Restructuring and Insolvency in the Dubai International Financial Centre

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1 Restructuring and Insolvency in the Dubai International Financial Centre

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3 The Dubai International Financial Centre (the DIFC ) is a federal financial free zone which has been granted authority to self-legislate in civil and commercial areas. An amendment to the UAE Constitution and a resulting federal law concerning financial free zones have allowed the government of Dubai to create a legal framework based on best practices of leading jurisdictions in Europe, North America and the Far East. The laws of the DIFC ( DIFC Law ) are enacted by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and under the UAE Constitution, are considered at the level of local legislation. DIFC Law provides a framework for the reorganisation and liquidation of insolvent companies. The DIFC regime remains largely untested as there has yet to be a major corporate insolvency within the jurisdiction. This note seeks to provide an overview of the legal framework within the DIFC, the various insolvency procedures contained therein and the key issues to be considered by company directors in an insolvency or potential insolvency scenario. Restructuring and Insolvency in the Dubai International Financial Centre 1 LEGAL FRAMEWORK 1.1 Overview The DIFC Insolvency Law (DIFC Law No.7 of 2004) (the Insolvency Law ) sets out the procedures that result in the reorganisation or liquidation of an insolvent Company. The Insolvency Law provides for company voluntary arrangements, company receivership and both voluntary and involuntary winding-up procedures. The Insolvency Law is supported by the DIFC Insolvency Regulations (the Regulations ) and Article 14 of the DIFC Code (the Code ). The Regulations are enacted pursuant to Article 116 of the DIFC Companies Law (DIFC Law No (3) of 2006, the Companies Law ) and Article 93 of the Insolvency Law. The Code was enacted for the purposes of consolidating, standardizing and harmonizing the laws applicable in the DIFC. Consolidation under the Code has not resulted in the amendment of any substantive provision of the Insolvency Law or the Regulations. The Code merely seeks to make the Insolvency Law easier to read and reference. To the extent that any conflict or inconsistency exists between the Code and the Insolvency Law, the terms of the Code shall prevail. The DIFC published a draft update of the Insolvency Law and Regulations for consultation purposes in November The consultation period ended on 13 December 2008 and we understand that, subject to the Ruler s approval, the revised Insolvency Law and Regulations will be enacted shortly. The updated Insolvency Law and Regulations, if enacted in the form published for consultation purposes, would not materially change the analysis of the DIFC restructuring and insolvency regime as set out in this note. Latham & Watkins Restructuring and Insolvency in the Dubai International Financial Centre 1

4 1.2 Jurisdictional issues and choice of law The Insolvency Law is applicable to any company under the jurisdiction of the DIFC and incorporated under the Companies Law (a Company ). In addition, Part 6 of the Insolvency Law contains provisions dealing with recognised and foreign companies. Where a foreign company (being a Company incorporated in any jurisdiction other than the DIFC) is the subject of insolvency proceedings in its jurisdiction of incorporation, the DIFC court (the Court ) shall, upon request from the court of that jurisdiction, assist the foreign court in the gathering and remitting of assets maintained within the DIFC. A recognised company (being a foreign company which is registered to carry on business in the DIFC) may be wound up in circumstances where it has been dissolved, deregistered or otherwise ceased to exist in its jurisdiction of incorporation. To the extent that there are any gaps in the Insolvency Law, it seems likely that the DIFC Court would consider foreign law when interpreting provisions of the Insolvency Law. DIFC Law (that is to say all of the laws in force in the DIFC rather than just the Insolvency Law) specifically provides for a hierarchy of applicable law for any civil or commercial matter as follows: (i) the laws in force in the DIFC; (ii) the laws of any jurisdiction other than that of the DIFC expressly chosen by any DIFC Law; (iii) the laws of any jurisdiction as agreed between the contracting parties; (iv) the laws of the jurisdiction that appears to the Court or the arbitrator to be the one most closely related to the facts and the persons concerned in the matter; and (v) the laws of England and Wales. 