Legal PinchApril 2010

Transcription

1 Legal PinchApril 2010 QUARTERLY NEWSLETTER UAE Bankruptcy Law: Reform Debate Bankruptcy Declaration: Non-Payment of Commercial Debts By-laws of Law No. 13 of 2008: Clarity on Controversies

2 Editorial The Dubai government has actively mobilized to respond to the real state crisis that befell Dubai. This is evident from establishment of specialized tribunals for claims relating to DP World and its subsidiaries, and for claims relating to Tamweel and Amlak. Additionally, the long-awaited bylaws to Law No. 13 of 2008 Regulating the Interim Real Estate Register in the Emirate of Dubai have been promulgated, providing some much needed clarification in the real estate law. In this issue we will focus on these recent developments. Notwithstanding the continuing real estate crisis, we note that UAE non free zone traders imported, repackaged and exported goods worth AED 186 billion throughout the region during This return-to-the-roots performance has also attracted attention from abroad. A large delegation Ali Al Aidarous of American Chamber of Commerce representative visited Dubai in March, for example, to see the benefits of a world class infrastructure, properly regulated financial sector, and an extensively developed hospitality industry. As 2010 enters its second quarter, therefore, we are hopeful that Dubai has turned the corner and is indeed emerging from the 2009 global crisis. Legislative Update Promulgation of By-Laws for Interim Real Estate Registration Law The Executive Council of Dubai issued Resolution No. 6 for the year 2010, on February 14, 2010, approving the by-laws of Law No. 13 of 2008 Regulating the Interim Real Estate Register in the Emirate of Dubai (the Law ). The by-laws are detailed (28 Articles) and deal, among others matters, with the requirements for commencing a real estate project, the procedure for registration of a real estate unit in the Interim Real Estate Register, the marketing of off-plan projects, events of default by both the developer and investor, and liquidation procedures for cancelled projects. We intend to analyze the by-laws in detail in a future issue of Legal Pinch. In the meantime, we will briefly highlight those provisions of the bylaws that address the most debated issues of the Law: a) The mere submission of an application by the developer of an off-plan transaction at the Land Department within 60 days from the enforcement of Law No. 13 of 2008 on August 14, 2008, is considered as meeting the requirements of Article 3.2 of the Law, even if the Land Department did not complete the registration procedure within this time frame. b) Should the developer make his application after the 60 day period, the Land Department will nevertheless accept the application and register the transaction, while imposing a fine of AED 10, on the developer. 1

3 This provision has put an end to the long standing debate whether non-compliance by the developer renders a sales agreement null and void. It is now clear that non-compliance with the requirements of Article 3.2 of the Law is simply an administrative violation, and will not nullify the transaction. c) Upon completion of the project, the developer may not refrain from handing over the unit, or registering the unit in the name of the buyer, as long as the buyer has fulfilled all contractual obligation relating to the unit, even if the buyer owes the developer amounts resulting from transactions other than the one relating to the unit in question. d) In the event the developer fails to register the unit in spite the buyer having fulfilled all its contractual obligations, the Land Department may register the unit at its own initiative or upon the request of the buyer. e) The developer cannot impose fees on the buyer except those approved by the Land Department. f) The by-laws impose strict sanctions for offplan transactions undertaken by the developer without securing the prior approval of the project from the Land Department, by considering such transactions null and void. g) Real estate brokers assuming the marketing of a project are under an obligation to deposit the price or any part of it into an escrow account, and they have no right to deposit such sums in their personal name, or deduct any commission before depositing same in the escrow account. Any agreement to the contrary is null and void. h) Extra footage cannot be charged to the buyer unless there is an agreement to the contrary. However, the developer must compensate the buyer if a shortfall in the built-up area exceeds 5% of the agreed area. i) The Land Department can offer its good offices in an attempt to resolve any dispute between the buyer and the developer, and any agreement reached as a result of the Department s intervention will be binding if such agreement is approved by the Department. j) In the event of default by the buyer, the developer, after having exhausted the procedures provided for in the by-laws, may: i. If the progress in the project is not less than 80%: - Retain the entire amount deposited by the buyer, and claim the balance of the contract value; or - Retain 40% of the value of the unit, and rescind the contract. ii. If the progress exceeds 60%: - Retain 40% of the value of the unit, and rescind the sales contract. iii. If the progress is less than 60%: - Retain 25% of the value of the unit, and rescind the sales contract. iv. If the project has not commenced for reasons beyond the control of the developer: - Retain 30% of the amount paid and rescind the sales contract, provided that the developer has fulfilled its contractual obligations and the non-commencement of the project was not due to his negligence, and was for reasons beyond its control. k) In regarding item j(iv) above, the by-laws specify those cases which should be considered beyond the control of the developer (e.g., confiscation of the land by the government, freezing the project by government authorities) as well as cases where the developer will be considered negligent (e.g., non-registration of the project, delay in commencing the construction work). The by-laws are intended as a response to the rapid changes in the real estate market conditions brought about by the recent crisis, and to create greater certainty for both investors and developers. Certainly, promulgation of the by-laws has addressed many controversial issues, and put an end to several long-standing debates before the courts relating to certain provisions of the Law. 2

