United Arab Emirates: Legal Developments changing Business in Dubai

Last Updated: 16 June 2010
Article by Philippa Barclay and Philip Jolowicz

Since international markets were sent into a spin following the Dubai World announcement proposing a standstill on its debts on November 25 in 2009, the Emirate of Dubai has sought to address systematic issues affecting the stability and attractiveness of the local economy.

In the first five months of 2010, we have witnessed changes which aim to improve the business "playing field" and renew confidence in Dubai as a global financial centre. This article reviews some of the key changes and highlights expected legal developments for the remainder of 2010.

Introduction

"Although we expect a return to high economic growth, it is critical that we urgently address the deeper risks and challenges that the economic crisis revealed."

Ahmed Humaid Al Tayer, Governor of DIFC, speaking at the MENASA Forum 2010.

In January 2010, Hadef & Partners explained the Dubai Government's actions immediately following the Dubai World announcement. The funding provided by Abu Dhabi, support from the Central Bank, repayment of the Nakheel 2009 Sukuk, the promulgation of a restructuring law for Dubai World and its subsidiaries and the creation of a special tribunal in aggregate, set the wheels in motion for significant change to the way business will be done moving forward.

Helping to settle the sandstorm
SPECIAL TRIBUNAL
Perhaps a surprise announcement to many was a statement which was made by the Government of Dubai on 7 December 2009 that it was not a guarantor the obligations of Dubai World. Further compounding the issue, Dubai World's status as a decree corporation, meant that the Dubai Government believed that it (and certain of its subsidiaries) did not have the ability to seek protection under the provisions of the UAE Commercial Code that govern bankruptcy and insolvency. Naturally, creditors and claimants began asking questions as to the priority and security of their debts and other rights and, how their claims would be settled.

In the stated absence of a reorganisation law applicable to Dubai World, the Government of Dubai developed Decree No.57 of 2009 which created a special Tribunal. The Tribunal has the jurisdiction to hear and rule on any demand or claim submitted against (i) Dubai World (including hearing and deciding any demand to dissolve or liquidate Dubai World), and against (ii) the Chairman, the Board of Directors and employees of Dubai World in relation to the financial obligations of Dubai World.

The first hearing took place on December 14 2009. The Tribunal issued its first Practice Direction on 30 March 2010 which stated that the Tribunal will respect and enforce arbitration agreements made between Dubai World and/or its subsidiaries and its creditors.


DUBAI WORLD DEBT RESTRUCTURING

A coordinating committee of creditors (CoCom) consisting of international and local banks was established to represent the interests of over 90 lenders to Dubai World and its subsidiaries. The members of CoCom, namely Emirates NBD, Abu Dhabi Commercial Bank, Royal Bank of Scotland Group, HSBC Holdings, Lloyds Banking Group, Standard Chartered Bank and Bank of Tokyo-Mitsubishi UFJ, represent approximately 60% of the total amount lent to Dubai World.

Dubai World and CoCom reached a deal on May 20, 2010, to restructure US$23.5 billion of liabilities. It is expected that Dubai World will repay US$4.4 billion over the next five years and another US$10 billion over eight years in order to settle its loans. The Government of Dubai agreed to convert US$8.9 billion of its loans to Dubai World into equity.

According to Dubai World's chief restructuring officer Aidan Birkett of Deloitte, the next step in the restructuring is to complete the documentation and present it to all the banks during the month of June 2010.

The IMF is understood to have referred to the restructuring as "a fair and equitable solution for all stakeholders". And, "a satisfactory conclusion of this process will pave the way for improving overall credit conditions, the investment climate, and economic activity in Dubai and the UAE in general".

Beyond lenders, Dubai World has promised to pay trade creditors what they are owed in the form of a 40% cash payment with the remaining 60% as tradeable security with a 10% annual rate of return. Subsidiaries, such as Nakheel, have proposed restructuring arrangements to its investors, mainly buyers of rights in real property, including unfinished and not started projects.


REORGANISING LAW TO IMPROVE THE BUSINESS ENVIRONMENT
"In order to be better prepared for the future, the Supreme Fiscal Committee, set up to oversee Dubai's fiscal policies, is establishing a comprehensive programme to address vulnerabilities in our financial system."
His Highness Sheikh Ahmed bin Saeed Al Maktoum, speaking at the MENASA Forum 2010.

A range of legal developments concerning business transactions and operations are expected to be introduced in 2010, as announced by Sheikh Ahmad Bin Saeed Al Maktoum in his capacity as the chairman of the Dubai Supreme Fiscal Committee on 22 May 2010:

  • A federal public debt law will seek to improve the federal authorities' oversight of borrowing by government entities and businesses. Following the issuance of the public debt law, the federal government will establish a debt management office to coordinate the raising of debt for government related entities.
  • Dubai will also set up a debt management office as part of a plan to improve Dubai's legal and regulatory infrastructure. The office is expected to centralise debt decision making in the Emirate of Dubai.
  • An insolvency framework is being addressed as a "policy priority" and is expected to give clear guidelines for the financial restructuring and reorganisation of companies based on international principles. The insolvency framework is considered necessary to modernise and reform the existing laws and regulations and remove impediments to corporate restructurings in the UAE.
  • The federal government is also expected to pass an arbitration law in 2010 or 2011 which will address arbitration procedures, confidentiality and the selection of arbitrators. The law will also cover Islamic arbitration. Arbitration aims to enable parties to resolve disputes amicably and is therefore seen as a necessary factor in boosting investor confidence in the UAE.

Renewed confidence?

Certainly the measures taken over the past few months indicate the Government of Dubai is focused on its commitment to cement Dubai as a business centre that promotes transparency, and good governance.

No doubt lenders, contractors and investors will be closely monitoring the outcomes of the Dubai World restructuring and Tribunal hearings such as the first claim against Nakheel.

Although the sand is yet to settle, the federal and local governments appear to be focused on bringing Dubai and the UAE up to international standards with respect to business laws and regulations. If conducted effectively, this can only improve the general environment and the way business is conducted in the UAE.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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