2 INSOLVENCY PROCEDURES 2.1 Company Voluntary Arrangements Commencement Directors of a Company may make a proposal to its members and its creditors for a scheme of arrangement of its affairs (a Voluntary Arrangement ). In such circumstances, the directors will appoint a DIFC registered insolvency practitioner as nominee to act in relation to the Voluntary Arrangement and supervise its implementation. The directors must provide the nominee with a proposal that must include information on a wide-range of matters including: assets that will be included in the Voluntary Arrangement; any security provided by the Company; the manner in which it is proposed to deal with liabilities; creditors (preferential, secured and unsecured); and whether the directors are aware of any transactions which would be classified as preferences, transactions at an undervalue or invalid security interests (see 3.4 below) if the Company were to go into liquidation. The directors must also provide the nominee with a certified statement of the Company s affairs. The nominee will then summon a meeting of the Company s creditors to consider the directors proposals and choice of nominee. The Voluntary Arrangement will be accepted if 75% or more in value of the creditors present and voting (in person or by proxy) on the resolution vote in favour. If approved, the Voluntary Arrangement will bind all creditors who had notice of, and were entitled to vote at the meeting (whether or not they were present or represented). It is not possible to approve a proposal which affects the rights of any preferred or secured creditors without their prior approval Implementation of proposals Upon approval, the nominee shall be appointed as the supervisor for the purposes of implementing the steps of the Voluntary Arrangement (unless a majority in value of creditors present at the creditors meeting resolves to appoint an alternative supervisor(s)). In implementing the proposals, the supervisor may apply to the DIFC Court for directions in relation to any particular matter arising under the Voluntary 2 Latham & Watkins Restructuring and Insolvency in the Dubai International Financial Centre

5 Arrangement or may apply to the DIFC Court for a winding-up or receivership order in respect of the Company. Any of the Company s creditors or any other person dissatisfied by any act, omission or decision of the supervisor may apply to the DIFC Court for a confirmation, reversal or modification of the supervisor s actions. The supervisor is required to keep detailed accounts and records of his actions and dealings, including records of all receipts and payments of money. At least once every 12 months the supervisor must send a report detailing such actions, receipts and payments to the Court, the Registrar of Companies, the Company, the Company s creditors bound by the Voluntary Arrangement and the members of the Company. Within 28 days of completing the implementation of the Voluntary Arrangement, the supervisor shall send a notice to the Court, the Registrar of Companies and all of the Company s creditors bound by the proposals confirming that the Voluntary Arrangement has been fully implemented. Attached to such notice shall be a final report of the supervisor detailing all receipts and payments made by him in connection with the Voluntary Arrangement and explaining any departure from the original proposals. Upon receipt of said notice and report by all parties, the supervisor shall be permitted to vacate office Moratorium (a) Application Directors of an eligible company (see (b) below) may instruct the nominee to apply to the Court for an order granting a moratorium. Such application can be incorporated into the Voluntary Arrangement proposal document and should be supported by a statement of the directors as to why the moratorium would benefit the general body of the Company s creditors together with any other relevant documentation. (b) Eligible Companies Regulation excludes certain Companies from applying for a moratorium, the most relevant of which are: any Company already subject to any insolvency procedure; any Company which has incurred a liability under an agreement of US$20,000,000 or more; or any Company which is party to certain secured or structured capital market arrangements. (c) Effects If the Court grants the application for a moratorium, then within the jurisdiction of the DIFC and during the period in which the moratorium is in force: no petition may be presented for the winding up of the Company; no meeting of the Company may be called except with the consent of the nominee or leave of the Court; no resolution may be passed or order made for the winding up of the Company; no administration application may be made or no administrator or administrative receiver may be appointed in respect of the Company; no landlord or other person to whom rent is payable may exercise any right of forfeiture in relation to any premises let to the Company except with leave of the Court; no other steps may be taken to enforce any security over the Company s property, or to repossess goods in the Company s possession under any hire purchase agreement, except with leave of the Court; and no other proceedings and no execution or other legal process may be commenced or continued, and no distress levied, against the Company or its property except with leave of the Court. There are certain additional effects of a moratorium, most notably in respect of the Company s ability to apply for credit, make disposals and make payments during the period in which the moratorium is in force. The additional effects are set out in Regulation 3.7. but not discussed further in this note. Latham & Watkins Restructuring and Insolvency in the Dubai International Financial Centre 3

