Scope and application of bankruptcy law

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Watson Farley & Williams has the Global Aviation Restructuring Index (“GARI“), An online tool that provides a benchmark index of 50 restructuring processes in more than 25 major aviation jurisdictions. GARI also assigns ‘debtor and creditor friendliness’ to each restructuring process, which enables easy comparison between different processes in the same or multiple jurisdictions. Please to access GARI.

The United Arab Emirates (“UAE”) are not yet included in GARI as their bankruptcy law is still relatively new. Its applicability to the aviation industry remains untested (there have been no past restructuring procedures for airlines based in the United Arab Emirates) and local airlines may not even fall within the scope of the law. It is therefore unclear how an airline in the UAE could be restructured, making it difficult to assign the GARI scoring system to jurisdiction.

In line with GARI’s goals, the following article offers:

  1. an overview of the current bankruptcy / restructuring regime of the UAE;
  2. a summary of the outlined key processes of the regime;
  3. our view of its possible applicability to the aerospace industry; and
  4. Considerations on the Question of Sovereign Immunity.

Background to bankruptcy law

This article is based on our review of both the English and Arabic texts of United Arab Emirates Federal Law No. 9 of 2016 (as amended) (the “Bankruptcy Law”) and United Arab Emirates Federal Law No. 21 of 2020 relating to Amendment to the Bankruptcy Act (the “Amending Act”), among others. The Arabic text is especially important as the versions of the decrees / laws in that language are final and binding, and take precedence over those in English. Unless otherwise stated, any reference to an “Article” refers to one in the Bankruptcy Act or Amending Act (if applicable).

“The Bankruptcy Act came into effect on December 29, 2016 and replaced the bankruptcy code previously contained in the UAE Commercial Code (Federal Act No. 18 of 1993) with the aim of streamlining and modernizing bankruptcy procedures in the UAE.”

The Bankruptcy Act came into force on December 29, 2016 and replaced the bankruptcy code previously contained in the UAE Commercial Code (Federal Act No. 18 of 1993) with the aim of streamlining and modernizing bankruptcy procedures in the UAE. In general, this has been partially successful.

Scope and application of bankruptcy law

Article 2 of the Bankruptcy Act states:

“Article 2

The provisions of this Legislative Decree apply to:

1- The companies are subject to the provisions of the Commercial Companies Act.

2- The companies that are not incorporated under the Law on Commercial Companies and are wholly or partially owned by the Federal Government or the local government and whose incorporation, their instrument of incorporation or their articles of association provide that they are subject to the provisions of this Legislative Decree.

3- The companies and establishments in the free zones that are not subject to any special provisions on the procedures of preventive settlement, restructuring or bankruptcy, taking into account the provisions of Federal Law No. (8) of 2004 on financial free zones.

4- Any person with the capacity of a merchant according to the provisions of the law.

5- Licensed civil companies of a professional nature. “

Applicability of Article 2 to UAE Airlines

UAE airlines may be subject to bankruptcy law if any aspect of Article 2 applies to them; in practice this is likely to mean either Article 2 (2) or Article 2 (4):

(i) if they have made the relevant “opt-in” clause of the Bankruptcy Act in their memorandum and articles of association of any other related law (pursuant to Article 2 (2)); or

(ii) if they could or would qualify as “dealers” (pursuant to Article 2 (4)) on the basis that airlines are acting as commercial units. However, the Arabic text of the Bankruptcy Act questions whether Article 2 (4) applies to both legal entities and individuals, or only to the latter.

Procedures and audits according to bankruptcy law

The processes

When the Bankruptcy Act applies, it provides three procedures:

(i) Preventive Composition Procedure (“PCP”) (under Chapter 3 of the Bankruptcy Act): A debtor-led process aimed at bailing out troubled businesses by helping them reach a court-supervised settlement with their creditors. While the debtor retains the right to conduct the business during this process, supervision is taken over by a court-appointed trustee.

