Category: inBriefs

New decree on mortgaging granted lands in Dubai

On 11 January 2017, Dubai Decree No. 31/2016 On Mortgaging Granted Lands in Dubai was issued (Decree).

 

The Decree permits the holder of “granted land” to mortgage such land subject to certain conditions. It is expected that the Decree will stimulate growth in Dubai by enabling developers, who hold granted land, to obtain finance for their projects by mortgaging the granted land.

 

The Director General of the Dubai Land Department (DLD), Sultan Butti Bin Merjren, has said that the Decree is a key legislative initiative that will have a positive impact on the real estate market.

 

What Is “Granted Land”?

 

“Granted land” is land which has been gifted by the Ruler of Dubai to a UAE national, at no cost, for:

 

• commercial or industrial purposes; or

 

• residential purposes.

 

Granting land in this manner furthers Dubai’s leadership vision of ensuring a dignified life for its citizens by enabling commercial and industrial assets to be developed, as well as homes to be built.

 

Granted land is not freehold land and is subject to various restrictions. For example, granted land cannot be disposed of unless:

 

• the UAE national obtains special permission from the Ruler of Dubai; or

 

• in case of commercial and industrial land, the UAE national converts their granted title to freehold upon payment of a fee and in accordance with Decree No. 4 of 2010 on Regulating Ownership of Land Granted for Industrial and Commercial Purposes in Dubai.

 

Key Features of the New Decree

 

The Decree permits a holder of granted land to mortgage that land under the following conditions:

 

• if the granted land is residential, the monies arising from the mortgage must be invested in maintaining, expanding, constructing or replacing the building;

 

• if the granted land is commercial or industrial, the monies arising from the mortgage must be invested to achieve the purposes of the original grant; and

 

• the mortgage must be registered with the DLD.

 

The DLD can only register a mortgage over granted land if:

 

• the borrowed amount will be used to achieve the purpose for which the land was granted; and

 

• the mortgagor has a construction license issued by a competent authority.

 

If a mortgagor defaults, the Decree provides mortgagees with a legal right to sell the granted land at public auction (and under the supervision of the DLD) provided that 30 days’ notice is given to the mortgagor to rectify the default.

 

All disputes relating to mortgages over granted land are to be heard through the Civil Court.

 

What Changes Compared to the Old Rules?

 

The Decree follows previous Orders and Instructions in relation to mortgaging granted land as set out below.

 

• Instructions issued on 20 September 1994 from the Ruler of Dubai – By these instructions, all mortgages over granted land were strictly prohibited, and any mortgage made in violation of this instruction was considered absolutely null and void.

 

• Order issued on 14 May 1996 from the Ruler of Dubai – By this order, granted land (whether residential or commercial) could be validly mortgaged.

 

• Instructions issued on 5 June 1996 from the Ruler of Dubai – By these instructions, a mortgage over granted land could only be registered at the DLD if:

 

o the DLD had verified that:

 

 the amount of the mortgage was used for the construction of a building on the granted land; and

 

 payment of the mortgage funds had been made in such a way that ensured the mortgage was used for its intended purpose;

 

o the mortgagor had a building license for the commercial development; and

 

o the mortgagor had obtained a no-objection letter from the Ruler of Dubai permitting the mortgage of the granted land.

 

It is important to note that the Decree provides that all prior regulatory measures that are inconsistent with the Decree’s provisions will be repealed, including the above.

 

Why Is the Decree Important?

 

It is expected that the Decree will stimulate growth in Dubai by:

 

• enabling developers, who hold granted land, to obtain finance for their projects by mortgaging the granted land; and

 

• encouraging banks to lend against granted land by providing them with:

 

o a legal right to sell the granted land at public auction (and under the supervision of the DLD) if the mortgagor defaults; and

 

o a dispute resolution process.

 

However, it is likely that further regulations will need to be issued to govern the implementation of the new Decree. ■

Companies law compliance

The new Commercial Companies Law was enacted as Federal Law No. 2 of 2015. It gave existing companies until 1 July 2016 to achieve compliance with its terms. Article 374 provides that a further one-year extension could be granted by Resolution of the Cabinet, and such an extension was in fact granted. Article 374 also provides that a company that fails to achieve compliance shall be deemed dissolved.

 

 

Many companies set about amending their constitutive documents (Contracts of Establishment for limited liability companies and Memoranda and Articles of Association for joint stock companies) to achieve compliance with the new requirements. Shareholders of limited liability companies were assisted somewhat by Ministerial Resolution No. 272 of 2016, which specified which provisions of the Commercial Companies Law on joint stock companies would also apply to limited liability companies.

 

 

A new resolution of the Minister of Economy, Ministerial Resolution No. 694 of 2016, now provides further relief. It states that Contracts of Establishment of existing limited liability companies that are not amended by the deadline shall be deemed amended to the extent necessary to achieve compliance. One could question whether the Commercial Companies Law gave the Ministry the power to grant this relief from compliance. Executive measures cannot modify legislative measures absent enabling legislation. Nevertheless, the practical result is that such companies no longer face the prospect of dissolution, fines or other sanctions for failure to comply.

 

 

The new measure applies to general partnerships and limited partnerships as well as limited liability companies. It does not apply to the other forms of companies that exist under the Commercial Companies Law, the private joint stock company and the public joint stock company.

 

 

Although sanctions relief is welcome, some uncertainty remains, and not only because of the inherent limitations on executive power noted above. The parties to a Contract of Establishment that is deemed amended could still be unsure of where they stand. The Contract of Establishment will no longer mean what it says, and an authoritative determination of its actual meaning may be elusive. Although major substantive problems would seem unlikely, it is not ideal for a corporate document not to mean what it says.

 

 

In contrast, the companies that have amended their Contracts of Establishment do not face this ambiguity. Their amended documents would have been notarized and filed with the authorities, making it unlikely that the new Resolution would impose further amendments.