6 2.2 Receivership Appointment and powers In circumstances where a creditor of a Company appoints a person to sell any part of the Company s property or assets and use the proceeds of sale to discharge the Company s debt(s) to that creditor, such appointed person is referred to as a receiver. A creditor may only appoint a receiver if it has been granted specific power to do so in an instrument executed by the Company (i.e. a credit agreement). Where the property over which the receiver is appointed consists of all or substantially all of the undertaking of the Company, the receiver shall be referred to as an administrative receiver. The powers of an administrative receiver are set out in Part 3 and Schedule 2 of the Insolvency Law. Most significantly, an administrative receiver has the power to: take possession of the property and assets of the Company; sell or otherwise dispose of the property of the Company; raise or borrow money and grant security over the property of the Company; do all acts and execute in the name and on behalf of the Company any deed, receipt or other document; and do all such other things as may be necessary for winding up the Company s affairs and distributing its assets. An administrative receiver may dispose of charged property in circumstances where the Court is satisfied that such disposal is likely to promote a more advantageous realisation of the Company s assets than would otherwise be effected. The Court may, by order, authorise the disposal of such property as if it were not subject to any security interest. Any such order will be conditional upon the proceeds of disposal being applied towards the discharge of the secured debt(s) Reporting obligations and resignation Within 3 months of his appointment, an administrative receiver shall circulate a report to all of the Company s creditors detailing the events leading up to his appointment, the disposal (or proposed disposal) by him of any property of the Company, the carrying on (or proposed carrying on) by him of any business of the Company, the amounts of principal and interest payable to debenture holders and preferred creditors, and the surplus (if any) likely to be available for the payment of other creditors. Following the circulation of such report, the administrative receiver shall summon a meeting of the Company s unsecured creditors on not less than 14 days notice to discuss the content of the report. An administrative receiver is also under an obligation to circulate accounts detailing all receipts and payments made during the course of the receivership. Such accounts are to be distributed to the Companies Registrar, the Company, the person who appointed the administrative receiver and the Company s creditors at least every 12 months, and in any event, within 2 months of the receiver vacating his position. An administrative receiver may resign and vacate his office by giving not less than 7 days notice to his appointee, the Company and the Company s creditors. In addition, a receiver can be removed from office at any time by order of the Court. 2.3 Winding-up The winding-up of a Company may be either voluntary or compulsory. A voluntary windingup is instigated by the Company and may proceed either as a members voluntary windingup or a creditors voluntary winding-up. A compulsory winding-up is instigated by the Court. 4 Latham & Watkins Restructuring and Insolvency in the Dubai International Financial Centre

7 2.3.1 Voluntary winding-up A Company may be wound up voluntarily: in accordance with its memorandum and articles of association (e.g. upon expiry of a prescribed term or upon completion of the Company s stated objectives); if the Company s shareholders resolve that it should be wound up voluntarily; or if the Company s shareholders resolve that it cannot by reason of its liabilities continue its business. A voluntary winding-up is deemed to commence on the passing of the shareholder resolution approving the winding-up. The Company shall, from the dates of commencement, cease to carry on its business (however, the corporate status and corporate powers of the Company shall not be extinguished until the Company is liquidated). Any transfer of shares or alteration in the status of the Company s members made after the commencement of a voluntary winding-up shall be deemed void unless sanctioned by the liquidator. If the passing of the resolution to wind up the Company is preceded by a statutory declaration of solvency sworn by a majority of the Company s directors then the windingup will proceed as a members voluntary winding up. If a majority of the Company s directors are unable to swear such a statutory declaration then the winding up will proceed as a creditors voluntary winding-up. A valid declaration of solvency must be sworn within the 5 weeks immediately preceding the date of the passing of the resolution to wind up the Company and confirm that, having made full enquiry into the Company s affairs, the directors (or majority of directors) have formed the opinion that the Company will be able to pay its debts in full as they fall due for the following 12 months. Directors who make the declaration without having reasonable grounds to do so commit an offence and are liable to a fine of up to US$20, Members voluntary winding-up A Company, in a general meeting, will appoint one or more liquidators for the purpose