New DIFC Insolvency Law

The DIFC has introduced a new Insolvency Law (Law No. 1 of 2019) as a means of enhancing and facilitating a more efficient and effective bankruptcy regime within the free zone. The new law was enacted on 30 May 2019 and came into force on 6 June 2019.

Rather than a wholesale overhaul of the existing law, new concepts have been introduced to provide debtors and creditors a larger toolkit to deal with insolvency situations. We briefly examine three of these new concepts below.

1. Debtor in possession regime – Rehabilitation

Where the directors of a company consider that it is likely the company may not be able to pay its debts, they can make an application to the court and submit a rehabilitation plan. Rehabilitation allows the debtor to remain in control and continue to manage its business and assets as the directors are authorised to continue managing the company’s affairs. The board of the company shall appoint one or more insolvency practitioner(s) as rehabilitation nominee(s).

The critical benefit is that, unless otherwise ordered by the court, an automatic moratorium of 120 days shall immediately apply to all creditors, thus preventing any enforcement proceedings against the debtor. Further any termination provision in any contract linked to insolvency of the debtor shall cease to have effect during the moratorium period.

In that period, the creditors are invited to consider the plan and if at least three quarters in value of any class of creditors or shareholders agree to the rehabilitation plan and it is sanctioned by the court, then the plan shall become binding on all persons within such class. However, the law also provides for a ‘cram down’ mechanism that can apply across the classes of creditors in certain circumstances adding additional flexibility to the procedure favourable to the debtor.

2. Appointment of Administrator in cases of mismanagement

An interesting new feature is the introduction of an independent Administrator role. Where an application for rehabilitation has been made and there is evidence of misconduct, one or more creditors may make an application for the appointment of an Administrator. The Administrator, on appointment, facilitates the insolvency process of the insolvent company.

3. Adoption of the UNCITRAL Model Law:

The new law also incorporates the UNCITRAL Model Law which is designed to assist in cross-border insolvency proceedings in cases involving companies which have assets or creditors in more than one country.

The UNCITRAL Model Law applies where:

  • assistance is sought in the DIFC in connection with foreign proceedings; or 
  • assistance is sought in a foreign country in relation to proceedings under the DIFC Insolvency Law; or 
  • foreign proceeding and proceedings under the DIFC Insolvency Law are taking place concurrently; or
  • creditors or other interested persons in foreign countries are interested in commencing or participating in proceedings under the DIFC Insolvency Law.

New regulations were implemented alongside the new law and came into force on 13 June 2019. The additions to the regulations support the amendments to the DIFC Insolvency Law such as adding in procedures regarding rehabilitation, details of bonding arrangements for insolvency practitioners.

The new law and regulations introduce the latest insolvency procedures to modernise a law that was only 10 years old. This reflects the DIFC’s ability to stay at the forefront of global best practice in order that the free zone remains one of the premier financial hubs.

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