4 Feature Article Introduction UAE Bankruptcy Law: Reform Needed? In the current economic context, UAE bankruptcy law, and its perceived ineffectivenes, have been become a topic of much discussion. This trend was exacerbated with the highly publicized move by Dubai World in November 2009 to delay its debt payments, and the related December 2009 announcement of a new legal framework governing any future formal reorganization and restructuring of Dubai World and any of its subsidiaries. In addition to the special legal regime created for Dubai World, a more comprehensive reworking of the UAE federal bankruptcy laws may be forthcoming. In March 2010, the firm s Ali Al Aidarous and Keith Wixler were asked to participate in a round table discussion organized by the International Bar Association and Dubai International Arbitration Centre to debate the need for new or amended bankruptcy legislation in the UAE, and related reforms ( IBA/DIAC Round Table ). The round table included some 30 participants chosen from among the Dubai legal community. In this article, we will summarize the existing legal regime for bankruptcy in the UAE, and identify some issues existing in practice in the UAE which have, indeed, rendered difficult the achieving of the goals of transparency, predictability, and fostering of an entrepreneurial spirit which are common policy goals underlying most modern bankruptcy legislation. Existing Legal Framework Commercial insolvency law in the UAE is governed in the main by the Commercial Transactions Law, Federal Law Number 11 of 1992 ( Commercial Transactions Law ). Part 5 of the Commercial Transactions Law contains detailed provisions dealing with declaration of bankruptcy, administration of the bankruptcy, the effects of bankruptcy, termination thereof, special provisions dealing with bankruptcy of companies, and rehabilitation of the bankrupt party. Additionally, the Commercial Transactions Law contains extensive treatment of so-called protective arrangements from bankruptcy intended to facilitate reorganization of the debtor, and similar in purpose to Chapter 11 of the US Bankruptcy Code. While bankruptcy itself is not a crime in the UAE, the Commercial Transactions Law also contains provisions which criminalize certain misconduct in connection with bankruptcy. The aforementioned bankruptcy regime contained in the Commercial Transactions Law applies to traders, which, broadly speaking, covers both individuals and corporations that conduct commercial activity. Technically speaking, there is no special regime for individual bankruptcy in UAE, as is the case in certain legal systems. However, non-traders whose debts exceed their liabilities, or their creditors, may be subject to a process contained in the UAE Civil Code known as Hajr in Arabic ( Restriction in English), which has features similar to the bankruptcy laws contained in the Commercial Transactions Law. Under the Hajr, upon a petition by the debtor himself or one of his creditors, the debtor may be prevented from dealing with his property and following issuance of a Restriction the debtor s property may be sold and distributed pro-rata among his creditors, in accordance with certain procedures set out in the Civil Code. Crimes relevant to bankruptcy are addressed in Articles 878 et. seq. of the Commercial Transactions Law, and include sanctions against bankrupt traders, bankrupt companies, creditors, trustees, and the debtor s accountants. As a general rule, criminal sanctions are based on misconduct deemed under the Commercial Transactions Law to be negligent or fraudulent, such as failure to 3