of winding up the Company s affairs and distributing its assets. Upon appointment of a liquidator, the directors powers will cease except to the extent that the liquidator sanctions their continuance. Upon completion of the winding-up, the liquidator shall produce a report detailing the liquidation process and how the Company s property and assets have been disposed of to be presented to the members of the Company in a general meeting Creditors voluntary winding-up A Company shall call a meeting of all of its known creditors to be held no more than 14 days after the date on which the winding-up resolution is passed by the shareholders. The Company shall also propose a person to act as liquidator. However, if the creditors resolve to nominate a different person at the creditors meeting, the creditors choice shall prevail. Once the liquidator is appointed, the creditors voluntary winding-up procedure mirrors that of a members voluntary winding-up Compulsory winding-up A Company may be wound up by the Court if: the Company has resolved that it is to be wound up by the Court; the Company is unable to pay its debts; a Court ordered moratorium has expired and no Voluntary Arrangement has been approved; Latham & Watkins Restructuring and Insolvency in the Dubai International Financial Centre 5

8 the Court makes such an order pursuant to any provision of DIFC Law; or the Court is of the opinion that it is just and equitable that the Company should be wound up. A Company will be deemed unable to pay its debts if a statutory demand for a sum in excess of US$2000 remains unpaid 3 weeks after receipt, any judgment in favour of a creditor is unsatisfied, or it is otherwise proved to the satisfaction of the Court that the Company is unable to pay its debts as they fall due. A Company will also be deemed unable to pay its debts if it is proved to the satisfaction of the Court that the value of the Company s assets is less than the value of its current liabilities. The Company, its directors or any creditor can petition the Court for a winding-up order. The Dubai International Financial Centre Authority may also present a petition if it considers it in the best interests of the DIFC to do so. Any disposition, attachment, sequester or appropriation of the Company s property, transfer of shares or alterations to the status of its members occurring after the commencement of compulsory winding-up proceedings shall be deemed void unless the Court orders otherwise. In circumstances where the Court is satisfied that one of the conditions set out above is met it will issue a winding-up order in respect of the Company. From the date of the winding-up order, any ongoing action or proceeding against the Company shall be automatically stayed and no action or proceeding may be commenced without leave of the Court and subject to such terms as the Court may impose. The Court will appoint a liquidator whose objective is to ensure that the assets of the Company are collected or otherwise secured, realised and distributed to the Company s creditors. The liquidator has the power to do all things that are necessary for the windingup of the Company and distributing its assets, and is entitled to access the Company s accounts, books and records. Creditors are required to prove their debts in a compulsory winding-up in writing to the liquidator. Secured creditors must also provide details of their security interest. A creditor may only participate in the winding-up if it has lodged a proof of debt and the claim has been admitted, and its debt is liquidated and ascertained (unless an exemption is applied and an estimated value is submitted). Secured creditors may only participate in the winding-up in respect of the balance due to them from the Company after deducting the value of the security held, and failure to disclose the security interest results in the secured creditor being required to surrender his security interest (unless the Court permits otherwise). If a secured creditor realises his security interest, he may prove for the balance of his debt or he may prove for the whole if he surrenders his security interest for the benefit of the creditors. A creditor has 21 days in which to appeal against the liquidator s decision to accept or reject a debt Power to disclaim onerous property In a creditors voluntary winding-up or a compulsory winding-up, the liquidator may disclaim the following onerous property : (i) any unprofitable contract; and (ii) any other property of the Company that is not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act. A liquidator in a members voluntary winding-up may not disclaim property. 3 DIRECTORS DUTIES AND PROTECTION OF ASSETS 3.1 Directors general duties The Companies Law requires that directors and other officers of Companies, in exercising their power and discharging their duties, act honestly, in good faith and lawfully, with a view to the best interests of the Company; and that they exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. 6 Latham & Watkins Restructuring and Insolvency in the Dubai International Financial Centre

