3 of 2003) and the licensing regime in place at the time.

 

Data Protection 

 

In addressing data protection, the IoT Policy focuses on data storage and the location of stored data. It should be noted that while drafting these provisions on data protection, we can see that the TRA has looked to existing international standards as well as Dubai’s own policies as many of the data protection-related terms and principles contained in the policy have been adopted from the General Data Protection Regulation (EU) 2016/679 (the GDPR) and the Dubai Data Manual published by Smart Dubai in 2016.

 

Data Storage. IoT Service Providers must adhere to the following principles:

 

• Purpose Limitation – Data must be collected for specified, explicit and legitimate purposes only and cannot be further processed in a manner that is incompatible with these purposes.

 

• Data Minimisation – Data must be adequate, relevant and limited to what is necessary in relation to the purposes for which it is processed.

 

• Storage Limitation – Data must be kept in a form that permits identification of Data Subjects for no longer than is necessary for the purposes for which the data is processed.

 

Data Localisation. Essentially, data must be classified based on the potential impact that will be caused in the event of a confidentiality breach or uncontrolled disclosure, and where data is to be stored depends on its classification. The TRA has set out four categories of classification, Open, Confidential, Sensitive, and Secret. Each of these classifications is defined in the IoT Policy and has been adopted from the Dubai Data Manual.

 

Data that is considered Secret, Sensitive or Confidential for individuals and businesses must be primarily stored within the UAE. However, this type of data may be stored outside of the UAE provided that the destination country meets or exceeds the UAE’s data security and user protection policies and regulations. Personal Data (as defined in the GDPR) will be classified as Secret Data for individuals. If any data is classified as Secret, Sensitive or Confidential Data for the government, then it must always be stored in the UAE. Finally, data that is classified as Open Data for individuals, businesses or the government may be stored in the UAE or abroad.

 

Compliance with the IoT Policy

 

Although the IoT Policy and IoT Procedures have only recently been made available to the public, they have been in effect since 22 March 2018 and 6 March 2019, respectively. In addition, the one-year transition period set out in the IoT Policy has elapsed. Therefore, unless an additional grace period is given, IoT Service Providers must immediately begin compliance with this new regulatory framework. Otherwise, noncompliance may result in the temporary or permanent suspension of services and may be considered as a breach of the Telecommunications Law, which could result in the imposition of fines and/or imprisonment.

 

Further Thoughts

 

The practical implications of the IoT Policy and IoT Procedures that are immediately obvious are the requirements that relate to data protection noted above. While the UAE (outside of the DIFC and ADGM) has not yet adopted a data protection law, the IoT Policy and Procedures have the effect of adopting certain key elements of a modern data protection regime and making them applicable to IoT Service Providers. This could be construed to apply to anyone who collects data remotely, if a liberal view is taken, as it could be difficult to draw a line between devices that collect and transmit data which do qualify as IoT devices, versus that which still collect and transmit data (like a mobile phone) which do not qualify as IoT devices. It may be that all such devices effectively are treated as IoT devices, and the result will be that different data protection regimes apply in the UAE depending on whether the data was transmitted by a device as opposed to collected directly or with pen and paper. We anticipate that this inequality of treatment under the law will be a transient phase as the UAE moves uniformly towards a consistent data protection regime, but businesses and advisors will need to be aware of this dichotomy in the meantime. It is easy to speculate that there may also be TRA approval required for importation of IoT devices too, to enable them to maintain a record or registry of IoT devices operating in the UAE.

 

We will provide further updates as this important area of regulation evolves.■

DIFC Courts pierce veil of incorporation in employment/marital dispute

The DIFC Small Claims Tribunal (SCT), a branch of the DIFC Courts, has in a rare (if not first of its kind) judgement, pierced the corporate veil of a DIFC incorporated company to look into its shareholding and key individuals in the case of Jamaru Group Holding Ltd v Jasmine [DIFC SCT 116/2019].

