Financial Restructuring MENA, Abu Dhabi: a wish list for the future

Specialist insolvency judges, greater clarity on the priority status of new money and better understanding and cooperation between onshore and offshore regimes: speakers from law and advisory firms, funds and banks in the Middle East provided food for thought for future restructuring reforms in the UAE and Saudi Arabia.

Opening a two-day event held in Abu Dhabi’s financial freezone, the ADGM, on 15 and 16 March, Bruno Navarro, managing director at UAE restructuring boutique Ipso Facto, remarked how much the restructuring infrastructure in the Middle East has changed in the few years since the Emirates enacted its first bankruptcy law in 2016 and Saudi Arabia followed suit in 2018.

Just 13 years ago there were only two international law firms offering restructuring advice in the region, Allen & Overy and Clifford Chance, Navarro recalled.

Now debtors and creditors have the “luxury” of a multitude of advisers to choose from and the restructuring environment has been maturing, particularly in Saudi where the number of filings under the new bankruptcy law has vastly outpaced the UAE, he said.

Abdullah Almogheerah, the secretary general of Saudi Arabia’s Bankruptcy Commission, told the audience in opening remarks that 135 financial restructuring processes have been commenced under the new law in total, with 43 proposals ratified so far.

Almogheerah said the Kingdom of Saudi Arabia had also enacted three new laws to support its bankruptcy regime, including a rule on cross-border insolvency on 16 December, a modernised Companies Law last July, a new evidence law in January 2022. He noted that another law, on torts and properties, is in the works.

Navarro welcomed the presence of distressed funds looking to develop a secondary debt market in the region and noted that litigation financiers had started to take an interest too. Burford Capital opened its first office in the Middle East in Dubai last month.

Meanwhile, Navarro said major test cases in the region – such as the restructurings of healthcare group NMC and related investment group KBBO in the UAE, and construction group Azmeel Contracting and conglomerate Ahmad Hamad Al-Gosaibi & Bros (AHAB) in Saudi Arabia – had provided valuable lessons.

Restructuring practitioners on the creditors’ and borrowers’ side largely agreed with Navarro on the progress that had been made, while listing some key changes they said would help the UAE and Saudi Arabia improve their restructuring ecosystems.

In a panel that took place under Chatham House rule, one speaker reflected on the NMC restructuring, which was completed by continuing the healthcare group’s onshore incorporated entities in the ADGM and road testing its administration and deed of company arrangement processes for the first time.

Based on English and Australian law, the main proceedings in the ADGM had all the attributes necessary for a successful restructuring, the speaker said – but there was a lack of understanding of the process from external stakeholders and some creditors sought to sue NMC in Dubai and other jurisdictions.

One creditor, Noor Capital, is still alleging there is a conflict of jurisdiction between the ADGM and Dubai courts in the Federal Supreme Court of the UAE.

The speaker said the merging of onshore civil law systems with the offshore common law systems in the UAE had “naturally” created a holdout for legacy creditors who had been quick to take advantage. They suggested a memorandum of understanding for better onshore and offshore recognition between the ADGM and Dubai would help encourage a going concern culture, more new money investments and fewer value-eroding litigations.

That same speaker also said the UAE would benefit from specialist insolvency judges, suggesting the possibility of setting up a tribunal with judges across the emirates. Tough, complex insolvency cases need experienced judges they noted – but they said the treatment of debtors across the UAE is currently a “lucky dip” depending where their assets.

A delegate from the floor went much further, stating that inexperienced judges in the region had “destroyed” some critical cases, not through bad faith but lack of experience.

Amir Ahmad, a partner at Reed Smith in Dubai, argued in a panel on driving successful restructuring in volatile markets that local courts need to be educated on how moratoriums work and why. The fact that a moratorium in one of the seven emirates or two financial free zones does not automatically apply in another “needs to be overhauled” he said, lending his support to the idea of an MoU.

But Ahmad also reasoned judges should be cut “a bit of slack” given the UAE’s law was only enacted in 2016. He said there has been a “complete mind shift” with “seismic changes and improvement” in the sector in the last 15 years and noted judges from France and the Netherlands have been lending their civil law expertise to the UAE’s judiciary in applying the new regime. 

Speaking about his experiences on the 14-year-long process AHAB is still pursuing in Saudi as part of a fireside chat, Simon Charlton, the group’s chief restructuring officer, said local legislation would benefit from clarity on finality to prevent recalcitrant holdouts.

He explained that a judge interpreting article 68 of the Saudi bankruptcy law left open the possibility creditors who were not admitted into a financial restructuring process could come back later and make a claim.  

In one particular case, Charlton said, a creditor sued, lost, appealed, lost, filed a bankruptcy procedure, lost, appealed that and had the appeal rejected, before filing proceedings in a foreign jurisdiction. “Will that claim be successful,” he pondered, questioning whether Saudi FRP proceedings would be recognised in the UAE too.

Discussing the NMC-linked KBBO case, one panelist complained that the UAE Ministry of Finance’s Financial Reorganization Committee (FRC) – an ad hoc group of nine individuals that administers applications for out-of-court workouts – has no judicial power and can’t impose a stay on creditors.

Describing the FRC as a “fantastic tool” that brought some “serenity” into the dialogue in KBBO, the speaker said they wished it could “get some teeth” as unfortunately, all it can do is ask banks to refrain from litigation and hope to enforce that by good will.

One or two members of the audience criticised well-capitalised regional banks for driving a very tough bargain on debtor-in-possession financing, and not lending enough support to restructurings.

Another panelist on the KBBO session reflected that one issue that needs to be tackled is the security status of new money funders, because there is currently no way to create super senior security under the UAE’s bankruptcy law unless everyone agreed to it, as in NMC.

Delegates heard how the UAE’s finance minister is working with the World Bank to improve the drafting of the UAE’s bankruptcy law and clarify that new money gets priority.

Personal guarantees issued by the shareholders in large family-run groups also came under heavy criticism, despite being common practice in Middle East financings.

One speaker called them a “bad banking practice” and reminded the audience that they are not backed by rights in rem, so while they can be a leverage tool, they are not a recovery avenue.

They added the UAE’s Central Bank is starting to question whether banks can rely on personal guarantees, and advised lenders to grant loans based on a company’s merits not the name behind the personal guarantee – because when everybody has a personal guarantee from a prominent figure, nobody has one.

During the last panel of the two days, Deloitte director Thomas Bullock who is based in Dubai said personal guarantees often persuade banks to pursue bilateral litigation that doesn’t serve a rehabilitation culture.

Bullock said that as long as such guarantees are still considered a means of long-term return, debtors will have a challenge hanging over them. A lot of the banks pursuing such litigations were not seeing the success they expected on the back of the personal guarantees, he added.

At least Saudi Arabia had witnessed creditor-led financial restructuring processes, which was not happening in the UAE, he said.

Charlton predicted that name lending would die out as many Saudi family businesses are split through the generations. At present, he said, getting the family to accept a restructuring deal is as hard as the lenders. “I know when it’s a good deal because everybody is unhappy,” he joked.