9 Directors must not act outside the power of the Company and must act within the limits of their powers imposed by the Company s memorandum and articles of association. Directors also owe fiduciary obligations to their companies under DIFC Law. Many of these fiduciary duties overlap with the general Companies Law duties of directors described above but others extend these duties to cover additional matters, including a duty to avoid conflicts of interest, a duty not to misuse Company property, a duty of loyalty to the Company and a duty of confidentiality. Failure to comply with directors duties may result in an individual director being liable to civil penalties under DIFC Law including personal liability and disqualification. 3.2 Fraudulent and wrongful trading and delinquent actions The Insolvency Law defines fraudulent trading as carrying on a business with intent to defraud creditors of the Company or creditors of any other person, or for any fraudulent purpose. Any person who is knowingly a party to carrying on a business in such a manner may be guilty of the offence of fraudulent trading. The offence of wrongful trading occurs when a Company is in insolvent liquidation and at some time before the commencement of the winding-up of the Company one or more of the directors of the Company ought to have known that there was no reasonable prospect of the Company avoiding insolvent liquidation. The Insolvency Law also recognises and imposes sanctions on fraudulent behavior in anticipation of a winding-up. Any past or present director or other officer of the Company who, within the 12 months immediately preceding the commencement of the winding-up, has committed one of the following acts in each case with the intention of defrauding the creditors of the Company or concealing the state of the Company s affairs will be guilty of a delinquent action: concealed any part of the Company s property to a value of US$ or more or concealed any debt due to or from the Company; fraudulently removed any part of the Company s property to a value of US$ or more; concealed, destroyed, mutilated or falsified any book or paper affecting or relating to the Company s property or affairs; made any false entry in any book or paper affecting or relating to the Company s property or affairs; fraudulently parted with, altered or made any omission in any document affecting or relating to the Company s property or affairs; or pawned, pledged or disposed of any property of the Company which has been obtained on credit and has not been paid for (unless such act was carried out in the ordinary course of business). Transactions in fraud of creditors, material omissions from statements relating to a Company s affairs and false representations to creditors are also considered to be delinquent actions. 3.3 Remedies against delinquent directors Any director or officer of a Company guilty of fraudulent trading, wrongful trading or any other of the delinquent actions set out above risks Court sanction. The Court may, on application by an aggrieved person (including a liquidator or administrative receiver) make any order as it sees fit in relation to the delinquent director or officer including one or more of the following: Latham & Watkins Restructuring and Insolvency in the Dubai International Financial Centre 7

10 an order to return or pay to the Company any money or other property of the Company which has been misapplied or retained or become accountable for; an order to compensate the Company in respect of any misfeasance or breach of any fiduciary or other duty relating to the Company; an order to make such contributions to the Company s assets as the Court thinks proper; or an order requiring the director / officer to do, or not to do, any act or thing. 3.4 Voidable transactions Transactions at an undervalue The Insolvency Law provides that where a receiver or administrative receiver is appointed, or where a Company goes into liquidation or a provisional liquidator is appointed, and where the Company has at a relevant time (see below) entered into a transaction with any person at an undervalue, the DIFC court may, on application of the receiver, administrative receiver, liquidator or provisional liquidator, make an order to set aside the transaction. Transactions at an undervalue include gifts and transactions where the Company either receives no consideration or receives consideration the value of which is significantly less than the value of the consideration provided by the Company. The Insolvency Law provides a defence in circumstances where the Company that entered into the transaction did so in good faith and for the purposes of carrying on its business and where there were reasonable grounds for believing that the transaction would benefit the Company at the time of entry into the transaction Preferences Where a Company has given a preference to a person at a relevant time (see below) such preferred transaction may also be set aside. A Company is considered to have given a preference to a person where: such person is one of the Company s creditors or a surety or guarantor for any of the Company s debts or other liabilities; the Company does anything or suffers anything to be done that, in either case, has the effect of putting that person into a position that, in the event of the Company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done; and provided that the Company was influenced to give the preference by a desire to put such third party in a better position than if that thing had not been done. A Company that has given a preference to a person connected with the Company (otherwise than by reason of being its employee) at the time the preference was given is presumed, unless the contrary is shown (for example, by receiving additional material consideration therefore), to have been influenced in deciding to give it by a desire to put such person in a better position than it would have been had the act or sufferance not occurred. 8 Latham & Watkins Restructuring and Insolvency in the Dubai International Financial Centre