 

Overview of dispute

 

Jamaru Group Holding Ltd (Claimant), filed proceedings against Ms Jasmine (Defendant) in the DIFC SCT seeking reimbursement of payments made to the Defendant purportedly during the course of her employment with the Claimant. The claim sought repayment of payments made by the Claimant towards her apartment rental in Dubai and a loan to enable the Defendant to pay off her student debt. The Claimant also claimed that the Defendant was in breach of her employment contract by resigning from employment without serving notice.

 

The Defendant in response argued that the Claimant was nothing more the alter ego of her ex-husband who was the sole shareholder of the Claimant and that the payments made to her were gifts given by her ex-husband during the course of their marriage routed through the Claimant which had no connection to her employment with the Claimant. The Defendant also raised a counterclaim against the Claimant for her gratuity payments which were being withheld by the Claimant together with Article 18 penalties and argued that she had been forced to resign from employment with the Claiment as a consequence of her divorce.

 

The Defendant invited the court to pierce the corporate veil of the Claimant since the Defendant’s ex-husband was maliciously driving the Claimant’s claim to circumvent the terms of the divorce between them which expressly stated that there would be no further claims by or against either party. The Defendant cited the English case of Wyatt v. Wyatt (545 S.W.3d 796, 801 (Ct. App. Ark. 2018), a divorce action, where the court pierced the  corporate  veil of a husband’s three corporations for the purposes of dividing the marital property to prevent injustice caused by an abuse of the corporate form to the wife’s detriment.

 

The judgement

 

SCT Judge Maha Al Mehairi in issuing her judgement accepted the Defendant’s arguments and noted that “the Court has the power to pierce the corporate veil of a company when a Claimant attempts to circumvent the terms of the divorce by claiming back payments or gifts given to the Defendant over the course of their previous marriage by hiding behind the corporate veil of the corporate entity to “prevent injustice”.”

 

The learned judge also held that the gifts given to the Defendant by her ex-husband “are entirely appropriate in a marriage” and that the payments were not made consequent to her employment with the Claimant and dismissed the Claimant’s claim for those payments. The Defendant was awarded her gratuity and Article 18 penalties as it was found that the Claimant had withheld these sums without a justifiable reason.

 

Effect 

 

This judgement reinforces the DIFC Court’s pragmatic approach to disputes and its willingness to develop its body of law based on more mature legal systems. It also demonstrates that the DIFC Courts would not consider the principle enshrined by the well-known case of Salomon V Salomon as iron clad and that the Court would not hesitate to pierce the corporate veil to prevent injustice.

 

Afridi & Angell was pleased to advise the Defendant in these proceedings on a pro-bono basis. ■

Keeping up with the trend: the new DIFC Insolvency Law

Introduction

 

The latest in the series of insolvency regime reformations in the Middle East is the new Dubai International Financial Centre insolvency law; DIFC Law 1 of 2019 (the New Law). Subject to article 1(4) of the New Law, the New Law repeals and replaces DIFC Insolvency Law 3 of 2013 (the Old Law). Article 3 of the New Law states that it applies in the jurisdiction of the DIFC, meaning that it applies to all DIFC incorporated entities. The New Law will come into force on 28 August 2019.

 

The New Law combined with the expanded and restated Insolvency Regulations aims at encouraging trade and investment in the UAE by bringing the DIFC in line with international best practice in cases of insolvency. The New Law generally follows the same principles as UAE Federal Law 9 of 2016 on Bankruptcy in so much that it offers a formal restructuring procedure as a rescue tool to debtors, provides a mechanism for binding non-consenting creditors and, generally, promotes a more structured and effective system for businesses in financial distress.

 

The New Law provides significant additional restructuring options to debtors and creditors. While offering additional protection and tools to debtors willing to rescue their businesses by way of restructuring, the New Law ensures that these protections and tools are balanced with the rights offered to creditors to recover their debts.

 

What is being offered?