5 maintain adequate books and records or conclusion of a clandestine agreement with one creditor to the detriment of the others. Following the recent announcement of the Dubai World standstill decision in late 2009, His Highness Sheikh Mohammed Bin Rashid Al Makhtoum, Ruler of Dubai, issued on December 13, 2009 Decree Number 57 for 2009 Establishing a Tribunal to Decide the Disputes Related to the Settlement of the Financial Position of Dubai World and its Subsidiaries ( Dubai World Tribunal ). The Decree establishes a three-judge special tribunal headed by the Chief Justice of the Dubai International Financial Centre (DIFC) Courts to handle Dubai World disputes based on the rules and regulations of the DIFC Courts (DIFC Law Number 3 of 2009 Concerning the Law of Insolvency, as amended by the Decree). The announced aim of the creation of the Dubai World Tribunal was to subject the Dubai World restructuring to a clear, transparent, and effective legal framework incorporating international best practices in restructuring, a move welcomed by some analysts. On the other hand, the Decree appears to have left a number of issues unresolved, such as, for example, whether the Dubai World Tribunal s jurisdiction is exclusive. While this almost certainly was what was intended, the Decree, as drafted, does not so state. Dubai World Tribunal decisions are final and not subject to any appeal. According to Mr. Hamad Bu Amin, Director General of the Dubai Chamber of Commerce and Industry, and other recent public statements, the UAE authorities are working on a new comprehensive federal bankruptcy law, but the timing and nature of any such new legislation is uncertain. A Need for New Federal Legislation? Participants at the IBA/DIAC Round Table were divided over the issue of whether the UAE requires new, comprehensive bankruptcy legislation. Certainly, the bankruptcy provisions of the existing Commercial Agencies Law, which is based on the Egyptian and French law, are extensive (more than 250 Articles) and provides relatively detailed mechanisms for both liquidation and reorganization. On the other hand, notwithstanding that such legislation has been in place for years in the UAE, bankruptcy proceedings in the UAE are rare. Opponents of the introduction of new legislation point out that the problem appears to lie not with the legislation per se, but rather with supporting laws and structures in the UAE. It is extremely difficult in the UAE to obtain information concerning a debtor s assets and financial situation. The Commercial Registry is not available for consultation by the public at large. There are no mechanisms for registration of liens on moveable assets, other than certain special registries established for highly-specialized assets like ships or aircraft. An owner who merely abandons a debtor limited liability company and reopens the same business under the name of a different company is extremely difficult to attack legally, since notions of piercing the corporate veil are not well-developed in the UAE. The contrast with a well-developed bankruptcy system such as that existing in the Unites States, for example, is obvious. The US Bankruptcy Code does not exist in a vacuum. Rather, this legislation exists in a context where there is tremendous transparency concerning the assets and financial situation of a debtor. Liens of all types are systematically recorded and available for consultation. Moreover, highly-developed laws and jurisprudence concerning fiduciary duties of directors act as a meaningful deterrent to merely closing up shop. There is a specialized network of bankruptcy courts with exclusive jurisdiction over such matters, with at least one such court in every judicial district in the United States. Accordingly, opponents of the introduction of new legislation argue, somewhat convincingly, that the reforms should focus on improving the structures and mechanisms which support the existing legislation. In support of this argument, we note that the DIFC Courts apply well-developed insolvency laws and regulations within DIFC based on the UK model. However, in practice we expect the DIFC Courts will encounter practical difficulties in resolving such cases due to the aforementioned lack of supporting systems outside the zone, as well as potential jurisdictional limitations. Proponents of the introduction of new legislation argue, however, that there exists an opportunity for the UAE to introduce comprehensive new legislation based on international best practices, along with associated reforms. Finally, according to Mr. Hamad Bu Amim, Director General of the Dubai Chamber of Commerce and Industry, and other recent public statements, the UAE authorities are working on a new comprehensive federal bankruptcy law, but the timing and nature of any such new legislation is uncertain. Contd. on P. 5 4

