Category: inBriefs

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. ■

Introducing the Dubai World Trade Centre free zone

In May 2015, a new free zone in Dubai, Dubai World Trade Centre (“DWTC”) and the “DWTC Authority” were established under Dubai Law No. 9 of 2015. DWTC’s stated objective is to provide services in the form of conferences and exhibitions as well as world-class hospitality and facilities management in a wide selection of venues. It has been reported that Schlumberger was the first company to be licensed under the new free zone, acquiring 5,762 square meters in the office building in Dubai Trade Centre District (“DTCD”).

 

Establishing a Company

 

The newly established free zone will follow the model of most other free zones in Dubai. It will incorporate branches of local companies; branches of foreign companies; single shareholder free zone establishments (FZEs) and multiple shareholder free zone companies (FZCOs). The minimum capital required will be AED 300,000.

 

The activities list available for companies in DWTC consists of three broad categories which are: (i) Trading; (ii) Services; and (iii) Events. The Events license includes activities such as organizing meetings, conferences and exhibitions. Each of the three broad license categories contains a prescribed list of activities which are accepted by the free zone. The DWTC appears to be following the example of the Dubai World Central free zone in that it will adhere to the Dubai Department of Economic Development’s activity list for licensed activities (albeit a restricted list).

 

The DWTC Company Regulations were established in September along with the DWTC Rules and Regulations. DWTC incorporated its first company at the beginning of November 2015 and it has office space which is ready to lease immediately. It has been reported that pre-letting of the office buildings in DTCD is already 70 percent.

 

Why choose DWTC?

 

One of the most attractive features of DWTC is its prime location. Sheikh Rashid Tower was built in 1979 and is one of the best known landmarks in Dubai. Located close to Downtown and the DIFC, DWTC is in an enviable central location which will surely be a deciding factor for many companies assessing which free zone is right for them. Another feature of DWTC is the facilities it offers, ranging from residential units, corporate units, exhibition halls and the Trade Centre Arena.

 

DWTC is still in its very early stages and we are looking forward to seeing how it develops and how it is embraced by the Dubai business community. Every indication is that it will be a popular and successful new venture. We will provide updates as it progresses further.

 

Please don’t hesitate to contact us if you would like to explore the possibility of establishing an entity in DWTC. ■

New labour regulations take effect January 1, 2016

A number of recently announced initiatives could introduce potentially significant changes to the rules governing the workforce in the UAE.

 

Earlier this year, the Ministry of Labour promulgated Ministerial Resolutions Nos. 764, 765 and 766 of 2015. According to the reports of Ministry of Labour spokesmen that appeared in the local press, the new resolutions were designed to deter a number of undesirable practices. Chief among these was the practice by recruiters of luring potential employees to the UAE with attractive job offers, only to change the terms of employment when the new recruits arrive.

 

Specifically, Ministerial Resolution No. 764 of 2015 requires that an employee sign an offer letter in advance of being recruited and that the signed offer letter support the application for the employee’s residence visa and labour permit – an application that the employer must submit to the concerned authorities in the UAE. A signed offer letter must also support an application to hire a new employee from the local labour market.

 

The new Resolution not only ensures that the employment contract will be consistent with the original offer letter. It also ensures that the employment contract must be followed in all respects. As regards employers that maintain collateral agreements, the Resolution provides that, “No new clauses may be added to the stated contract unless they are consistent and comply with the Ministry’s legal requirements, do not conflict with other clauses of the standard contract and are approved by the Ministry.”

 

Of course, many employers use international employment contracts and detailed HR policies to supplement the brief standard employment contracts that are required by the Ministry of Labour. Provisions in such collateral documents that are inconsistent with the official registered contract would be unenforceable. It could now be the case that such collateral terms will be unenforceable if they are not approved in advance by the Ministry of Labour.

 

Resolutions Nos. 765 and 766 facilitate the transfer of employees within the UAE. They do this by providing, in Resolution 765, clear criteria as to when the authorities may deem an employment relationship to have ended. Ending an existing employment relationship is a pre-requisite to allowing an employee to seek work with another employer. Of course, most employment relationships end with the routine cancellation of an employee’s labour permit and residence visa, a process that is not disturbed by the new resolutions.