(ii) Bankruptcy (according to Chapter 4 of the Bankruptcy Act) itself is divided into two separate processes:

(A) a reorganization and reorganization proceeding (restructuring): A court-approved reorganization plan in which a debtor is insolvent but the court determines that their business can be bailed out (e.g. a return to viability could be and be possible within a reasonable period of time Sufficient assets to cover the restructuring); and

(B) a formal liquidation and distribution procedure: if the answer to either bankruptcy test is “yes” and the debtor concerned has stopped paying their debts for more than 30 consecutive days “due to instability in… financial position or accounts receivable“(Article 68 paragraph 1), the latter is considered insolvent and the Bankruptcy Act obliges them to file for bankruptcy within 30 days of one of the two bankruptcy tests (pursuant to Article 68). An application to open insolvency proceedings under the Insolvency Act can (in addition to the debtor himself), a creditor or creditors with a debt of at least AED 100,000 owed to them (under certain conditions), any competent regulatory body and public prosecution of the application are in the public interest.

Bankruptcy tests

In order to determine which procedure is to be used, the Insolvency Act provides for the following two tests (together the “insolvency tests”):

(i) Has the company stopped paying due debts for more than 30 consecutive days?

(ii) Do the company’s assets not cover its liabilities?

The aim of the insolvency tests is to encourage troubled companies to restructure at an early stage.

Recent changes to the insolvency law to deal with the “emergency financial crisis”

It is worth noting that the Amending Act has added a new chapter to the Insolvency Act with the title “Chapter 15 bis – Bankruptcy Proceedings During the Emergency Financial Crisis“. This chapter covers times of serious financial distress, such as the Covid-19 pandemic.

“Emergency financial crisis” is defined as “A general situation that affects trade or investment in the country, such as a pandemic, natural or environmental disaster, war, etc.“. Although the Amending Act includes a definition, it still provides for the UAE cabinet to determine when such a situation will occur and the period of time for it, which suggests that a UAE cabinet decision is required before a party decides can invoke and invoke the provisions of Chapter 15 of the Amending Act.

A detailed analysis of Chapter 15bis is beyond the scope of this note.

Sovereign immunity

We would also like to point out that although there is no concept of immunity to states under UAE law, Article 247 of the UAE Code of Civil Procedure a general prohibition on enforcement against “public property of the state or one of the emirates“. Similarly, Article 106 of the Cabinet Decision prohibits the attachment of any public or private property owned by the UAE or one of its emirates. Losses of immunity from enforcement, attachment or other legal proceedings may not be valid or binding under UAE law and there is a possibility that such waivers could be lawfully revoked. However, a counterparty and its assets (if, in an official capacity, are or will be directly or indirectly owned by the government or a ruler of an emirate) are considered assets within the meaning of the law of the United Arab Emirates.

In our experience, governments tend to take a commercial view of this issue and are therefore unlikely to seek immunity given the potentially damaging economic impact. In fact, it is common practice for government agencies to resolve disputes rather than engaging in proceedings that risk reputational damage.

Practical implications

From a purely practical point of view, given the amount of government funding available to airlines in the United Arab Emirates, we believe it is very unlikely that any of them will go bankrupt, let alone be forced into bankruptcy proceedings.

As mentioned above, there is a chance that some of these airlines could argue that the bankruptcy law does not apply to them because of the way the bankruptcy law is written.

In any case, many of them are funded by the government and would likely be bailed out anyway, as most recently the reported $ 4.8 billion ($ 4.1 billion) of which was distributed through direct cash injections to help the airlines that increased cope with the financial risks they have been exposed to due to the wider impact of the Covid-19 pandemic on the aviation industry.

Even if they weren’t bailed out, the government could theoretically try to amend the bankruptcy law to treat claims against them favorably. In 2009, for example, the Emirate of Dubai set up a tribunal to settle claims against Dubai World and its subsidiaries. Dubai World was able to reach an agreement with its creditors to restructure their debts, with the funds coming from a bailout from the Dubai government. However, there is no formal obligation for the government of the United Arab Emirates (nor the government of Dubai) to do so, despite the fact that the Crown Prince of Dubai announced in March 2020 that the government of Dubai is fully of its support of its airlines due to the Covid-19 pandemic crisis.

CONCLUSION

While the introduction of the bankruptcy law is a long-awaited change in the legal landscape in the United Arab Emirates, its applicability to airlines in the jurisdiction is still unclear and untested to this day.


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