 

 

To illustrate the issues that might arise, the new Commercial Companies Law requires that a register of shareholders be maintained by the company, including such particulars as the full name, nationality, date of birth and place of residence of each shareholder. The date of birth was not previously required. Even a company that does not amend its constitutive documents should amend its register of shareholders so as to include this new information.

 

 

As a further example, the new law slightly changes the requirements for exercise of preemption rights when a share transfer is contemplated. When a shareholder in an LLC wishes to sell its shares, it must first make an offer on the same terms to the other shareholders, or alternatively obtain a waiver of the preemption right from the other shareholders. In the event of a dispute over the price, the new Commercial Companies Law requires that the price be determined by one or more experts nominated by the Competent Authority in the relevant Emirate. The previous Commercial Companies Law (and many constitutive documents of companies formed in the UAE) provided that this value would be determined by the company auditor. An expert appointed by the Competent Authority will now play that role, whether or not the underlying constitutive documents are amended.

 

 

The new Commercial Companies Law contains an express prohibition against a manager of a limited liability company acting as manager of a competing enterprise without the consent of the company. This exposes a manager to liability even if the prohibition is not stated in the constitutive documents of the company.

 

 

As a final example, a shareholder in a limited liability company is now able to pledge its shares. However, this is possible to the extent that the constitutive documents enable the same. It is unlikely that a provision to this effect would be deemed included in the company’s constitutive documents by virtue of the new Resolution.

 

 

The new Resolution was published in Issue No. 612 of the UAE Federal Official Gazette dated 28 February 2017, and it took effect on 1 March 2017. ■

New UAE funds regime

The UAE has embarked on an ambitious undertaking by introducing new business friendly mutual funds regulations to stimulate the UAE funds industry and provide the foundation for a more developed regional funds regime in the Gulf Cooperation Council (the “GCC”). The mutual funds industry can facilitate the gathering of monies for investment in various sectors across the UAE and Middle Eastern economies through funds that are established in the UAE, as well as foreign funds that are registered and promoted in the jurisdiction.

 

The Emirates Securities and Commodities Authority (“SCA”) has recently issued the following new regulations governing the registration, licensing, and promotion of mutual funds in the UAE (the “Fund Regulations”):

 

1. SCA Board Decision No. 9 of 2016 regulating mutual funds;

 

2. SCA Board Decision No. 10 of 2016 setting out fees related to mutual funds;

 

3. SCA Administrative Decision No. 49 of 2016 regulating exchange traded funds (“ETFs”);

 

4. SCA Administrative Decision No. 52 of 2016 regulating cash investment funds;

 

5. SCA Administrative Decision No. 1 of 2017 regulating real estate investment trusts (“REITs”);

 

6. SCA Administrative Decision No. 2 of 2017 regulating private ownership funds;

 

7. SCA Administrative Decision No. 3 of 2017 regulating venture capital funds; and

 

8. SCA Board Decision No. 3 of 2017 regulating promotion and arranging activities.

 

The Fund Regulations constitute the new UAE fund regime regarding onshore local funds and foreign funds that are marketed in the UAE (outside of its financial free zones).  Such regulations replace SCA Board of Directors Decision No. 37 of 2012 concerning the regulations on mutual funds (the “2012 Regulations”).

 

In addition to revamping the primary mutual fund law that applies to all UAE funds, the Fund Regulations set out additional obligations and key exemptions for certain funds, including REITs, ETFs, private equity funds, and venture capital funds.  This marks a significant change from the 2012 Regulations, which failed to differentiate between varying types of local funds, and should encourage fund managers and other sponsors to establish funds in the UAE.

 

Mutual Funds

 

As with the 2012 Regulations, the Fund Regulations apply to all mutual funds and parties that are “related” to mutual funds.

 

A “mutual fund” is defined as a financial pool engaged in the activity of accumulating investors’ assets for the purpose of investment against the issue of fund units of equal value. SCA interprets this definition broadly.

 

Corporate Structure

 

A local mutual fund must be established by an eligible sponsor, which includes companies licensed by SCA “in the area of securities” or to manage funds, local and foreign banks licensed by the UAE Central Bank, and UAE branches of foreign companies licensed by an International Organization of Securities Commissions regulator and having an operating history of at least five years.  The sponsor must contribute a minimum share capital of AED 5,000,000 and cannot own more than 30% of the fund units.

 

While UAE Law No. 2 of 2015 (the “Companies Law”) contemplates local funds having corporate personality, it does not prescribe a specific form for funds.  As with the previous regime, a UAE fund is established through the contractual relationship between the sponsor and its investors, and each investor will have a balance sheet entry in the accounts of the fund administrator (which must meet comparable eligibility requirements as those of the sponsor).

 

The Fund Regulations provide that the contractual relationship will benefit from limited liability (i.e. up to the amount invested) and impose certain conditions related to the fund units (e.g. preventing pledging assets of the fund to satisfy third party debts and allocation of units by heirs or creditors).  Furthermore, a fund sponsor is only required to obtain SCA approval to establish a local fund; accordingly, there is no need to obtain a separate operating license for the fund with any economic department in accordance with the Companies Law.

 

Types of Local Funds

 

The Fund Regulations provide for (or otherwise contemplate) the following types of funds:

 

• public and private funds;

 

• master/feeder funds and umbrella fund/sub-funds;

 

• open ended and closed ended funds; and

 

• specialty funds, including Islamic funds, REITs, venture capital funds, private equity funds, ETFs, and cash investment/money market funds.

 

The provisions related to these funds are based on the Undertakings for Collective Investment in Transferable Securities (UCITS) model, which creates a harmonized regulatory regime that permits funds to be sold to any investor in the European Union.  While the GCC states have not adopted a comparable framework, it appears that the Fund Regulations have been prepared with this possibility in mind. ■

 

* * *

 

The new Fund Regulations mark the beginning of a new chapter in the UAE funds regime and should contribute to the growth of the UAE and the broader region by fostering more efficient and transparent investment structures.

