DIFC Courts refuse to recognise proceedings under onshore UAE Bankruptcy Law

Justice Cooke's decision (outlined below) is an important reminder that the Model Law can only be relied on in specific circumstances and confirms the DIFC Courts as an appropriate choice of forum when potentially facing a dispute with distressed debtors, especially those who are individuals. 

The key practical considerations arising from this case are:

• Parties litigating against an individual (such as a personal guarantor) in the DIFC Courts can take some comfort that, should the individual commence restructuring/bankruptcy proceedings in another jurisdiction, the individual is not entitled to rely on the procedures set out in the Model Law to seek a stay of or derail proceedings in the DIFC Courts. 
• Parties may therefore wish to consider to confer exclusive jurisdiction on the DIFC Courts in any personal guarantees entered into with individuals with extensive assets in the Middle East. 
• When commencing restructuring /bankruptcy proceedings in the UAE, parties should be mindful of who is the 'debtor' for the purposes of those proceedings. It is not possible to rely on the mere joinder of other parties to those proceedings to justify that 'foreign proceedings' are on foot for the purposes of recognition in the DIFC Courts. 
• When bringing or defending an application under the Model Law, parties should be aware of the scope of the trustees' mandate. Anything that falls short of a Court order to administer the reorganisation or the liquidation of a debtor's assets will not meet the criterion for recognition in the DIFC.  For example, an order that simply authorises a process that might lead to a reorganisation or liquidation is insufficient.

The Model Law defines a 'foreign representative' as a person or body, including one appointed on an interim basis, authorised in a 'foreign proceeding' to administer the reorganisation or the liquidation of the debtor's assets or affairs or to act as a representative of the foreign proceeding.

Justice Cooke, in his analysis, considered the scope of the Trustees' appointment in the AD Proceedings. As part of this analysis he considered the terms of the Commencement Order and found that no order had been made for any reorganisation or liquidation by the Abu Dhabi Court. Rather, the Trustees' function was 'preparatory' in nature and limited to putting forward proposals for restructuring for the approval of the creditors and the Abu Dhabi Court on the basis of information gathered by them in relation to the assets and liabilities of the Debtor, with a list of creditors where liability is accepted or disputed. [5]

It follows, the Trustees' role does not extend to administering any reorganisation or liquidation until such time as any proposal is accepted and/or an order to this effect is made by the Abu Dhabi Court.  Whilst his Honour's findings on this point were unequivocal, the Judge did note that there were more fundamental issues with the Claim, which we consider in detail below. 

Article 117(3) of the DIFC Insolvency Law states that the Model Law has force in the DIFC in respect of Foreign Companies.  The Judge found that the operation of the Model Law in the DIFC is therefore restricted to Foreign Companies and does not apply to individuals. As a consequence, Justice Cooke found the Model Law provisions set out in the DIFC Insolvency Law cannot apply to the Debtor, who is an individual. 

As the Model Law does not apply to individuals (such as the Debtor) the question arose as to whether it applied to the Joined Litigants (which included 28 companies).  

As outlined below, the characterisation of the 'Debtors' and the 'Joined Litigants' in the AD Proceedings and the subsequent Commencement Order was of critical importance to Justice Cooke's reasons for deciding the AD Proceedings were not 'foreign proceedings' for the purposes of the Model Law.

The Model Law defines 'foreign proceeding' as 'a collective judicial or administrative proceeding in a foreign State, including an interim proceeding… in which proceeding the assets and affairs of the debtor are subject to control of supervision by a foreign court, for the purposes of reorganisation or liquidation'.

In his reasons, Justice Cooke drew a distinction between the Debtor and the Joined Litigants, noting that the Joined Litigants did not apply to the Abu Dhabi Court for restructuring or liquidation as debtors and were not recognised as such in the AD Proceedings. [6] The UAE Bankruptcy Law permits the joinder of persons whose assets overlap with a debtor's assets in a way which is hard to desegregate.  Following this reasoning, his Honour found that the Joined Litigants were not classified as insolvent debtors petitioning for restructuring or liquidation; they had simply been joined because of an overlap of assets. [8]

It follows, the Trustees could not assert that the Joined Litigants (all but one of which are companies) were 'debtors' for the purpose of the definition of 'foreign proceeding', which refers specifically to a proceeding where the assets and affairs of 'the debtor' are subject to control or supervision by a foreign court.  Therefore, his Honour found that the DIFC Court could not recognise the AD Proceedings, even if they had been brought by a 'foreign representative' (which, as noted above, his Honour found they were not). [9]

The Court's decision on this point serves as an important lesson that the Model Law can only be invoked to recognise 'foreign proceedings' involving companies and not individuals. It follows, where proceedings have been commenced against an individual in the DIFC Courts (such as a high net worth personal guarantor), creditors can take some comfort in the knowledge that should that individual apply to commence restructuring or insolvency proceedings in another jurisdiction, they cannot rely on the Model Law to have those proceedings recognised and to stay the DIFC Court proceedings. 

Other key findings: 

1. The DIFC Courts are the appropriate forum to determine forgery allegations 

Both the Debtor and one of the Joined Litigants have asserted in DIFC Court proceedings that the personal guarantees allegedly given by them were the subject of forgery and therefore are not valid. 

Justice Cooke noted in his decision that issues of forgery can only be appropriately decided, if genuinely in dispute, by the court process. [10] His Honour went further and confirmed that in these circumstances the DIFC Courts are the preferable forum to determine allegations of forgery. This point is made by his Honour in no uncertain terms. He says: "there can be no doubt in the mind of any objective observer that this Court is better equipped to determine issues of forgery with the benefit of disclosure, cross examination and expert evidence". [11]

Therefore, the Court may have been minded to exercise its discretion to lift any stay of proceedings (even if the Claim had succeeded) so as to permit these contested issues of forgery to be determined by the DIFC Courts.

2. The DIFC Court has a broad discretion to grant or lift any stay under the Model Law

Whilst his Honour ultimately found there were no 'foreign proceedings', his Honour did confirm that the Model Law clearly states that upon the recognition of a 'foreign proceeding' that is a 'foreign main proceeding'[12], there is an automatic stay of proceedings concerning the debtor's assets, rights, liabilities and obligations. However, the Court has a discretion to lift an 'automatic' stay.  

In addition, where the Court recognises a foreign proceeding, which is a 'non-main proceeding', the imposition of any stay is discretionary. His Honour noted that in the context of the Court's power to lift the automatic stay or to impose a discretionary stay, the essential criterion to be adopted by the Court is that it must do what is right and fair according to all of the circumstances of the case. [13] This suggests the Court recognises its broad discretion to lift or order a stay, as the circumstances permit. 

3. Stay orders may not be enforceable under the JAL

The Trustees submitted that the DIFC Court should recognise and execute the Commencement Order (and the stay ordered by the Abu Dhabi Court when making the Commencement Order). The Trustees sought to rely on Articles 7(4), 7(5) and 7(6) of the JAL (as well as other DIFC laws) in support of this submission. 

His Honour rejected the Trustees' argument. Article 7(4) of the JAL states "[w]here the subject matter of execution is situated in DIFC, the judgments, decisions and orders rendered by Dubai Courts or Arbitral Awards ratified by Dubai Courts shall be executed by the execution judge of the Courts subject to [certain conditions". 

His Honour found there was no 'subject matter of execution' because the decision of the Abu Dhabi Court to stay proceedings was a procedural decision of that court (not a final and executory decision) which does not have extra-territorial effect in the DIFC and therefore no process of execution can apply. [14]