11 3.4.3 Relevant time The relevant time for the purposes of transactions at an undervalue and preferences is: two years prior to the onset of insolvency in respect of transactions at an undervalue and preferences involving connected persons; six months prior to the onset of insolvency in respect of preferences involving unconnected persons; and in the case of transactions at an undervalue and preferences, at any time between the presentation of an administration petition and the making of an order Voidable security interests The Insolvency Law provides that a security interest in all or substantially all of the Company s property is invalid where: the security interest is created in favour of a person connected with the Company and was created after a date two years before the onset of insolvency; or the security interest is created after a date one year before the onset of insolvency and the Company was either at the date of the creation, or became pursuant to the transaction in respect of which the charge was created, unable to pay its debts as they fell due; or the security interest was created after the commencement of a company voluntary arrangement. However, this provision does not invalidate a security interest to the extent of the value transferred to the Company or liabilities of the Company released as a result of the transaction giving rise to the grant of the security interest. 4 RANKING OF CREDITORS The DIFC Preferential Creditor Regulations apply to any Company to which the Insolvency Law applies. The combined effect of the Insolvency Law and the Preferential Creditor Regulations ensures that, in the winding-up of a Company, its preferential debts shall be paid after the expenses of the winding-up in priority to all other debts that are unsecured or secured by an interest over all or substantially all of the assets and undertakings of the Company. Preferential debts are categorised as follows: any sum owed by the Company which is a contribution to a pension scheme on behalf of the Company s employees or any end of service gratuities; remuneration of Company employees for a period of up to four months preceding the date of the appointment of a provisional liquidator or the winding-up order in the case of a compulsory winding-up; or the passing of the resolution approving the winding-up in the case of a voluntary winding-up; any payments due in lieu of notice; and compensation in respect of accrued holiday entitlement. Latham & Watkins Restructuring and Insolvency in the Dubai International Financial Centre 9

12 SCHEDULE 1 Heading QUICK REFERENCE GUIDE Key Issues Legal Framework Relevant Legislation - DIFC Insolvency Law (DIFC Law No.7 of 2004) - DIFC Companies Law (DIFC Law No. 3 of 2006) - DIFC Insolvency Regulations - DIFC Preferential Creditor Regulations - DIFC Code (Article 14) NB: The consideration of foreign laws pursuant to Article 8 of the DIFC Law on the Application of Civil and Commercial Laws (see 1.2 above) Insolvency Procedures Company Voluntary Arrangements Commencement - directors propose scheme of arrangement of Company s affairs to its creditors - nominee appointed to supervise implementation of the voluntary arrangement - nominee must be a registered insolvency practitioner recognised by the DIFC Creditor Approval Thresholds - 75% or more in value of those present and voting (in person or by proxy) - if approved, arrangement will bind all creditors who had notice of the meeting and were entitled to vote - rights of preferential and secured creditors shall not be affected without consent Role of Registered Insolvency Practitioner - summon creditors meeting - supervise the implementation of the voluntary proposal - apply to the DIFC Court for directions, a winding-up order or receivership - keep accounts and records of receipts and payments during the procedure - report to the Court, Company Registrar, Company and the Creditors - register completion of the voluntary arrangement and circulate final report Moratorium Application - directors of an eligible company instruct nominee to apply for Court order - application must contain a statement from directors as to how a moratorium would benefit the Company s general body of creditors Eligibility - Regulation list certain categories of excluded companies : - any Company subject to any insolvency procedure - any Company which has incurred a liability of US$20,000,000 or more - any Company party to certain secured and/or structured capital market arrangements - any Company which is a debtor under a financial collateral security interest - any Company subject to the clearing rules of an authorised market institution - any Company defined as an Authorised Person