GCC Quarterly Review - Q3 2018

DIFC proposes new insolvency regime: The Dubai International Financial Centre (DIFC) is consulting on a new insolvency regime, to replace the current Insolvency Law No.3 of 2009 and the Insolvency Regulations. The reform is intended to modernise and streamline procedures. The current regime is largely based on the insolvency regime in the United Kingdom. It comprises company voluntary arrangements, receivership and winding up procedures. Currently, there are no formal restructuring procedures.

Key proposals include:

• a new rehabilitation procedure for debtors in financial difficulty, primary objective of which is to rescue the debtor. This new court-supervised, debtor-in-possession procedure is available to a debtor which is or is likely to become unable to pay its debts and there is a reasonable likelihood of a successful rehabilitation plan being reached between the debtor and its creditors and shareholders. It features a moratorium, a cram down mechanism and the ability for a debtor to obtain new secured or unsecured funding with court approval. Should the court decide not to sanction the plan, the debtor will be wound-up.;
• a new administration procedure. A court application for administration can be made only by a creditor or creditors, where the debtor is in a rehabilitation procedure and there is evidence of fraud, dishonesty, incompetence, mismanagement, or a specified offence having been committed. Any person having the right to appoint an administrative receiver may object. The court may approve the application if:
  • - the debtor is or is likely to become unable to pay its debts; and
  • - the appointment of an administrator would be likely to achieve one or more of the specified purposes, such as the approval of a rehabilitation plan, a voluntary arrangement or a scheme of arrangement or to assist in the protection of assets.
  • An administrator will then manage the business and assets of the debtor and a moratorium will be imposed. Alternatively, the court may dismiss or adjourn the application, or make any other order that it thinks fit, including a winding up order;
• amendments to the rules governing voluntary and compulsory winding up procedures;
• a new mechanism allowing a liquidator to disclaim onerous property; and
• a new provision incorporating the UNCITRAL Model Law on cross border insolvency proceedings into the DIFC law (with modifications), including in relation to the recognition of foreign proceedings. This is particularly important given the prevalence of international companies operating in the DIFC. This enhances the existing provisions relating to assisting foreign insolvency proceedings.

These developments form part of a regional wave of insolvency reform - including in the UAE, the Abu Dhabi Global Market (ADGM) and Saudi Arabia - as many jurisdictions have sought to modernise their insolvency legislation to encourage the development of a rescue culture. We have issued a series of notes on the UAE Bankruptcy Law in which we provide an overview of its main features. This series is available via our Knowledge Portal. Read more about the insolvency regime in Saudi Arabia in our previous issue.

Saudi Arabia issues implementing regulations under new bankruptcy law: New implementing regulations have been issued by the Cabinet under the new bankruptcy law (Royal Decree No. M/05 dated 28/05/1439H (13/02/2018G)) in Saudi Arabia. Largely governing procedural matters, the Cabinet Resolution No.(622) dated 24/12/1439 AH provides further detail on the different procedures; preventative settlement, reorganisation and liquidation. The matters addressed by the regulations include the opening of proceedings and filings with the court, creditor claims, notifications, the role and qualifications of trustees, the creditors’ committee, voting on a plan proposal, the impact of the proposal on contractual rights, the moratorium (and extensions to the stay period), debtor reports on the progress of implementation of a plan, priority issues and set-off. Read more about the new Saudi Arabian bankruptcy law.

ADGM consults on bank recovery and resolution regime: The ADGM is proposing to enact a new regime for ADGM financial institutions experiencing financial difficulty, as an alternative to winding up pursuant to ADGM’s Insolvency Regulations 2015. The draft ADGM Bank Recovery and Resolution (BRR) Regulations (and amendments to other existing ADGM regulations) are set out in Consultation Paper No.5 of 2018. The draft BRR Regulations draw on the Financial Stability Board’s (a body created and mandated by the G-20) “Key Attributes on Effective Resolution Regimes for Financial Institutions” and related guidelines, together with the European Union’s Bank Recovery and Resolution Directive.
The regime will apply primarily to ADGM entities which accept deposits (Islamic or conventional), trade in investments on a proprietary basis or provide clearing services. Key features include:

• recovery and resolution planning: those entities whose risk profile meets specified criteria may be compelled to engage in recovery and resolution planning. Broadly, this will be the case for entities whose failure would have a significant adverse impact upon confidence in ADGM, its economy, reputation, or the financial system. Court approval may be required;
• early intervention: the Financial Services Regulatory Authority (“FSRA”) has the power to direct an entity to take action to remedy any deterioration of its financial and economic situation, including where compliance with minimum capital requirements is threatened. Early intervention powers include, for example, the power to compel the management to take steps to halt the deterioration, including by convening a meeting of shareholders to consider restructuring measures, or to require the removal and replacement of management; and
• resolution tools: the FRSA has a range of tools that it may use where an entity is failing, however these are not as extensive as in other jurisdictions. These tools include the ability to write‐down or convert debts (to the extent necessary to recapitalise or resolve that institution), compel the delivery of information, replace management, temporarily suspend payment or delivery obligations, temporarily stay the enforcement of security and require that critical arrangements continue by suspending default rights. These measures may be used on a standalone basis to restore the viability of the entity, or as a precursor to the transfer of the shares or assets of a failing institution to a third‐party purchaser. As a general principle, no creditor should be placed in a worse position due to the application of resolution measures than would have resulted if the institution had been wound up.

The DIFC is also considering a bespoke recovery and resolution framework financial institutions in the DIFC, as mooted in the Dubai Financial Services Authority discussion paper on a published in September 2017 (read more). Currently, there is no separate restructuring regime for financial institutions in the ADGM or the DIFC.

DIFC Courts and Smart Dubai to launch world's first “Court of the Blockchain”: The Dubai Government intends to run 100 per cent of applicable government transactions on blockchain by 2020. As part of this strategy, the Dubai International Financial Centre Courts and Smart Dubai, a government initiative, are working together on a new “Court of the Blockchain”. This taskforce is intended to be the first step in “creating a blockchain-powered future for the judiciary” of the DIFC. Dubai has an ambitious agenda to become a world leader in legaltech and judicial innovation.

• Remit of the taskforce: The joint taskforce will explore how to enable more efficient resolution of disputes relating to smart contracts. Its preliminary work will be to explore activation of cross-border enforcement of legal judgments through the blockchain. Future research will focus on building dispute resolution mechanisms into the smart contract code. A central aim is to explore how smart contracts between businesses can be executed using blockchain, with regulation and contractual terms encoded within the smart contract. The joint taskforce intends to model smart contracts across the blockchain incorporating logic to allow for various forms of exceptions and conditions with the aim of supporting more seamless and efficient dispute resolution process in the DIFC.
• Blockchain and smart contracts: Distributed ledger technology – such as blockchain – provides a platform on which smart contracts may be hosted. A smart contract can be defined as a contract whose terms have been reduced in whole or in part to computer code and which is capable of self-executing (in part or in full) on the occurrence of pre-defined triggers. Smart contracts offer the promise of greater speed, cost efficiency, enhanced trust and fluidity of transactions with reduction of ambiguity in contracts. However, the automated nature of smart contracts and the technology which hosts them raise novel dispute resolution issues for lawyers and legal bodies to address. Generally smart contracts remain untested in the courts.
• Dispute resolution issues specific to blockchain: Determining which law applies to a blockchain transaction and the relevant jurisdiction in which to resolve any disputes can be a challenge. There may also be issues around conflict of laws in a cross-border context and enforcing a judgment or award in respect of a digital asset. Also, blockchain-based smart contract transactions are considered to be irrevocable and there is no straightforward technical means to unwind a transaction. The self-executing nature of a smart contract also makes it difficult to provide for discretion on whether to exercise a clause. Getting code to respond to real-life events (such as force majeure) is also challenging. Disputes could also arise around a host of legal technical questions related to smart contracts that still need to be answered. For example, how to ensure a smart contract is properly entered into and executed, how a smart contract could be amended or terminated, how confidentiality can be ensured and how security could be granted over assets via a smart contract.

You can read more about developments in the fintech sector in Linklaters FintechLinks, our new blog from our dedicated fintech lawyers. Click here to view FintechLinks.

ADGM to regulate private financing platforms: The ADGM has consulted on a proposed regulatory framework for operators of Private Financing Platforms (PFPs) in the free zone. Designed to facilitate alternative financing solutions for non‐public start‐ups and SMEs, Consultation Paper No.4 of 2018 proposes to incorporate a new regime for PFPs in the ADGM Financial Services and Markets Regulations 2015 and the ADGM Financial Services Regulatory Authority (FSRA) Rules.