 

Rehabilitation:  the New Law provides for a court supervised debtor in possession regime called ‘rehabilitation’ which essentially allows a debtor an opportunity to rescue its business by way of proposing a rehabilitation plan to its creditors and shareholders for their vote. A debtor is entitled to apply for rehabilitation if it is, or is likely to become, unable to pay its debts and if there is reasonable probability of reaching a mutually agreeable arrangement with its creditors and shareholders.

 

One key feature of the New Law, and one that will surely be welcomed by financially distressed businesses, is that from the time that a debtor makes an application for rehabilitation, an automatic moratorium is immediately applied to all its creditors (secured and unsecured) for a period of 120 days. Amongst other things, the automatic moratorium affords debtors certain protections against termination of contracts. With the intention of creating a balance between the protections afforded to debtors and creditors, the New Law allows creditors to apply to the court seeking relief from the moratorium.

 

The New Law provides that for the purposes of voting on the rehabilitation plan, creditors and shareholders will be categorised into different classes with the court’s consultation. In order to be implemented, the plan needs to be approved by at least 75 per cent of the creditors or the shareholders in each class as well as the court. This essentially allows for binding the minority dissenting creditors and shareholders in each class to the rehabilitation plan.

 

The New Law grants courts the overriding power to sanction the rehabilitation plan provided that: (a) at least one class of creditors affected by it has accepted the plan; (b) all creditors are receiving at least as much value as they would have if the debtor was wound-up; and (c) a junior creditor in a class of creditors does not get paid before a senior dissenting creditor in that class.

 

Another significant relief that the New Law provides to debtors during the rehabilitation process is the ability to take on court sanctioned new financing (secured or unsecured).

 

Court appointed administrator: in the event that there is evidence of mismanagement and misconduct, one or more creditors can make an application to the court for the appointment of an independent administrator to manage the affairs of the debtor during the rehabilitation process. If appointed, the administrator will have the power to: (a) approve the rehabilitation plan; (b) facilitate a company voluntary arrangement; (c) approve a scheme of arrangement under the Companies Law; and (d) investigate any misconduct and mismanagement by the debtor and its management.

 

Cross-border insolvency:  another important feature of the New Law and one that should provide a great deal of confidence to the international trade community when investing in the UAE is the adoption of the United Nations Commissions on International Trade Law (UNCITRAL) Model Law. This will essentially ensure the mutual co-operation and co-ordination of cross-border insolvency proceedings.

 

Other enhancements: the New Law amongst other things also: (a) improves on the voluntary and compulsory winding up procedures offered by the Old Law by streamlining the appointment process for the appointment of a creditors’ committee in a winding up and clarifying the process for dissolution; (b) provides additional provisions governing unlawful trading and the reuse of company names; and (c) creates an offence of misconduct in the course of winding up.

 

Conclusion

 

The New Law introduces many welcomed features which should place the DIFC at the forefront of jurisdictions with developed and sophisticated insolvency regimes and is certainly a step forward in maintaining the UAE’s position as a world leading trade hub. ■

The new DIFC Employment Law: key changes

On 12 June 2019, the Dubai International Financial Centre (the DIFC) announced the enactment of DIFC Law 2 of 2019 (the New DIFC Employment Law) to replace the existing DIFC Law 4 of 2005 (the Old DIFC Employment Law). The New DIFC Employment Law is to come into force on 28 August 2019 and will directly affect almost 24,000 employees based in the DIFC.

 

As the leading regional financial centre, the DIFC’s employment law is a fundamental piece of legislation which is key in ensuring a balance between an employer’s business interests and employee rights within the DIFC. After an extensive consultation process, the New DIFC Employment Law has introduced a number of changes which focus on this balance.

 

The repeal of the Old DIFC Employment Law 

 

The New DIFC Employment Law “repeals and replaces” the Old DIFC Employment Law in its entirety. However, the transitionary provisions (i.e. provisions which clarify the effect of the new law on any rights accrued under the old law) set out in Article 1 have ensured that any “right, remedy, debt or obligation which has accrued” under the previous law would not be prejudiced by the enactment of the new law, subject to a few exceptions.