which effects insurance contracts, accepts deposits, holds investments, investment entities for account holders or holds money to which DFSA rules regarding the holding of client money apply Consequences - no proceedings may be taken against the Company - no resolution or petition for winding-up may be presented - no application to appoint a receiver or administrative receiver may be made - no security enforcement steps may be taken - Company s ability to grant security, borrow money, dispose of property and make payments is also affected Receivership Commencement - where a creditor of a Company in distress has been granted the specific power to do so, it may appoint a receiver or administrative receiver to collect and sell any party of the Company s property or assets and use the proceeds of sale to reduce the debt due to that creditor Receiver -v- Administrative Receiver - a receiver is appointed in relation to specific property / assets - an administrative receiver is appointed in relation to all or substantially all of the undertaking of the Company 10 Latham & Watkins Restructuring and Insolvency in the Dubai International Financial Centre

13 SCHEDULE 1 Heading QUICK REFERENCE GUIDE Key Issues Receivership Powers of an Administrative Receiver - take possession of the property and assets of the Company - sell or otherwise dispose of the property and assets of the Company - raise or borrow money or grant security therefor - do all acts and execute on behalf of the Company any deed or other document - do all such other things necessary for the winding-up of the Company - dispose of charged property with Court s consent Reporting Obligations - within 3 months of appointment a report must be circulated to the company s creditors detailing the events leading up to the appointment, the disposal or proposed disposal of any Company property, the proposed carrying on of any Company business, sums payable to secured and preferred creditors and any surplus available to pay other creditors - administrative receiver shall then summon a creditors meeting on not less than 14 days notice to discuss the report - continued obligation to circulate accounts detailing all receipts and payments made during the receivership, at least every 12 months and within 2 months of the receiver vacating his position Resignation - on service of not less than 7 days notice to the appointing creditor - Court can order removal at any time Winding-up Voluntary Winding-up - commences on the date of Company resolution approving the winding-up - from date of commencement Company ceases to carry on its business - any transfer of shares after commencement date is void - a solvent winding-up = Members Voluntary Winding-up - an insolvent winding-up = Creditors Voluntary Winding-up - liquidator appointed to wind up company s affairs and distribute its assets Compulsory Winding-up A Company can be wound up by the Court if: - it is unable to pay its debts (statutory demand <$2000 remains unpaid); - a moratorium has expired and no Voluntary Arrangement has been approved; - the Court makes such an order pursuant to DIFC Law; or - the Court is of the opinion that it is just and equitable to do so - from date of commencement Company ceases to carry on its business - any transfer of shares after commencement date is void - Court issues winding-up order if any of the conditions satisfied - any proceedings against the Company stayed and no proceedings to be commenced from date of Court order (unless approved by the Court) - Court appoints liquidator to wind up company s affairs and distribute its assets to approved creditors Directors Duties General duties Directors and other officers of the Company to act honestly, in good faith and lawfully, with regard to the best interests of the Company. Directors to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Fraudulent trading Any person who knowingly carries on a business with the intent to defraud creditors of the Company or creditors of any other person, or for any fraudulent purpose Wrongful trading Occurs where, during the course of a winding-up, it becomes apparent that the Company is in insolvent liquidation and at some time before the commencement of the winding-up one or more of the directors of the Company ought to have known that there was no reasonable prospect of avoiding an insolvent liquidation Latham & Watkins Restructuring and Insolvency in the Dubai International Financial Centre 11

14 SCHEDULE 1 Heading QUICK REFERENCE GUIDE Key Issues Delinquent Actions Any of the following actions committed with the 12 months immediately preceding the commencement of a winding-up with intent to defraud creditors or conceal the state of Company affairs: - concealing any Company property to a value of $200 or more or concealing any debt due to or from the Company - fraudulently removing any part of the Company s property to a value of $200 or more - concealing, destroying, mutilating or falsifying any book or paper affecting or relating to the Company s property or affairs - making any false entry in any book or paper affecting or relating to the Company s property or affairs - fraudulently parting with, altering or making any omission to any document affecting or relating to the Company s property - pawning, pledging or