The FSRA intends to introduce a new Regulated Activity of “Operating a Private Financing Platform”. Encompassing both loan financing and investment-based capital raising, the types of financing PFPs may offer range from business-to-business lending to equity crowdfunding. Those wishing to access financing via PFPs must meet the criteria for “Professional Clients”, however there is an exception for “Retail Clients” where certain conditions are met. PFP Operators will be subject to ongoing regulatory requirements including relating to disclosure, safeguarding of client assets, anti-money laundering and counter-terrorist financing and prudential requirements.

Derivative contracts regulated in the UAE: The UAE has introduced new regulations on derivatives (including over the counter (OTC) derivatives), which modernise the existing regulatory landscape. The UAE Securities and Commodities Authority Directors' Decision No. (22/R.M) of 2018 Concerning the Regulation of Derivatives Contracts introduce:

• mandatory reporting of derivatives contracts; and
• a requirement for market participants to clear derivatives through a central counterparty (CCP) licensed by Security and Commodities Authority (SCA).

The precise scope of the regulation is yet to be confirmed. For example, derivative contracts involving benchmark rates such as LIBOR or foreign exchange rates are not routinely cleared through a CCP, however the text of the regulation may be interpreted so as to capture these.

The requirement to clear through a CCP is likely to be prove difficult in practice due to a shortage of SCA-licensed CCPs that are established to clear derivatives. In order to facilitate transactions between EU and UAE counterparties, any locally established SCA-licensed CCP would need to be recognised by the European Securities & Markets Authority (ESMA) in order to be able to offer clearing services to EU counterparties. Currently, only the Dubai Commodities Clearing Corporation is an SCA-licensed CCP that is recognised by ESMA to offer clearing of derivatives, however this recognition does not extend to all categories of derivative contracts.

Banks therefore face a challenge with compliance, both in terms of adjusting their position within 6 months of the regulation in relation to pre-existing derivatives transactions and also planning for future transactions. Derivatives entered into in breach of the regulations are invalid. Were a derivative transaction to be deemed invalid, this may have several negative consequences, including on the Basel III risk-weighting allocation for that position.

Fee change for enforcing against assets in Abu Dhabi Courts: New fees apply in the Abu Dhabi Courts in proceedings to enforce against movable and immovable property via a UAE court-authorised sale by way of a public auction. The new fees, which are likely to increase the costs of enforcement, are set out in Chairman of the Judicial Department of Abu Dhabi issued Resolution No.13 of 2018. The fees are:

• a 5% service fee of the auction sale value for immovable; and
• a 4% service fee of the auction sale value for vehicles and movable property.

Public auction is the typical method of enforcing security in the UAE. Creditors seeking to enforce security over movable assets located in Abu Dhabi which is granted in accordance with Federal Law No.20 of 2016 on the Mortgage of Movable Assets to Secure a Debt may be able to enforce using self-help remedies, without recourse to the Abu Dhabi Courts.

New DFM Investment Funds and REITs rules: The Dubai Financial Market (DFM) has published two new sets of Rules on the Listing and Trading of Investment Funds and Real Estate Investment Trusts (REITs). The DFM is expected to launch a REITs platform soon, as part of its 2021 strategy.

REITs are a rapidly growing asset class in the UAE. The UAE imposes restrictions on foreign ownership of property in the state: REITs allow investors to invest in a stake in real estate without having to directly own the property and enable issuers to raise capital without selling their property.

A Memorandum of Understanding between the DFM and the Dubai Land Department (DLD) is expected to incentivise the REITs market, with specific provisions relating to registration and fee structures for property owned by REITs. There is speculation that a new real estate mortgage law is being considered, which may address issues faced by REITs that are not catered for under the Mortgage Law of Dubai (Law No. 14 of 2008). No further details of the legislative proposals or timescales for reform are available. Currently, the only exchange in the UAE which has REIT listing is Nasdaq Dubai in the DIFC.

Data protection reform in Bahrain: Businesses in Bahrain will need comply with the new data protection law by 1 August 2019. Prior to Law No.30 of 2018 on Protection of Personal Data being enacted in August, Bahrain did not have a comprehensive data protection law. The new law draws on aspects of international best practice, including concepts addressed in the EU General Data Protection Regulation.

A new data protection agency will be established, referred to as the Personal Data Protection Authority. There are restrictions on the processing of personal data, with enhanced restrictions for the processing of sensitive personal data, by a data manager and the data owner must give consent (subject to certain exceptions). There are also restrictions on the transfer of personal data to a recipient located in a jurisdiction outside Bahrain: that jurisdiction must have a sufficient level of protection for that personal data. There may be civil, and unusually in some cases also criminal liability, for breach of the law.