Changes to anti-corruption regulation in the UAE

Changes to the UAE Penal Code (Federal Law No. 3 of 1987) (the “Penal Code”) at the end of 2016 have (i) extended the current bribery provisions to include bribery involving a foreign public official or an official of an international organisation, (ii) increased the penalties for committing a bribery-related offence and (iii) criminalised the offering of a bribe in the private sector.

 

General Overview of Anti-Corruption Regulation

 

Since 1987, the Penal Code has contained prohibitions against bribery, making it an offence to bribe a public official in consideration for an act on the part of that official. A bribe could be anything of value. Offering or promising a bribe was also prohibited, as was the solicitation or acceptance of a bribe on the part of a public official. A public official could be an employee of the government or a person tasked with an official duty. An offence would be committed even if the official’s act was not part of his or her official duties, and even if the official did not actually intend to commit the act. In December 2005, the solicitation or acceptance of a bribe on the part of an employee in the private sector was also prohibited.

 

Changes to the Penal Code

 

The recent amendments to the Penal Code have brought anti-corruption regulation in the UAE more in line with other jurisdictions by the inclusion of “foreign public officials”.

 

Foreign public official is defined as “any person in a legislative, executive, administrative or judicial position [in] another country, whether permanently or temporarily, be elected or appointed, and whether with or without pay and any person entrusted with a public service”.

 

Both individuals and companies can be found to be liable for bribery of a foreign public official, as the relevant provisions of the Penal Code apply to anyone (whether a natural or legal body).

 

Crucially, the Penal Code provisions also now apply outside the territory of the UAE to any person who commits any of the bribery offences set out in the Penal Code, if the criminal or victim is a UAE citizen or if the crime is committed by an employee of the public or private sector of the UAE or if it involves public property. (Public property is defined as “(i) property that is fully or partially owned by any of the federal or local authorities, federal or local public establishments or institutions or companies owned, either wholly or partially, by the federal Government, local governments, societies and associations of public welfare and (ii) any property that is subject to the management or supervision of any of the entities set forth in paragraph (i) or of which it has the right to use or exploit”).

 

In addition, bribery involving an official of an international organisation has been prohibited.

 

Finally, the prohibition against bribery in the private sector has been expanded.  Previously, the offence of private sector bribery was limited to the solicitation or acceptance of a bribe by a private sector individual. Now, it is also a criminal offence to offer a bribe to a person working in the private sector.

 

Consequence of Committing an Offence

 

There are various punishments for committing an offence under the bribery provisions, as follows:

 

• Imprisonment for any public official, foreign public official or official of an international organisation who demands or accepts a bribe. This now means that the relevant bribery provisions apply to non-UAE nationals and entities engaging in acts of bribery.

 

• Up to five years imprisonment for (i) anyone who offers a bribe to a public official, a private sector manager, a foreign public official or an employee of an international organisation and (ii) any person that has acted as a mediator between the briber and the receiver.

 

• A fine equal to the amount of the bribe (but which shall not be less than AED 5,000) for any of the above offences.

 

• Any gifts accepted or offered as a bribe will be confiscated.

 

The briber or mediator can be exempt from the above punishments if he informs the relevant judicial or administrative authorities of the crime, but only so long as he does so before the crime is discovered.

 

There is no time restriction on a civil or criminal lawsuit being taken against any individual or company having been found to have committed bribery offences.

 

Conclusion

 

The changes to the bribery provisions of the Penal Code are a significant change to anti-corruption regulation in the UAE. The Penal Code is now more wide ranging than before, extending to foreign as well as domestic bribery, and covering the public sector, international organisations and the private sector. ■

New UAE pledge law over movable assets

Overview

 

The new Pledge Law of the UAE was enacted on 12 December 2016 as Federal Law No. 20 of 2016. The Pledge Law was published in the Federal Official Gazette on 15 December 2016 and will become effective on 15 March 2017. The Pledge Law introduces a new regime for registering a pledge over movable assets which are pledged as security for the repayment of a debt. Whilst the Pledge Law provides some helpful guidance on the type of movable asset pledges that can be registered and the effects of registration, the key administrative details regarding the administration of the pledge register, including the entity that will establish and operate the register, the format of the pledge contract that will be registered and the registration procedure and fees will be outlined in the Executive Resolutions to the Pledge Law; which will be issued by the UAE Cabinet within 6 months of the effective date of the Pledge Law (the “Executive Regulations”). The most significant development under the Pledge Law is that it is no longer necessary for a lender to take possession of movable assets in order to perfect a pledge over the same. This means that a lender is no longer required to appoint an employee/representative of the pledger, as its agent, in order to take possession of any pledged movable assets.

 

Certain Key Features

 

  • In comparison to the previously unregistered pledges, which simply created a contractual right that needed to be enforced by the UAE civil courts, the Pledge Law allows a pledgor to perfect its legal rights over the movable assets through registration.

 

  • Once registered, the pledge gives the pledgor priority over third parties and the registration is deemed notice to third parties.

 

  • A broad category of pledge assets that can be registered, including bank accounts, tangible and intangible assets, fungible assets, raw material and future assets.

 

  • It is not possible to register a pledge over certain types of movable assets including (i) assets relating to home or personal use, (ii) receivables under an insurance policy, (iii) public, foreign consulates or endowment properties, (iv) rights resulting from future inheritance, and (v) assets which require possession or specific registration, in order to perfect a pledge over the same.

 

  • The public will have access to information regarding a registered pledge. However, details regarding the information that will be made available to the public and the procedure for requesting the same will be outlined in the Executive Resolutions.

 

  • A lender may secure a pledge over tangible and intangible assets of a commercial business, as security for any acquisition funding provided to acquire such commercial business. Such pledge will have priority over the rights of any purchaser, lessee or lien holder, provided that the pledge is registered before the creation of any other rights on the relevant assets. It is not clear to what extent this would replace the current use of commercial mortgages, which also secures an interest over tangible and intangible assets.