disposing of any property of the Company which has been obtained on credit and has not been paid for (unless such act was carried out in the ordinary course of business) Transactions in fraud of creditors, material omissions from statements relating to a Company s affairs and false representations to creditors are also considered to be delinquent actions. Remedies Against Delinquent Directors Court may make any order as it sees fit including one or more of the following: - an order to return any money or other property which has been misapplied, retained or become accountable for - an order to compensate the Company in respect of any misfeasance or breach of any fiduciary or other duty - an order to make such contributions to the Company s assets as the Court thinks proper - an order requiring the director / officer to do, or not to do, any act or thing Voidable Transactions Transactions at an Undervalue - gifts and transactions where the Company either receives no consideration or receives consideration the value of which is significantly less than the value of the consideration provided by the Company - there is a defence in circumstances where the Company that entered into the transaction did so in good faith and for the purposes of carrying on its business and where there were reasonable grounds for believing that the transaction would benefit the Company at the time of entry into the transaction Preferences - a Company is considered to have given a preference to a person where: such person is one of the Company s creditors or a surety or guarantor for any of the Company s debts or other liabilities; the Company does anything or suffers anything to be done that, in either case, has the effect of putting that person into a position that, in the event of the Company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done - provided that the Company desired to put such third party in a better position than if that thing had not been done (desire assumed if beneficiary is a connected person) Relevant time - two years prior to the onset of insolvency in respect of transactions at an undervalue and preferences involving connected persons - six months prior to the onset of insolvency in respect of preferences involving unconnected persons - at any time between the presentation of an administration petition and the making of an administration order Voidable Security Interests A security interest in all or substantially all of the Company s property is invalid where: - the security interest is created in favour of a person connected with the Company and was created after a date two years before the onset of insolvency; or - the security interest is created after a date one year before the onset of insolvency and the Company was either at the date of the creation, or became pursuant to the transaction in respect of which the charge was created, unable to pay its debts as they fell due; or - the security interest was created after the commencement of a company voluntary arrangement Ranking of Creditors The following preferential debts are paid after the expenses of the winding-up in priority to all other debts that are unsecured or secured by an interest over all or substantially all of the assets and undertakings of the Company: - any sum owed by the Company which is a contribution to a pension scheme on behalf of the Company s employees or any end of service gratuities; - remuneration of Company employees for a period of up to four months preceding the date of the appointment of a provisional liquidator or the winding-up order in the case of a compulsory winding-up; or the passing of the resolution approving the winding-up in the case of a voluntary winding-up; - any payments due in lieu of notice; and - compensation in respect of accrued holiday entitlement 12 Latham & Watkins Restructuring and Insolvency in the Dubai International Financial Centre

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16 If you have any questions about Restructuring and Insolvency in the Dubai International Financial Centre please contact Bryant Edwards, Aaron Bielenberg or Christian Adams in our Dubai office on Abu Dhabi Nick Collins Mark Godfrey Barcelona José Luis Blanco Beijing John Otoshi Brussels Howard Rosenblatt Chicago Stephen Bowen Doha Craig Stoehr Dubai Aaron Bielenberg Christian Adams Frankfurt Hans-Jurgen Lutt Hamburg Gotz Wiese Hong Kong Joseph Bevash Houston Michael Dillard London John Houghton Los Angeles John Clair Jr Madrid José Luis Blanco Milan Fabio Coppola Moscow Christopher Allen Munich Jörg Kirchner New Jersey David McLean New York Keith Simon Orange County Scott Shean Paris Olivier Delattre Riyadh* Mohammed A. Al-Sheikh Rome Fabio Coppola San Diego Bruce Shepherd Joseph Bevash San Francisco Scott Haber Shanghai Rowland Cheng Silicon Valley Ora Fisher Singapore Mark Nelson Joeseph Bevash Tokyo Hisao Hirose Washington, D.C. Eric Bernthal If you wish to update your contact details or customize the information you receive from Latham & Watkins, please visit to subscribe to our global client mailings program. Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in association with the Law Office of Mohammed Al-Sheikh. Copyright 2011 Latham & Watkins. All Rights Reserved. * In association with the Law office of Mohammed A. Al-Sheikh