 

Specifically, Resolution No. 765 provides that the employment relationship ends if:

 

  • The employer misses payroll for 60 days or otherwise fails to meet its contractual and legal obligations to its employees.

 

  • The employer becomes inactive, provided that this is verified by a labour inspection and provided further that the employee reports the same to the Ministry.

 

  • The employee files a labour complaint with the Ministry, which is referred to court, which in turn pronounces a final ruling in favor of the employee awarding the employee no less than two months’ salary, or indemnification for arbitrary or early termination, or other benefits denied by the employer, or end of service gratuity.

 

Resolution 766 addresses the conditions under which an employee may transfer from one employer to another. It was previously the rule (with limited exceptions) that an employee would have to complete 12 months of service with an employer before he would be eligible to transfer to another employer. This general provision has now been reduced to six months.

 

Other initiatives also have an impact on the labour market. A Federal Law enacted this year, Federal Decree-Law No. 2 of 2015, is designed to criminalize acts of discrimination and hatred. Although not expressly directed at the workplace, this would apparently criminalize discriminatory hiring practices, if they were based on distinctions of religion, creed, doctrine, sect, caste, race, color or ethnic origin.

 

As a final matter, the requirement for employer provided medical insurance coverage is being introduced in phases in the Emirate of Dubai. Coverage was imposed on employers with more than 1000 employees in 2014, and employers with between 100 and 1000 employees in 2015. All other employers will be subjected to the same requirement by the end of June 2016. ■

Do I need a DIFC will?

The Wills and Probate Registry in the Dubai International Financial Centre (the “Registry”) opened in late April of this year. It is now possible to register a will in Dubai, and to have a high degree of confidence that it will be enforced in accordance with its terms. Prior to the establishment of the Registry, it hadn’t been possible to be so confident that foreign wills would be enforced in the United Arab Emirates. There were concerns that Shari’a law would be applied to the estates of non-Muslims, particularly with respect to real property (land and buildings).

 

In summary therefore, the establishment of the Registry is a welcome initiative, and if you have assets in Dubai then you should almost certainly register a will with the Registry.

 

A few points to note right from the beginning: firstly, only non-Muslims may lodge their wills with the Registry. At the time of registering the will the testator (the person making the will) must confirm that they are not a Muslim, nor have ever been a Muslim. If this confirmation is later proved to be inaccurate then the will becomes void. Secondly, testators must be at least 22 years old. Thirdly, the will can only relate to assets in the Emirate of Dubai. Finally, the value of the Dubai assets must be balanced with the costs of using the Registry. There are a number of fees payable, some reasonably significant for many people. (The cost of registering a will is currently AED 10,000.)

 

Prior to the introduction of the Registry, a multitude of approaches were taken in respect to estate planning by Dubai residents. Many people, of various faiths, made no will at all. For those people who were aware of the applicable inheritance and intestacy rules, this was (and continues to be) a perfectly sensible choice. If your family structure is straightforward, and you understand and are comfortable with how your assets will be distributed where there is no will, then there is no reason to make one.

 

Historically, a variety of solutions were offered to those people who were not sure how their assets would be treated if there was no will, and who wished to create one. Some were told that it was necessary to register a Dubai will with a local notary. Others were told to make a will in their home country, have it translated into Arabic, and then registered locally. Others were told that it was sufficient to sign the will and have it witnessed by a staff member at their home country consulate in Dubai. In short, there was no consensus as to the most appropriate method of creating a will in the UAE, or of ensuring that it would be enforced in accordance with its terms.

 

The DIFC Registry seeks to resolve these concerns. Wills are reviewed by Registry staff prior to being accepted for registration. This review is anticipated to prevent the registration of wills with blatantly unacceptable terms (ie “. . . and finally, I leave the balance of my estate for the funding of international terrorism, and general crimes against the state”). More significantly, the review ensures that the will formalities are properly attended to (that the will is correctly witnessed, and so forth).

 

Once registered, the intention is that the terms of the will can be given effect to by the DIFC Court if necessary. Decisions of the DIFC Court must, as a matter of UAE law, be enforced by the Dubai Courts. It is then anticipated that other relevant Dubai governmental entities (such as the Economic Department in respect of assets such as company shares, or the Lands Department in respect of real property) would automatically abide by orders issued by the Dubai Courts (or even by the DIFC Court directly).