 

Essentially, the New DIFC Employment Law has no retrospective effect and proceedings already before the DIFC Court (including appeals) would continue to be based on the provisions of the old law.

 

Conditions of employment, probation and part-time employment 

 

Article 17 of the new law now makes provisions with regard to the employment of part-time employees (a concept not recognised under the old law). A part-time employee is defined as an employee whose employment contract either stipulates: (a) less than eight working hours per work day, inclusive of any rest, nursing or prayer breaks; (b) less than five work days per work week; or (c) terms of employment which do not constitute full time employment.   All  provisions  of  the  new law  apply  to  part-time employees except for leave entitlements which are to be calculated on a pro rata basis as provided for in Article 17(2).

 

Other changes to conditions of employment include the expansion of maternity leave benefits for female employees who adopt a child less than five years old (Article 37(3)), introduction of up to five days of paternity leave for male employees to be taken within a month of the child being born (Article 39) and a reduction of sick pay (Article 35) as follows:

 

a) hundred per cent of the employees daily wage for the first ten work days of sick leave taken;

b) fifty per cent of the employees daily wage for the next 20 work days of sick leave taken; and

c) no further pay for the remaining maximum sick leave entitlement (60 work days per year).

 

In terms of Article 11(2), the conditions of employment set out in the New DIFC Employment Law are “minimum requirements” and cannot be waived even by express agreement by the employer and the employee unless such waiver is specifically allowed under the new law. It is possible to agree on conditions that are more favorable to the employee in an employment contract.

 

One such instance where an employer may change the minimum requirements by express written agreement is the maximum weekly working time of an employee. In terms of Article 22, the employee’s maximum working time is 48 hours per week. However, Article 22 allows an employer to increase this limit if the employee consents in writing. Taking into account the mandatory daily rest period (11 hours per day) and the weekly rest period (24 hours per week), an employer may increase the weekly working time up to 78 hours if the employee consents to such increase in writing.

 

The New DIFC Employment Law has also formally recognised the concept of probation (not specifically recognised under the old law). In terms of Article 14(2)(l), the maximum period of probation which a new employee may be subject to is six months. Furthermore, an employee terminated during a probation period is not entitled to a minimum notice period as specified in Article 62(2) and it appears that the New DIFC Employment Law has impliedly recognised that an employee may be terminated without notice during the probation period if such provisions are specifically made in the employment contract.

 

According to Article 14(3), any amendments to an employment contract must now be in writing and signed by both the employer and employee unless such amendment is of an administrative nature. In case of such an administrative amendment, the employer is required to record the amendment in writing and to give written notice to the employee prior to the amendment taking effect.

 

 Non-discrimination and non-victimisation 

 

The New DIFC Employment Law makes extensive provisions relating to non-discrimination and non-victimisation of employees and remedies for discrimination. Article 59 defines discrimination in wide terms to include both direct and indirect discrimination. New grounds of discrimination introduced under Article 59 of the new law are age, pregnancy and maternity.

 

Furthermore, Article 60 of the new law prevents an employer from victimising an employee for committing a “protected act”. Protected acts include bringing legal proceedings for discrimination against an employer, giving evidence against an employer in a claim for discrimination (whether in an employee’s own claim or a third party employee’s claim) and making allegations that the employer has committed acts of discrimination or victimisation.

 

In terms of Article 61, an employee is entitled to bring proceedings against an employer for victimisation or discrimination within six months of such an act taking place. The burden of proof in proving discrimination is on the employee and the court may (a) make a declaration as to the rights of the employee; (b) award compensation which could include compensation for “injured feelings”, subject to a maximum amount equivalent to the employee’s annual wage; (c) make appropriate recommendations; or (d) order a combination of such remedies.