6 Case Law Non-payment of Even a Single Commercial Debt Can be a Basis for Bankruptcy Declaration In an unequivocal decision reinforcing the legal grounds for declaration of bankruptcy, the Dubai Supreme Court in Appeal No. 88/2008 ruled on September 9, 2008 that the suspension of payment by a trader of a single commercial debt is sufficient to declare his bankruptcy, as long as the non-payment indicates the instability of the trader s financial position and the fragility of his creditworthiness. The facts of the case can be summarized in that the Plaintiff brought an action against the Defendant debtor company to declare the latter bankrupt, as it failed to pay a judgment amount in the Plaintiff s favor, and was facing various attachments of its assets, as well as closure of its premises. The Lower Court dismissed the case based on the conclusion of an expert appointed to determine the financial position of the Defendant. The expert had concluded that the non-payment was due to temporary financial difficulties, and did not necessarily prove cessation by the company of payment of its debts. The Plaintiff appealed this decision. The Court of Appeal dismissed the appeal. The Plaintiff then appealed to the Dubai Supreme Court, which finally overruled the Court of Appeal s decision. The Supreme Court pointed out that it is not necessary that a debtor cease paying multiple commercial debts in order for such debtor to be declared bankrupt. Rather, the mere cessation of payment of a single debt is sufficient for such a finding, as long as the cessation of payment indicates the instability of the debtor s financial position, and the fragility of the debtor s creditworthiness. Contd. from P. 4 UAE Bankruptcy Law: Reform Needed? Conclusion It remains to be seen how federal bankruptcy law and supporting structures in the UAE will evolve in view of these recent public announcements. Certainly, recent developments have underscored the need for continued reflection and debate regarding reform by all concerned actors, including the legal and business communities. In the meantime, legal counsel in the UAE, and their clients, will need to continue to make decisions in a legal environment where there exists a considerable disparity between theory and practice. 5

7 Events Bankruptcy Round Table discussion relating to bankruptcy laws from around the world, and how these laws could influence eventual evolutions in UAE bankruptcy law. Mr. Ali Al Aidarous was a keynote speaker at the round table, and focused on the practical issues surrounding application of the existing UAE bankruptcy law. Other speakers provided a brief description of bankruptcy laws existing in France, Switzerland, the UK, Canada and the USA. The International Bar Association ( IBA ) and Dubai International Arbitration Centre ( DIAC ) invited senior lawyers from leading international and local law firms to participate in a round table Following the presentations, the lawyers engaged in a lively discussion concerning the need for reform of the UAE Bankruptcy Law, as well as other related laws such as criminal sanctions for writing checks with inadequate funds. Happy Birthday Sherif 6

8 Memories of spring rains in Hatta Prospects of Bankruptcy Practice Sue, did you notice how dressy our bankruptcy lawyer was? Why? How did you think he would be? Ummm... a Pinch of Legal Life Ali Al Aidarous International Legal Practice Suite 101 Zalfa Bldg. Al Garhoud Street, Dubai, UAE legal@alialaidarous.com (+971 4) DISCLAIMER & COPYRIGHT NOTICE The contents of Legal Pinch are not intended to be a substitute for specific legal advice on individual matters. All reproduction and copyrights reserved. The opinions expressed by guests may not necessarily reflect the view of Ali Al Aidarous International Legal Practice.