 

This process appears robust, but a small note of caution must be sounded. This is a new, and so far untested, system. It remains to be seen whether the relevant government departments will indeed recognize DIFC wills. We anticipate that this point will be resolved relatively soon, as there appears to be a significant number of individuals eager to make use of the Registry. Furthermore, we have no reason to believe that the system will not work as it should. On that basis, we welcome this beneficial addition to the legal landscape of the Emirate of Dubai. ■

 

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Afridi & Angell can assist with the drafting and registration of DIFC wills. Please contact Stuart Walker if you wish to arrange an appointment to discuss any of the issues mentioned in this note.

DFSA imposes record fine on Deutsche Bank

At the end of March 2015 the Dubai Financial Services Authority (the “DFSA”) imposed its largest fine to date on Deutsche Bank AG Dubai (DIFC Branch) (“Deutsche Bank”). The size of the fine, US$10.5 million, is perhaps modest when compared to the recent GBP 126 million (US$189 million) fine handed to Bank of New York Mellon by the UK regulator, but it is significant in the context of the DIFC, particularly when you appreciate that Deutsche Bank is one of the larger and more important financial institutions in the Centre. The fine sends a clear signal that the DFSA is both independent, and unafraid of taking on sophisticated and well-resourced opponents.

 

The fine is also a reminder that a cover up can often be worse than the initial crime. Sources close to the DFSA have confirmed that the regulator is unlikely to have taken any formal action against Deutsche Bank if the bank had disclosed its initial breach in a timely manner. As is made very clear in the Decision Notice published on the DFSA website, the bulk of the fine is based upon the fact that Deutsche Bank not only failed to cooperate with the DFSA investigation, but also actively mislead the DFSA and provided false information to the regulator.

 

During a three-year period beginning in January 2011, Deutsche Bank operated in a manner that was contrary to certain provisions of the DFSA Rulebook. The bank’s private wealth management team in the DIFC was providing some advisory services to high-net-worth individuals without documenting these individuals as clients of the DIFC branch. In summary, Deutsche Bank is authorized by the DFSA to provide the financial services of, amongst others, arranging and advising. This was the case during the relevant period, and continues to date. Also, there is no suggestion that the advisory services provided were anything other than competent and professional. The investigation found that there was no evidence of financial detriment to the bank’s clients. Furthermore, this does not seem to be a case of rogue individuals inside the bank improperly chasing bonuses or commissions.

 

The only thing Deutsche Bank did wrong (at least initially) was to fail to document high-net-worth individuals as clients of the DIFC branch. The business model that the bank was meant to be following was for the individuals to be referred by the DIFC branch to other parts of the Deutsche Bank group (including but not limited to branches in Geneva and Luxembourg). This was being done (and the clients properly documented in those booking centres) but the DIFC private wealth management team continued to be in touch with the clients, and therefore provided the previously mentioned advisory services. If they had simply issued a DIFC client agreement, and complied with the standard DIFC KYC and AML procedures, all would have been well. Unfortunately, this did not happen, and the DFSA became aware that Deutsche Bank might have been uncompliant in these areas.

 

It was at this point that the senior management within Deutsche Bank made some startling errors of judgment. Amongst other things, false and misleading emails and letters were sent to the DFSA by the bank’s compliance team. Internal reports about possible breaches of the DFSA Rulebook were suppressed. Bank employees were encouraged to amend internal reports to remove references to regulatory breaches. The bank then refused to comply with a DFSA notice requiring the production of various documents. This then compelled the DFSA to seek a DIFC court order to enforce the notice.

 

The DFSA’s investigation into the breaches at Deutsche Bank took two-and-a-half years to resolve. The final six months were apparently spent negotiating the wording of the published Decision Notice. The bank obtained a 20 percent discount on the total amount of the fine by agreeing not to appeal or otherwise contest the fine. Unlike many of the other notices or undertakings published by the regulator in other matters, no specific names are mentioned in the Deutsche Bank notice. The blushes of the relevant people at Deutsche Bank have therefore been spared. Nonetheless, this must have been an embarrassing episode for the bank, and something of a success for the DFSA. ■