 

  • If the pledgor or obligor (as applicable) fails to perform its obligations under the pledge contract the pledgee may seek to sell the pledged asset, pursuant to the mutual agreement of the parties or through a summary judgement from the UAE courts.

 

Application of the Pledge Law

 

The Pledge Law applies to all civil and commercial transactions that create a right of pledge over movable assets in accordance with the provisions of the Pledge Law. The Pledge Law includes a broad category of pledge assets that can be registered, including bank accounts, commercial paper, tangible and intangible assets (previously intangible assets could only be pledged under a commercial mortgage for LLCs and would require a UAE licensed bank to act as the mortgagee), raw material and fungible assets and future assets (which was not previously possible as this would create a floating charge, which was not recognised under UAE law).

 

However, the Pledge Law does not apply to movable assets that can only be pledged by possession or where UAE laws require an interest over such assets to be registered under a specific register (e.g. vessels, cars, planes and shares of an LLC). Furthermore, it is not possible to register a pledge over certain categories of assets including (i) assets relating to home or personal use, unless they have been pledged as security for financing the purchase of the same, (ii) proceeds under an insurance policy, unless such proceeds relate to a pledged asset (iii) public, foreign consulates or endowment properties, (iv) rights resulting from future inheritance and (v) assets which require possession or specific registration, in order to perfect a pledge over the same.

 

How to Create a Right of Pledge

 

In order to register a pledge, the parties must (i) conclude a pledge contract, including details of the pledged asset, declaration from the pledgor confirming his right to pledge the pledged asset and the nature of the secured debt and (ii) notify the holder of the pledged asset (if not held by the pledgor). The pledge shall be registered by filing the necessary registration form with the registrar. All persons that should be notified of the pledge registration under the provisions of the Pledge Law (e.g. third party holders of the pledged asset), must be notified of the pledge registration at the time of the application. The pledge registrar and registration fees / charges (which will be paid by the pledgor, unless agreed otherwise by the parties) will be specified in the Executive Resolutions.

 

Once the pledge is registered the legal rights of the pledgee shall be effective against third parties. The pledgee shall be entitled to track and inspect the pledged asset (even if it is held by a third party), have priority over any income generated from the pledged asset and benefit from other priorities that are specific to certain types of pledged assets. For example, any registered pledge over a movable asset that is attached to real property shall have priority over any pledges relating to the real property, provided that the pledged movable asset can be removed without damaging the real property. The pledge rights over the movable asset attached to real property must also be registered in the relevant real estate register.

 

Enforcement

 

If the pledgor fails to perform its obligations under the pledge contract then the pledgee may (following prior written notice to the pledgor or obligor (as applicable)) request the sale of the pledged asset at market value within 10 working days, provided that certain conditions are met including (i) the parties agreeing to proceed with the sale without resorting to the courts, (ii) there are no outstanding third party rights over the pledged asset, (iii) notice of the enforcement to the person holding the pledge asset and owner of the real property (in the event that the pledged asset is connected to real property). In the case of pledged accounts the sums in the pledge account may be set-off by the account bank against sums owed to the pledgee (in the case that the pledgee is also the account bank) or the amount in the pledged account can be claimed from the account bank.

 

Alternatively, the pledgee may apply to the UAE courts for a summary judgement to exercise his rights over the pledged asset. This may involve placing the pledged asset into the hands of a third party in order to affect the sale of the pledged asset. The summary proceedings judge shall notify all relevant parties of the application, who may lodge an objection to the court. If the court permits the summary judgement application it shall permit the pledgee to either (i) take possession of the pledged asset and sell the same at market value or (ii) attach additional conditions for the sale of the pledged asset. The pledgee must register the decision of the court in the pledge register before selling the pledged asset. The pledgee must deposit the sale proceeds, from the sale of the pledged asset, into the treasury of the court, in accordance with the sale procedure set out under the Executive Resolutions.

 

The sale proceeds shall be distributed in accordance with the directions of the court, taking into account the rights of any other parties over the pledged asset. However, generally the sale proceeds shall be distributed in the following order of priority:

 

(a) any expenses relating to repairing, the sale, licensing or maintenance of the pledged asset;

 

(b) charges and fees relating to the enforcement of the pledge, including judicial fees;

 

(c) to the pledgees, in accordance with the priority determined by the court; and

 

(d) any surplus to be distributed in accordance with the laws of the relevant emirate.

 

Any remainder of the purchase price shall be distributed to the pledgor. If the sale proceeds are insufficient to discharge the debt secured by the pledge, the pledgor shall remain liable for the remaining unpaid debt. Enforcement and sale of the pledged asset will not be possible if the pledgor is subject to any preventative composition, bankruptcy or equivalent procedures under the Federal Decree Law No. 9 of 2016.

 

Termination of Pledge

 

A registered pledge may be terminated if (i) the pledgee and pledgor or obligor (as applicable) agree to strike-off the registration, (ii) the obligor discharges the obligations that are secured by the registered pledge, (iii) the registration relates to assets that cannot be pledged under the Pledge Law, (iv) the pledgee fails to discharge its obligations following the registration of the pledge contract, or (v) a court order is issued to strike-off the pledge registration.

 

Conclusion 

 

Whilst the Pledge Law provides a valuable opportunity for lenders to perfect their rights through registration, the popularity of the new regime will depend largely on the administrative registration mechanisms that will be outlined in the Executive Resolutions. Nonetheless, the concept of the pledges register is another step (along with the introduction of the share pledge register under the new UAE Companies Law) towards providing greater certainty and protection for lenders. ■

The new UAE Bankruptcy Law

Overview

 

The new Bankruptcy Law of the UAE was enacted on September 20, 2016 as Decree-Law No. 9 of 2016. It was published in the Federal Official Gazette on September 29, 2016, giving it an effective date of December 31, 2016. The new Bankruptcy Law replaces and repeals the previous legislation on the subject, Book 5 of the Commercial Code, which was seldom used in light of its perceived shortcomings. Perhaps the most important new feature of the new Law is the introduction of a regime that allows for protection and reorganization of distressed businesses.