 

Termination of employment and settlements 

 

While termination with notice is largely unchanged from the old law, the New DIFC Employment Law has made a major change to an employee’s entitlements upon termination for cause (i.e. termination without notice for misconduct). In terms of Article 63(2) of the new law, an employee terminated for cause would still be entitled to gratuity payments which could have been withheld under the old law. Accordingly, the only retention that an employer could make when terminating an employee for cause is notice pay.

 

The New DIFC Employment Law does not expressly recognise the concepts of constructive termination (termination where an employee is forced to resign) or unfair dismissal (termination with notice for unfair reasons) and the DIFC Court has previously held that it would not intervene to introduce these concepts by judicial intervention unless statute specifically makes appropriate provisions in that regard.

 

Furthermore, the new law appears to have expressly recognised the ability to enter into employment settlement agreements. In terms of Article 11(2)(b), an employee may waive any right, remedy, obligation, claim or action under the new law by entering into a written agreement with their employer to terminate their employment or resolve any dispute. In entering into such agreements, the employee must warrant that the employee was given an opportunity to receive independent legal advice on the terms and effect of the agreement from a legal practitioner registered as a Part 1 or Part II practitioner in the DIFC Academy of Law’s register of legal practitioners.

 

Article 18 penalties

 

Another change which the New DIFC Employment Law has introduced, perhaps to balance the benefit granted to employees in awarding of gratuity when terminating an employee for cause, is the limitation of Article 18 penalties under the old law. In terms of Article 18(2) of the old law, an employer was liable to pay an employee a penalty equivalent to the last daily wage for each day the employer is in arrears or any amount (even one dirham) owing to an employee upon his termination.

 

Practically, the Article 18 penalties were applied inconsistently by the DIFC Courts in claims by employees challenging termination for cause (where the employer withholds gratuity and notice pay) leading to judgements where Article 18 penalties amounted to a substantial portion of the judgement amount. In certain cases, the court applied Article 18 penalties for the entire period from the date of termination of the employee to the date of judgement, without considering that (a) an employee had waited for a substantial period of time before bringing a claim; or (b) Court proceedings often took many months to complete.

 

In terms of Article 19(4) of the new law, in awarding Article 18 penalties (now Article 19 penalties), the court must discount (a) the time period in which a dispute is pending before a Court; and (b) the employee’s unreasonable conduct which is the material cause of the employee failing to receive any amounts due from the employee. Afridi & Angell is currently canvassing an appeal from a decision of the DIFC Small Claims Tribunal where Article 18 penalties were applied to almost an eight-month period. The appeal is based on the unfairness caused to employers by such an application of penalties which has now been recognised by the changes made to the new law.

 

Furthermore, Article 19 penalties cannot be awarded if the amount withheld by the employer as held by the court is not in excess of the employee’s weekly wage.

 

Recruitment costs

 

In terms of Article 21(2) of the New DIFC Employment Law, an employer is prevented from recouping any costs or expenses incurred in employing an employee from such employee during the course of employment. However, according to Article 21(3), an employer may now recoup such costs from an employee if an employee terminates their employment contract (ex. by resignation), within a period of six months from the employee’s date of commencement of employment.

 

Accordingly, an employee may now be liable to repay the employer for any fees charged by a recruitment firm or head-hunter (common in the DIFC) if the conditions set out in Article 21(3) are met.

 

Time limitation for employment claims

 

Yet another important and timely change brought about by Article 10 of the New DIFC Employment Law is the introduction of a six-month time limitation for employment claims starting from the date of termination of an employee. This time limitation comes into effect on 28 August 2019.

 

The introduction of a time limitation for employment claims will bring comfort to many DIFC employers. There have been cases before the DIFC Courts where ex-employees have made claims over twelve months after a termination occurred, exposing the employer to heavy penalties under the Old DIFC Employment Law.

