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Cross Border Insolvencies Within One Nation: The UAE Experience

In one of the first expositions by the DIFC Court of the effect of Schedule 4 of the DIFC Insolvency Law, the case confirmed that the UNCITRAL Model Law applies in the DIFC only in relation to corporate insolvency. David Russell QC and David Holloway appeared as counsel.

This case has generated great interest and was recently included as a Case Focus in Lexis Middle East Law Alert March/April 2022. David Russell QC and David Holloway appeared as counsel and have also written a more detailed Case Comment, first published in the MENA Business Law Review 2022 First Quarter.

What happened?

An application was made by Trustees who had been appointed by the Abu Dhabi Court in some insolvency proceedings. The purpose of the application was to bring about a stay, or automatic suspension, of all claims in the DIFC Court involving all parties said to be involved in these Abu Dhabi insolvency proceedings. The application was based on the principle that the DIFC Court was bound to recognise or give effect to the Abu Dhabi insolvency proceedings and stay or pause DIFC proceedings until the Abu Dhabi insolvency procedures concluded. The legal basis for the application was the DIFC Insolvency Law (DIFC Law No. 1/2019) and principles of comity between Courts. Schedule 4 of DIFC Law No. 1/2019 enacts a modified version of the UNCITRAL Model Law on Cross Border Insolvency.

The claims proceedings in the DIFC involved largely, but not solely, claims by a number of banking syndicates for the repayment of loans. The claims were based on underlying loan agreements and a number of personal and corporate guarantees. The application by the Trustees to stay these proceedings was the latest in a series of attempts on their and the Defendants’ part to have the DIFC proceedings stayed.

What was decided?

The application was rejected for a number of legal and practical reasons. Firstly, the Abu Dhabi insolvency proceedings had been commenced by only one of the many parties (who was one of the personal guarantors) who were involved in the DIFC proceedings.

The Judge held that DIFC Law No. 1/2019 and its provisions on recognition of foreign proceedings, applied only to companies and not to insolvency proceedings involving individuals. As the Abu Dhabi proceedings had been commenced by one individual debtor who was also the only person named as a debtor, they related to an individual and were therefore generally outside the scope of the DIFC Law No. 1/2019.

Most but not all of the other defendants in the DIFC proceedings had also been named in the Abu Dhabi insolvency proceedings, but in the DIFC proceedings they were named as joined litigants but not debtors. Therefore, the DIFC Court of First Instance held there could be no basis on which the proceedings could be recognised for those defendants as the principle of recognition could only apply to debtors in the insolvency proceedings and not to any other litigant named in the proceedings.

The Court also found the Trustees had only been appointed to attempt to develop a plan for restructuring the debtor’s business for consideration by creditors. Although the proceedings were capable of recognition within the meaning of DIFC Law No. 1/2019, the Trustees did not have the necessary powers to enable them to be recognised as foreign representatives in respect of the proceedings.

In addition, the court found the evidence presented by the claimant was unsatisfactory, as it did not establish that the parties had their Centre of Main Interests or even an establishment in Abu Dhabi as required by DIFC Law No. 1/2019. The Court could see no good reason why a stay of proceedings could be of practical benefit to the Debtor or their estate. The proposal that any outstanding claims could be determined summarily by the Trustees, particularly as these involved allegations of forgery, without DIFC Court procedures was rejected as unworkable. The Court also criticised the Trustees for their conduct in bringing the application as they had been critical of the previous conduct of the defendants in the DIFC litigation. This weighed against the Trustees in so far as the Court had any discretion in deciding whether to stay the DIFC proceedings. Matters of discretion arose irrespective of whether the proceeding was a foreign main proceeding or a foreign non-main proceeding because in both cases the DIFC Court had the power to lift or impose a stay.

The Court held that the terms of DIFC Law No. 1/2019 meant attempts to effect recognition of foreign insolvency proceedings outside the framework of that Law would face formidable difficulties.

Why is it significant?

This case is one of the first clear opinions by the DIFC Court on the effect of Schedule 4 of DIFC Law No. 1/2019.

It confirms the scope of application of the UNCITRAL Model Law in the DIFC which is that it only applies in relation to corporate insolvencies. The decision also highlights the importance of the DIFC Court’s discretion in deciding whether to offer recognition and assistance to non-DIFC proceedings, including in situations where they are the proceedings of a sister Court in the UAE. It was emphasised that DIFC Courts are likely to look carefully at the conduct of the parties and the practical benefit to the parties when exercising their discretion on whether or not a stay of DIFC proceedings should be granted or continued.

Read the detailed ‘Case Comment’

First published by Lexis Nexis in the MENA Business Law Review 2022 First Quarter, David Russell QC and David Holloway analyse the proceedings and the decision in a detailed Case Comment. Read the full article here.

More information

David Russell QC is an Australian barrister specialising in international trust and tax law. He is admitted to practise in England and Wales, Australia, New York (as a legal consultant) Papua New Guinea, New Zealand and the DIFC Court.

David Holloway is a barrister and arbitrator based in the Middle East. He has over 20 years’ experience as counsel specialising in international trade law and international arbitration. He is a panel arbitrator with several international institutions. He is a licensed advocate with the ADGM Court and the DIFC Court and has been instructed as counsel in significant cases involving the laws of the Middle East.

To find out more or instruct David or David, contact Matt Sale on +44 (0)20 7427 4910 or Sam Carter on +44 (0)203 989 6669 for a confidential discussion.

Legal Blog & Publications, Commercial, Insolvency and Restructuring 8 Apr, 2022

Authors

David Russell KC

Call: 1977 (Australia) Silk: 1986

David Holloway

Call: 1996

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