 

Certain key features

 

 

  • The current law relating to insolvency has been repealed.

 

 

  • Coverage is different; many entities covered by the previous law are not covered by the new Law, while the new Law covers many entities that were not covered before.

 

 

  • The Financial Restructuring Committee has been established.

 

 

  • A debtor can seek court protection and assistance while it agrees to a financial arrangement with its creditors without having to proceed to bankruptcy proceedings (“preventive composition”).

 

 

  • A creditor (or group of creditors) must now have a debt owed of at least AED 100,000 before it can initiate bankruptcy proceedings.

 

 

  • The Penal Code provisions on non-fraudulent bankruptcy have been repealed.

 

 

  • Criminal proceedings relating to “bounced” cheques will be suspended for the duration of the preventive composition or restructuring procedures.

 

 

  • A debtor can raise new finance during the preventive composition or restructuring process, with court approval.

 

 

Who does the New Bankruptcy Law apply to?

 

 

Article 2 of the new Bankruptcy Law provides that it shall apply to:

 

 

  • Private sector companies:

 

  • All companies governed by Federal Law No. 2 of 2015 on Commercial Companies (the “Companies Law”);

 

    • Businesses established in the Free Zones, except for the Financial Free Zones (the Dubai International Financial Centre and the Abu Dhabi Global Market), which have their own rules on bankruptcy; and
    • Licensed civil companies conducting professional activities.

 

  •  Public sector companies:

 

  • Companies wholly or partially owned by the federal government or an Emirate government whose founding statutes or constitutive and governing documents provide that they shall be subject to this Law.

 

  • Individuals:

 

  • Traders.

These are significant changes. Civil companies were generally viewed as falling outside the previous law, since they engaged in “civil” as opposed to “commercial” activities. But in contrast, the public sector is now almost completely exempt from the new Bankruptcy Law, unless and until a public sector company undertakes the amendment of its founding statute or constitutive and governing documents so as to make it subject to the new Bankruptcy Law. Coverage did not change as regards sole to proprietorships; traders who were engaged in business as sole proprietorships were subject to the previous law (although this was not generally appreciated) and are subject to the new Bankruptcy Law.

 

Some Key Features of the New Bankruptcy Law

 

The Financial Restructuring Committee

 

Article 4 provides that the Financial Restructuring Committee will be responsible for:

 

  • the supervision of financial restructuring procedures of financial institutions so that the debtor’s arrangements with its creditors can be appropriately agreed and managed;

 

  • the accreditation of experts involved in financial restructuring and bankruptcy dealings and establishment of fees and costs payable for their services;

 

  • the establishment and maintenance of a register for persons against whom judgments under this Law are made;

 

  • reporting to the Minister of Finance on the work carried out by the Committee, results achieved and any actions it proposes; and

 

  • any other tasks prescribed under this Law or by the UAE Cabinet.

Debtor-creditor agreement – preventive composition

 

Rather than having to proceed directly (or at all) to bankruptcy proceedings, preventive composition will afford the debtor the opportunity to reach an agreement with its creditors for the repayment of sums owed (Article 5), while under court protection from individual creditor claims. This option will be available to the debtor only if it has not been in default for more than 30 consecutive business days and is not insolvent (Article 6(2)). The debtor will not be able to dispose of any property, stocks or shares, make any borrowings, or (if a company) change ownership or corporate form (Article 31(1)) whilst it is undergoing this process.

 

Application

 

The application must include, among other things, a description of the debtor’s economic and financial position; details of its movable and immovable properties, employees and creditors; and cash flow and profit and loss projections for the 12 months following the date of application (Article 9).

 

Debtor obligations

 

The debtor must continue to perform its obligations under any contract, provided the Court has not issued a judgment of stay of execution due to the debtor’s failure to perform its obligations (Article 34(1)). The trustee designated to facilitate the preventive composition process does have the right to request the Court to rescind any contract if that is in the best interests of the debtor and its creditors and provided that it does not substantially harm the other contracting party’s interests (Article 34(2)).

 

Appointment and obligations of the trustee

 

The Court will appoint one to three trustees as designated by the debtor or appoint an expert or other person (if more appropriate) (Article 17(1) and (2)).

 

The trustee will be obliged to publish in two daily local newspapers (i) a summary of the decision approving the preventive composition, with a request that all creditors file appropriate claims (Article 35(1)), (ii) a list of the debts and statement of accounts accepted from each of those debts (Article 37(2)), (iii) the invitation to creditors to discuss and vote on the draft preventive composition arrangement (“Arrangement”) (Article 42(3)) and (iv) once approved by the Court, the decision and summary of the Arrangement (Article 54). Ultimately, the Court will approve the final list of approved creditors, having reviewed any objections received following the publication of the debts (Article 38(1) and (8)).

 

The trustee will submit the draft Arrangement to the Court, who will then have five business days to make its decision to approve or reject it (taking account of any creditor objections) (Article 49(1) and (2)).

 

Thereafter, the trustee is responsible for supervision of the Arrangement throughout the implementation period (as described below), including submission of quarterly reports to the Court detailing progress and/or any failures by the debtor to implement the Arrangement (Article 55(1) and (2)). The trustee can apply to the Court for any amendments to be made to the Arrangement if it considers it necessary at any point during the implementation period (Article 55(3)).

 

Implementation

 

The preventive composition arrangement must be implemented within three years of the date of Court approval (Article 41). This term can be extended for a further three year period if a two thirds majority of the unpaid creditors consent to the extension (Article 41).

 

Discharge of the Arrangement

 

Following a request by the trustee, and pending discharge of the debtor’s obligations under the Arrangement, the Court will issue its decision confirming that the Arrangement has been entirely fulfilled. Such decision will be published in two daily newspapers, although the Law is silent as to which party is responsible for such publication (Article 56).