 

Application of the New DIFC Employment Law and secondment 

 

Article 4 of the New DIFC Employment Law does not, unlike the Old Employment Law, limit its application to employees based within or ordinarily working within or from the DIFC. In terms of Article 4(1)(b)(ii), an employer who has a place of business in the DIFC (including a branch), may employ an employee under an employment contract subject to the New DIFC Employment Law even if such employee is not based within the DIFC.

 

Furthermore, Article 4(2)(1) of the New DIFC Employment Law also allows for a seconded employee to be subject to a law other than the New DIFC Employment Law despite such employee being based in the DIFC. For the purposes of this section, the secondment should be recognised by the DIFCA and should be for a temporary basis not longer than 12 months (or other period approved by the DIFCA on exceptional grounds).

 

Conclusion

 

The changes introduced by the New DIFC Employment Law have enhanced the balance between a DIFC employer’s legitimate requirements and the need to ensure global employment standards for DIFC employees. Changes to payments upon termination are likely to reduce employment claims proceeding to Court since an employer would not have a real incentive to risk litigation by terminating an employee for cause when the employee could be terminated with notice, especially since the employer can no longer withhold gratuity when terminating for cause. The new enhanced non-discrimination provisions are progressive, yet the practical effects of such provisions are yet to be tested by the courts. ■

A closer look at payment orders under the UAE Civil Procedure Law

Several significant changes to the UAE Civil Procedure Law (Federal Law No. 11 of 1992 as amended) came into effect in February this year. An overview of these changes, brought about by Regulations promulgated pursuant to Decree by Law No 10 of 2017 and Cabinet Resolution No. 57 of  2018 (the Regulations) can be found in our inBrief of 12 February 2019.

 

The changes made to Payment Orders under the Regulations have gathered a lot of interest, as it may offer an efficient means of recovering certain debts through the onshore UAE courts. In this inBrief, we take a closer look Payment Orders and the changes made by the Regulations.

 

What are Payment Orders?

 

Payment Orders are a mechanism for immediate ex parte judgment (i.e. without notice to the debtor). It existed under the UAE Civil Procedure Law before the Regulations were issued, but its use was restricted to claims involving financial instruments such as promissory notes and bills of exchange. Pursuant to the provisions   the Civil Procedure Law, Payment Orders may be applied for by a creditor holding a financial instrument and who has a confirmed claim for a fixed amount of money or a movable of a known type and quantity. It is important to note that where multiple claims are being asserted, and not all of them meet the legal requirements for an application for a Payment Order, the ordinary civil procedure for claims should be followed.

 

A key change brought about by the Regulations was to extend Payment Orders to disputes where the creditor’s right is “confirmed” either electronically or in writing, which need not be a financial instrument. What constitutes a “confirmed” debt has not been defined in the Regulations and the ordinary meaning may mean a written admission of debt. Recently, the Dubai Court granted a Payment Order based on a payment certificate certified by the engineer in a construction matter notwithstanding the existence of an arbitration clause in the underlying contract. The court therefore considered the certification of the engineer to be confirmation that the debt is due. This decision was not tested in appeal. Additionally, the Regulations provide that a claim for interest can be made under a Payment Order, whereas previously interest could not form part of such a claim.

 

This inBrief will consider the position where a Payment Order is sought consequent to a written admission of debt.

 

What constitutes a written admission of debt?

 

While the Civil Procedure Law and the Regulations provide no guidance on this issue, given the consequences of a successful application for a Payment Order (e.g. order issued within three days, a reduced appeal window of 15 days), it is likely that the courts will require a clear and unequivocal admission of debt. Although there is no system of binding precedent in the UAE, guidance may be given by reference to previous judgments:

 

It is established in the judgments of this court that an acknowledgment of a debt is the acknowledgment of a person that he owes a certain right to someone else, with a view to consider that right as being proved, and exempt the creditor from adducing any further evidence. For such an acknowledgment to be valid, it must be certain and assertive. If such an acknowledgment is surrounded by doubt, then it cannot be considered as correct or valid. The value of acknowledgment and significance of the paper issued by the debtor, where he acknowledges a debt and the consequences thereof on termination of limitation are matter of facts at the court discretion, as long as its inference is correct and reasonable. (Petition No. 1/2010(Labor))

 

The Regulations provide that confirmation of the debt, including written admissions of debt, may be established by reference to electronic sources.

