Earlier this year lawyers in the Middle East were struggling to find any precedent cases to test the UAE’s insolvency and restructuring laws. After recent events at Dubai World, however, that could be about to change.
The UAE has no Chapter 11-style system and some have called for reform to existing insolvency laws. A report earlier this year scored the UAE at only 74 out of 155, on a scale measuring the strength of insolvency regimes.
Some lawyers in the region expect the scale of Dubai World’s restructuring could eventually lead to the long-awaited developments.
“Particularly given the magnitude of the amounts at stake, the restructuring of Dubai World will stress the nascent governing legal infrastructure,” said Oliver Agha of Islamic finance firm, Agha & Shamsi. “It may result in initiatives to develop or fill in gaps in the law that are highlighted once major restructurings like this test and stress the existing legal framework.”
“This is not the first restructuring exercise in the Gulf, but it is the biggest,” said Mark Andrews, the head of restructuring & insolvency at Denton Wilde Sapte, which is representing creditors of Dubai World. “It will test the local business culture very severely.”
However, the likelihood that Dubai World will reach the litigation stage to test the legal framework is complicated by the uniqueness of this case – Dubai World may be exempt from action since it is state-owned and could be subject to sovereign immunity. Actions against the Dubai government (and, perhaps, its entities) are not permitted without the Ruler of Dubai’s consent.
Although recent reports indicate that some creditors may be mobilising towards action, the complexities of the case may deter them for now. “Creditors are naturally keen to understand their legal position, as these matters can be quite complicated,” said Philip Abbott, a partner at Simmons & Simmons (pictured, below left). “Each creditor will have its own motivations in terms of a restructuring process, but I would expect parties will attempt for the process to be consensual rather than litigious.”
There’s also the issue of the various laws the companies in question may be subject to. Nakheel is incorporated in the Jebel Ali Free Zone and is subject to those laws but its controversial sukuk, due in mid-December, is listed in the DIFC and is governed by English laws. Dubai World is subject to UAE laws, since it is incorporated as a UAE public company. At least Nakheel’s sukuk won’t be subject to the laws governing Dubai World. “The choice of law contained in a finance document will only be relevant to that document. It would not be relevant to a corporate or debt restructuring where the laws of the UAE or free zones in which members of the Dubai World group are incorporated, will be relevant,” explained Abbott.
Regardless of what happens with Dubai World, Abbot added that it’s largely up to the government as to whether insolvency & restructuring laws can be developed. “The UAE has restructuring & insolvency laws; the issue is that all laws are open to interpretation and the lack of any major corporate insolvency in the UAE means there is uncertainty in the law,” he explained. “Most commentators agree the legal system would benefit from some clarity and improvement in the law. Whether this happens and the speed at which it happens will very much depend on the degree of government support for such a process. The laws would have to be changed at a UAE federal level, thus all emirates comprising the UAE would need to approve.”
Clarifying Islamic finance
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For Islamic finance lawyers, Dubai World’s restructuring also provides an opportunity to help clarify misunderstandings around Islamic finance structures. Agha & Shamsi’s Oliver Agha (pictured) said that some Islamic finance products import conventional structures and may not in fact be Shariah-compliant. Subsequently, defaults in Islamic finance products are not necessarily Shariah-related defaults. “The restructuring of Dubai World….should result in a renewed effort to structure Islamic products from a genuine Shariah base given the potential enforceability of issues if this is not done,” he said. “[Events like this] can actually result in a reinvigorated effort by the industry leaders to develop the Islamic finance sector … and move away from structures that replicate conventional risk profiles.”
The problem is based around whether products, in this case the Nakheel sukuk, are genuinely structured to comply with Shariah principles. “Some structures [do not] comport in all salient respects with Shariah principles,” said Agha. “This may lead to purchasers of sukuk being left with an Islamic instrument that is akin to a conventional bond on paper without being informed of potential enforceability issues of such imported bond provisions.”
Nevertheless, if there is one consensus, it’s that the Dubai World affair has been blown out of proportion. Even for regional lawyers, it’s certainly not going to be the Middle East’s Lehman Bros, at least according to Denton Wilde Sapte’s Andrews. “It is a very significant announcement from a very large company with a huge worldwide exposure, but it has nothing like the scare factor of the implosion of a major global bank,” he said.
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