 

Conversion from preventive composition into bankruptcy procedures

 

At the request of an interested party, or in exercise of its own discretion, the Court may, under Article 65, initiate the termination of the Arrangement and convert it into a bankruptcy proceeding if:

 

  1. it is proved that the debtor was in payment default for more than 30 consecutive business days or was insolvent on the date of commencement of the preventive composition proceedings, or if this became clear to the Court during the course of the preventive composition proceedings; or

 

  1. it becomes impossible to apply the Arrangement, and ending the same would result in payment default for more than 30 consecutive business days or result in the debtor’s insolvency. (There is no guidance as to what would constitute “impossible”).

 

Creditor-initiated bankruptcy

 

Under the old regime, a creditor could initiate bankruptcy proceedings against a debtor for any amount owing (provided such creditor could provide evidence that the debtor had ceased to make payments when they fell due). Now, there is a minimum threshold of AED 100,000 before a creditor (or group of creditors) can initiate bankruptcy proceedings against the debtor, provided that such creditor has adequately notified the debtor of such debt and the debtor has still failed to repay it within 30 consecutive business days of notification (Article 69(1)).  How disputed amounts will be treated by the court is not addressed.

 

This more debtor-friendly position can be contrasted with other jurisdictions. For example, the Insolvency Act 1986 (which applies in England, Wales and Scotland) provides for a minimum debt exceeding just £750 (approximately AED 3,400) before  a creditor is able to raise insolvency proceedings against a company debtor and apply to the Court to have the company wound up.

 

Removal of criminal offence

 

Under previous law, the UAE Penal Code treated bankruptcy as a potentially criminal act, even if not accomplished by fraud. The new Law abolishes the criminal provisions relating to non-fraudulent bankruptcy, eliminating the perceived stigma under the prior law. Despite this, it is important to note that the new Law in many circumstances still provides for criminal liability of entities and persons involved in a case of bankruptcy, and the existence of these provisions may continue to give owners, directors and management significant cause for concern.

 

Suspension of criminal proceedings relating to “bounced” cheques

 

Provided the debtor has given a cheque as payment before an application for a preventive composition or restructuring arrangement has occurred, any resultant criminal proceedings will be suspended pending the outcome of those arrangements and the recipient of such a cheque will be considered to be a creditor under the relevant arrangement (Article 212(1) and (2)).

 

Ability to raise new finance

 

While undergoing the preventive composition or restructuring process, a debtor (or the trustee) has the option to apply to the Court for authority to obtain new funding (Article 181). Any “new” creditor will have precedence over any ordinary outstanding debt owed by the debtor (but providing protections for existing creditors) (Article 181(1)).

 

Conclusion

 

While the new Bankruptcy Law favours debtors by giving them greater flexibility and protections in the event of insolvency, it will be interesting to see how the Law is implemented in practice and whether debtors make use of its provisions. Nevertheless, the introduction of an insolvency regime which offers protection and encourages restructuring to enable troubled businesses to survive what would otherwise have been a bankruptcy situation is welcome, and is a milestone development in the UAE’s business law landscape. ■

Potential criminal liability for arbitrators and experts

Article 257 of the UAE Penal Code (Federal Law No. 3 of 1987) was recently amended by Federal Law No. 7 of 2016 to introduce the concept of criminal liability for arbitrators, experts, and translators who issue decisions and opinions ‘contrary to the duties of impartiality and honesty’. Article 257 as amended provides (in translation) as follows:

 

“Whoever issues a decision, makes an opinion, files a report, presents a case or asserts a fact in favour of or against someone, contrary to the required duties of impartiality and honesty, in their capacity as arbitrators, experts, interpreters (translators) or fact finders appointed by the administrative or judicial authority or nominated by the parties shall be punished by temporary imprisonment. The above said categories shall be prohibited from taking up any new assignments and shall be subject to the provisions of Article (255) hereof.”

 

Article 255, referred to in Article 257, provides for reduced sentences in certain circumstances. An unofficial translation is set out below:

 

“Shall be exempted from penalty:

 

  • The witness who, if he tells the truth, shall be subject to a severe prejudice in his freedom, honour or shall expose to such severe prejudice his spouse, even if divorced, one of his ascendants, descendants, brothers, sisters or in-laws of the same degrees.

 

  • The witness who reveals before the court his name, surname and nickname and who had not to be heard as a witness or if he has to be told that he has the right, if he wishes, to abstain from testifying.

 

  • In the two above instances, if such perjury exposes another person to legal prosecution or to a judgment, the author shall be sentenced to detention for a minimum term of six months”.

 

Article 255 refers to witnesses and their testimony, and therefore appears more likely to be relevant to expert witnesses, and not arbitrators.

 

Article 257 prescribes a punishment of temporary imprisonment. Pursuant to Article 68 of the Penal Code, temporary imprisonment constitutes imprisonment of between 3 and 15 years.

 

The amendment became effective on 29 October 2016.

 

Prior to its amendment, Article 257 was confined to the criminal liability of experts appointed by the courts. Subsequent to the amendment, Article 257 has been expanded to apply to arbitrators and experts who are appointed by an administrative or judicial authority, or nominated by the parties. Ostensibly therefore, arbitrators and experts appointed in Dubai under institutional or ad hoc rules will be subject to Article 257.

 

It is yet to be seen how Article 257 will be interpreted and applied in practice. It would conceivably be a difficult task to establish that an arbitrator or an expert has failed to act in an honest and impartial manner. However, the prospect looms where parties dissatisfied with the outcome of an arbitration will pursue complaints under Article 257, and this prospect is one that potential arbitrators will now have to take into account when accepting appointments. ■

The UAE Competition Law clarified

In an earlier inBrief dated 9 December 2014 we wrote about Federal Law No. 4/2012 on the regulation of competition (the “Competition Law”), which introduced the means by which the United Arab Emirates could regulate anti-competitive practices. The Competition Law comprises three key elements: a restriction on anti-competitive agreements, restrictions as to the behaviours of entities holding dominant market positions, and a requirement that mergers between entities with a sufficiently large combined market share obtain clearance in advance from the Ministry of Economy (the “Ministry”).