 

What is the process?

 

Article 63 of the Regulations requires a creditor wishing to make an application for a Payment Order to first demand payment from the debtor. The creditor is required to grant the debtor at least five days from the date of receiving the demand to make payment. While the Regulations do not specifically address how a demand may be issued, Article 144 of the Civil Procedure Law provides that the demand be issued by registered post with acknowledgment of receipt, or by any other method that is agreed upon by the parties. Such alternative method should necessarily be one which facilitates a record of when the demand was served on the debtor. A prudent option would be to issue the demand through the Notary Public, as this would minimize the room for a debtor to successfully claim that the demand was not served on it.

 

Once five days have lapsed without payment being received from the debtor, an application may be filed before a summary judge. The competent court is identified with reference to the debtor’s domicile. The application must include the details required of an ordinary Statement of Claim/Plaint.  Additionally, the written admission of debt must be produced as evidence with the Statement of Claim/Plaint, together with evidence of the demand for payment being made.

 

An application for a Payment Order attracts the normal court fee (in Dubai, 6% of the claim value subject to a cap of AED 40,020).

 

Article 63 provides that the order be granted (or denied, presumably) within three days of the application being filed. If the application is denied, the judge is required to provide reasons. Prior to the Regulations, there was no requirement for the judge to provide reasons. If the application for a Payment Order is denied, the case will be transferred to be heard under the ordinary procedures. If the Payment Order is granted, the Payment Order is required to be served on the debtor through court within three months, failing which the Payment Order is rendered void.

 

A Payment Order may be appealed within 15 days by the debtor, and the court is required to determine the appeal within a week from the date of registration. Payment Orders qualify for expedited execution, i.e. execution may immediately commence notwithstanding that time for an appeal still exists.  It is also important to note that an application for a Payment Order does not preclude the party from seeking provisional relief under the relevant provisions of the Civil Procedure Code.

 

What next?

 

There are already reports of Payment Orders being applied for and obtained pursuant to written admissions of debt, including reports of a recent case in which a Payment Order for approximately USD 8 million was obtained. While this is promising, not every debt may be suitable for an application for a Payment Order. Payment Orders have been consistently recognised by the UAE courts as being an exceptional remedy, and as being subject to the rules of public order which suggests that the courts will approach applications strictly.

 

A note of caution

 

This development also serves to highlight the fact that the concept of ‘without prejudice’ correspondence is not recognised by the onshore courts. Parties often make written settlement offers in good faith which are subsequently seized upon in onshore court litigation as admissions of indebtedness. With Payment Orders now being extended to written admissions of debt, it is ever more important to be cautious in conducting settlement attempts. ■

Keeping up with the Trend: The New Dubai International Financial Centre Insolvency Law

This article explores the reformation of the insolvency regime by the DIFC which had been motivated by the need to provide more efficient and practical insolvency and restructuring mechanisms to debtors as well as creditors. This article provides an understanding of the new Dubai International Financial Centre (‘DIFC’) insolvency law; DIFC Law 1 of 2019.

Is arbitration an exceptional or alternative form of dispute resolution?

The enactment of the UAE’s first standalone arbitration law (Federal Law No. 6 of 2018; the Arbitration Law) introduced some important changes to arbitration in the UAE, such as recognising the enforceability of interim awards and significantly streamlining the enforcement of arbitral awards. However, the requirements for establishing a valid arbitration agreement (i.e. a written agreement entered into by persons with the requisite authority) remained largely unchanged under the new law, which restated the previously existing legislative requirements and codified principles established by the courts, for example recognising arbitration agreements incorporated through reference to standard terms and through electronic correspondence.

 

Judgments on issues of arbitration ordinarily contain a reference, if not as part of the reasoning of the judgment then at least as a preface to the reasoning, to the nature of arbitration as a form of dispute resolution. In cases decided before the Arbitration Law came into effect, arbitration was characterised as an exceptional form of dispute resolution. The characterisation of arbitration as an exceptional form of dispute resolution goes beyond mere semantics, as it formed the basis for the application of strict standards in determining whether a valid arbitration agreement existed.

 

It was therefore a welcome development that the Dubai Court of Appeal in a judgment issued in January 2019 characterised arbitration not as an exceptional form of dispute resolution, but as an alternative one:

 

As such, arbitration is not an exceptional means of resolving disputes but an alternative means that shall be followed once its conditions are satisfied. Arbitration is a matter of the parties’ intent and giving expression to their intent in a written agreement, whether in the form of a separate agreement or as a clause within a contract. In all cases, the law requires that such agreement be evidenced in writing.1 

 

However, in its judgment issued in Cassation Petition No. 1019 of 2018 in March 2019, the Dubai Court of Cassation once again characterises arbitration as an exceptional form of dispute resolution. By way of background, Cassation Petition No. 1019 of 2018 involved a challenge to the jurisdiction of the Dubai Court based on the existence of an arbitration clause. Although several drafts of a contract containing an arbitration clause were exchanged between the parties via email, a physical copy was not signed. It is also important to note that (a) the disagreement between the parties was with respect to the commercial terms, and there was no discussion or disagreement regarding the arbitration clause in the draft agreements, (b) both parties performed certain obligations under the contract, and (c) the plaintiff in fact asked the defendant how many arbitrators should constitute the tribunal, before it instituted proceedings in Court. The Court held as follows:

 

It is also established that arbitration is an express agreement whereby parties agree on referring their disputes to an arbitrator and not to the court. The agreement on arbitration may be an arbitration clause or terms of reference, and this is only valid in writing, whether by signing an instrument between the two parties or the messages, cables or other electronic means exchanged between the parties or through any form of written correspondence. Agreement on arbitration may not be assumed or inferred from general provisions in a document or a quotation as long as the arbitration agreement is not specifically provided for in a way indicating that both parties expressly know about and accept it, because it is an exception from courts’ jurisdiction. (Emphasis added).

 

Following from its characterisation of arbitration as an exceptional form of dispute resolution, the Court of Cassation went on to hold that there is no valid arbitration agreement:

 

However, the emails do not show that the two parties agreed on the terms included in the draft contract and this is further evidenced by the two parties’ failure to sign the contract. The expert’s report, which the court believes to be correct, indicates that the two parties did not sign the contract because they were in disagreement on some of the contractual terms and that the basis of the transactions between them was the quotation. The messages exchanged between the two parties did not refer to any agreement between the parties on referring their dispute through arbitration or to the back-to-back condition, therefore, the two pleadings are baseless both in fact and law, and the court hereby dismisses them.

 

Interestingly, the Court of Cassation made no reference to the provisions of the Arbitration Law or its applicability, even though it was relied on by the parties in their written arguments.

 

There is no system of binding precedent in the UAE and, notwithstanding the judgment discussed above, there is still reason to believe that the Dubai Courts are getting progressively more arbitration-friendly, particularly following the enactment of the Arbitration Law. However, it appears that there still may be some instances where the courts view arbitration as an exceptional form of dispute resolution and consequently apply strict standards to determining whether a valid arbitration agreement exists.  Given the circumstances, the prudent view is that parties should continue to have a signed agreement (as was the practice before the enactment of the Arbitration Law) or, at the very least ensure that there is an unequivocal agreement to arbitrate contained in the electronic correspondence they wish to rely on, which are until there is further clarity on this issue. Parties will also have to ensure that the individuals agreeing to arbitration on behalf of corporate entities must have specific authority to do so, regardless of whether the agreement is reached through a signed agreement or electronic correspondence. ■

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1 Quoted from third party sources.