 

Although the Competition Law took effect on 23 February 2013, it has had minimal impact as it provided insufficient detail to enable compliance or enforcement.In particular, the Competition Law failed to establish the market share thresholds at which its restrictions become applicable, and to define the small and medium establishments to which it does not apply.

 

This year, two Cabinet Decisions have been issued, which provide much needed guidance on these outstanding aspects: Cabinet Decision No. 13/2016 (the “Ratios Decision”) in respect of market share thresholds and Cabinet Decision No. 22/2016 (the “SME Decision”) in respect of small and medium establishments. The uncertainty that remains at this stage relates to how the Competition Law will be applied and enforced by the Ministry as a matter of practice.

 

In this inBrief we highlight the main functions of the Competition Law and how the Ratios Decision and SME Decision have added clarity.

 

The Cartel Restriction

 

The Competition Law prohibits agreements between entities whose subject or aim is violating, reducing or preventing competition, specifically including price-fixing, market-sharing and bid-collusion agreements, among others. Price-fixing and market-sharing, considered the most egregious of all anti-competitive behaviours by many jurisdictions, are always prohibited, but other restrictive practices may be acceptable if they are ‘weak agreements’, meaning that they are entered into by parties with a combined market share below a certain threshold. The Ratios Decision provides that this threshold, below which such agreements do not raise concerns, is set at 10% of the concerned market.

 

The Dominant Position Restriction

 

Although the Competition Law prohibits entities holding a dominant position from taking certain actions, such as imposing resale prices on retailers, price discrimination or artificially cutting prices to force competitors out of the market, it does not specify which entities are regarded as dominant. The Ratios Decision confirms that an entity is considered dominant when its share of the concerned market exceeds 40%.

 

Exemptions

 

All is not lost for entities which, although they exceed the relevant thresholds, wish to enter into restrictive agreements or carry out prohibited activities. An application may be made to the Ministry for exemption from the cartel or dominant position restriction, requiring submission of an application with supporting documents and an explanation as to why exemption is required, among others. It is as yet unclear how generous the Ministry will be, and for what reasons, in granting such exemptions.

 

Merger Clearance

 

Finally, the Competition Law provides that clearance from the Ministry is required in advance of any merger, acquisition or other consolidation of two or more entities, such as would create an entity with a market share above a certain threshold, and which may affect competition in that market. Although the Competition Law provides that clearance is “particularly” required when a dominant position is being created, it states that merger control does not apply solely in such circumstances. The Ratios Decision set the threshold at 40% of the concerned market, the same level at which a dominant position is stated to exist.

 

Concerned Market

 

In each case – cartels, monopolies and mergers – the Ratios Decision sets the relevant threshold as a percentage of the ‘concerned market’. This is defined broadly to comprise markets in which commodities or services are replaceable or may be substituted to meet specific needs, according to price, properties and use.

 

Whilst it is difficult to define the relevant market in legislation and, oftentimes, markets are only identifiable on a case-by-case basis, the effect of the Ratios Decision is to prevent entities from easily identifying themselves as restricted by the Competition Law – for example, would the relevant market be ‘luxury cars’ or ‘Lamborghinis’? It would be helpful for the Ministry of Economy to issue guidance as to how widely or narrowly it intends to apply the definition of ‘concerned market’ in practice. The practice in the UAE will undoubtedly be driven by how pro-actively the Ministry chooses to enforce the Competition Law, which remains an open issue.

 

Small and Medium Establishments

 

In addition to the thresholds provided in respect of the individual restrictions, the Competition Law in its entirety is stated not to apply to ‘small and medium establishments’. The SME Decision defines what such term means, such definition varying depending on whether the relevant entity operates in the trade, industry or services sector. Unlike the definition of concerned market, small and medium establishments are identifiable by turnover and number of employees, thus providing comfort to such entities that they are excluded.

 

Implications

 

The Ratios and SME Decisions have provided welcome clarity as to the application of the Competition Law. The Ministry has sufficient guidance to begin actively enforcing. Companies entering into transactions that are arguably within the specified thresholds should seriously consider the Competition Law and whether they need to file for merger clearance or an exemption. With significant consequences for breach – criminal sanctions and fines up to AED 5 million, or 5% of the relevant entity’s turnover – it will be important to keep a close eye on any enforcement actions taken by the Ministry that may give a signal to the market. ■

Proposed insurance authority decision concerning marketing of insurance policies by banks

Recently, the Emirates Insurance Authority (the “Insurance Authority”) proposed a regulation in draft form concerning marketing of insurance policies by banks (the “Draft Regulation”). It is intended to regulate local insurance companies that market insurance policies through banks in the UAE. Once this Draft Regulation comes into force, banks will, in addition to the approval of the UAE Central Bank, require the approval of the Insurance Authority to market insurance policies.

 

Scope of the Draft Regulation

 

The Draft Regulation applies to insurance companies and banks that operate in the United Arab Emirates. It does not apply to insurance companies and banks in free zones.

 

Approval of the Insurance Authority

 

To obtain approval from the Insurance Authority to market insurance policies through a bank (the “Approval”), an insurance company must submit an application to the Insurance Authority. Within twenty (20) working days, the Insurance Authority will either approve or reject the application. An Approval shall be valid through December 31 of each year and must be renewed annually.

 

To cancel an Approval, an insurance company must terminate the agreement between the bank and the insurance company and notify the Insurance Authority of such termination. The Insurance Authority will then cancel the Approval. The Draft Regulation also permits an insurance company to temporarily suspend the Approval, thereby temporarily stopping the bank from marketing insurance products.

 

Restrictions under the Draft Regulation

 

The Draft Regulation imposes certain restrictions on banks and insurance companies:

 

  • A bank cannot act as an insurance agent, broker, consultant or other insurance-related professional of an insurance company.

 

  • A bank can only market certain types of insurance products.

 

  • A bank must have a designated officer to market insurance policies who (i) must receive ongoing training in marketing insurance policies; and (ii) must have successfully attended three training courses on insurance.

 

  • An insurance company must have a branch in the emirate in which the bank is marketing insurance products.

 

  • A bank can only market insurance products to its customers (defined as those that have accounts with or credit cards issued by the bank).

 

  • The agreement between the bank and the insurance company must state the rights and obligations of both parties, the bank’s commission, the types and classes of insurance products that will be marketed, rules to protect consumers’ rights in the event the agreement is terminated, a mechanism for training designated officer(s), and a requirement to comply with laws on anti-money laundering.

 

  • An insurance company must notify the Insurance Authority of any changes or amendments to the agreement and of any violations of the law by the bank.

 

  • Banks must maintain all documents and information related to marketing insurance products for a period of five (5) years.

 

Bank’s Obligation Towards its Customers

 

The Draft Regulation sets out rules on how the bank should market insurance products to its customers. The bank must ensure that customers are aware of the terms of, and the risks under, an insurance policy.

 

A bank must not condition the provision of banking services to the purchase of insurance and must disclose the fact that it will earn a commission on the sale of insurance.

 

Non-Compliance and Penalties

 

To enforce the draft Regulation, the Insurance Authority can:

 

  • issue a warning to an insurance company to stop violations;

 

  • suspend the Approval; or

 

  • cancel the Approval.

 

Banks that Currently Market Insurance Policies

 

Banks that currently market insurance policies must ensure that the relevant insurance companies obtain Approval from the Insurance Authority within a period of six (6) months from the effective date of the Regulation. ■

Ministerial decision No. (272) of 2016

Federal Law No.2 of 2015 on Commercial Companies (the “New Law”) came into force on 1 July 2015, replacing Federal Law No.8 of 1984. The New Law, similar to its predecessor, contains sections relating to various forms of companies, including public and private joint stock companies (“PJSCs”) and limited liability companies (“LLCs”).

 

While the New Law is divided into sections which expressly apply to a particular type of company, Article 104 of the New Law relates specifically to LLCs and states that “the provisions concerning Joint Stock Companies shall apply to Limited Liability Companies”.

 

The recently enacted Ministerial Decision No. (272) of 2016 (the “Decision”) addresses the scope of Article 104 by stating which articles relating to PSJCs apply to LLCs.

 

Article 3 of the Decision sets forth the articles of the New Law relating to PJSCs which also apply to LLCs. The articles listed are:

 

  • Article 162 – This article states, inter alia, that members of the board shall be liable to the PJSC, its shareholders and third parties for acts of fraud, violations of law or the PJSC’s articles or for errors in management. As applied to an LLC, this would mean that the manager or manager(s) of an LLC would also be so liable to the LLC and its partners for fraud, violations of law, breach of the articles and mismanagement.

 

  • Article 163 – This article states that a PJSC will be bound by acts of a director vis-à-vis a third party, even if it is later found that the director was not properly elected or appointed. Again, with respect to LLCs this would apply to acts of its manager(s).

 

  • Article 167 – This article relates to a waiver by the general assembly of a PJSC of the liability of its directors. A general waiver will not prevent a claim against the directors. However if the act giving rise to the claim was presented to and approved by the general assembly, the claim shall be discharged after one year. Again, with respect to LLCs this would apply to acts of its manager(s).

 

  • Articles 174, 175 and 176 – These articles state, respectively, that shareholders holding 20% of the shares of a PJSC, the PJSC’s auditor, or the Securities and Commodities Authority (the “SCA”), may require the PJSC’s board to convene a meeting of the general assembly. It also stipulates deadlines within which to do so. Applied to LLCs, this would mean that partners owning at least 20% of the capital of the LLC, the LLC’s auditor, or the Economic Department of the relevant Emirate, may require the manager(s) to convene a meeting of the general assembly.

 

  • Article 191 – This article stipulates that shareholders holding at least a 5% shareholding in a PJSC may apply to the SCA to have decisions of the general assembly annulled if such decision is prejudicial to a certain class of shareholders or are of particular benefit to the directors of the PJSC. Article 191 also states that the decision of the SCA may be appealed to a court of law. Thus partners of an LLC that hold at least 5% of the LLC’s capital may make a similar application to the relevant Economic Department for a decision to annul a resolution of the general assembly.

 

  • Article 192 – Section 1 of this article states that in the event a PJSC’s general assembly fails to elect a board in two successive meetings, the SCA’s Chairman may appoint a temporary board for not more than one financial year. After such period the general assembly will be asked once again to elect a board, failing which the SCA’s Chairman will decide a course of action which may include dissolving the PJSC. Section 2 states that if the general assembly fails to appoint an auditor, the SCA may do so on its behalf for a period of one year. Applied to an LLC, Section 1 of Article 192 would mean that if the partners fail to appoint a manager after two successive meetings, the relevant Economic Department may do so. Section 2 would mean that if the partners cannot decide on an auditor, the Economic Department may do so.

 

  • Chapter 7 (Dealing with Auditors) – Provisions relating to the requirement for appointment of an auditor (though for no longer than three consecutive years) (Article 243); requirement for the auditor to issue a report (Article 245); confidentiality of the report (Article 247); prohibition on the auditor from trading in the company’s securities (Article 248); requirement that the auditor report violations of law it may uncover (Article 249); required contents of the auditor’s report (Article 250); dismissal of an auditor (Article 251); resignation of an auditor (Article 252); liability of an auditor and limitation periods for such liability (Article 253 and 254). With the respective replacement of directors for managers and the SCA with the Economic Department, the above provisions apply virtually verbatim to LLCs.

 

  • Article 236 – This article requires a PJSC to provide the SCA and the relevant Economic Department with a copy of the auditor’s report within seven days of the submission of the report to the general assembly. Thus an LLC will need to provide its audited financial statements to the Economic Department within the same time frame.

 

Article 3 of the Decision also sets forth provisions of the New Law which apply to PJSCs but do not apply to LLCs. ■