Restructuring and Insolvency in the Dubai International Financial Centre Bryant B

Pratt’s Journal of Bankruptcy Law Volume 6 Number 3 April/May 2010

Headnote: Dubai Steven A. Meyerowitz 193 Restructuring and Insolvency in the Dubai International Financial Centre Bryant B. Edwards, Timothy N. Ross, and Christian Adams 195 New Light Shed on Important Preference Defense Issue in Delaware: Must New Value Remain Unpaid? J. Gregg Miller 210 The Year in Bankruptcy 2009: Part 2 Mark G. Douglas 215 Shelter From the Storm: Recent Decisions From the Third Circuit and Southern District of New York Confirm the Breadth of Bankruptcy Code Section 546(e)’s Safe Harbor for Transactions Involving the Purchase or Sale of Securities Philip D. Anker and Benjamin W. Loveland 259 Recent Decisions in Saad, Metcalfe, and Condor: Chapter 15 Re-Energized Mitchel Appelbaum, George W. Shuster, Jr., and Melanie J. Dritz 267 How Does Losing the Absolute Right to Credit Bid in a Sale Under a Plan of Reorganization Impact Lenders and Borrowers? Carolyn P. Richter and Sabrina G. Fitze 274 U.S. Supreme Court Upholds Discharge of Student Loan Debt Richard L. Fried and Stephen M. Schauder 284 Editor-in-chief Steven A. Meyerowitz President, Meyerowitz Communications Inc.

BOARD OF EDITORS Scott L. Baena Mark G. Douglas William I. Kohn Bilzin Sumberg Baena Price & Jones Day Schiff Hardin LLP Axelrod LLP Timothy P. Duggan Matthew W. Levin Leslie A. Berkoff Stark & Stark Alston & Bird LLP Moritt Hock Hamroff & Horowitz LLP Gregg M. Ficks Alec P. Ostrow Coblentz, Patch, Duffy & Bass Stevens & Lee P.C. Andrew P. Brozman LLP Clifford Chance US LLP Deryck A. Palmer Mark J. Friedman Cadwalader, Wickersham & Kevin H. Buraks DLA Piper Rudnick Gray Cary Taft LLP Portnoff Law Associates, Ltd. US LLP N. Theodore Zink, Jr. Peter S. Clark II Robin E. Keller Chadbourne & Parke LLP Reed Smith LLP Lovells

Thomas W. Coffey Tucker Ellis & West LLP

Pratt’s Journal of Bankruptcy Law is published eight times a year by A.S. Pratt & Sons, 805 Fif- teenth Street, NW., Third Floor, Washington, DC 20005-2207, Copyright © 2010 ALEX eSOLUTIONS, INC. All rights reserved. No part of this journal may be reproduced in any form — by microfilm, xerography, or otherwise — or incorporated into any information retrieval system without the written permission of the copyright owner. Requests to reproduce material contained in this publication should be addressed to A.S. Pratt & Sons, 805 Fif- teenth Street, NW., Third Floor, Washington, DC 20005-2207, fax: 703-528-1736. For permission to photocopy or use material electronically from Pratt’s Journal of Bankruptcy Law, please access www.copyright.com or contact the Copyright Clearance Center, Inc. (CCC), 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400. CCC is a not-for-profit organization that provides licenses and registration for a variety of users. For subscrip- tion information and customer service, call 1-800-572-2797. Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., 10 Crinkle Court, Northport, NY 11768, [email protected], 631-261-9476 (phone), 631-261-3847 (fax). Material for publication is welcomed — articles, decisions, or other items of interest to bankers, officers of financial institutions, and their attorneys. This publication is designed to be accurate and authoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher. POSTMASTER: Send address changes to Pratt’s Journal of Bankruptcy Law, A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC 20005-2207. ISSN 1931-6992 Restructuring and Insolvency in the Dubai International Financial Centre

Bryant B. Edwards, Timothy N. Ross, and Christian Adams

The Dubai International Financial Centre (the “DIFC”) is a federal financial free zone which has been granted authority to self-legislate in civil and commercial areas. An amendment to the UAE Constitution and a resulting federal law concerning financial free zones have allowed the government of Dubai to create a legal framework based on best practices of leading jurisdictions in Europe, North America and the Far East. The laws of the DIFC (“DIFC Law”) are enacted by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and under the UAE Constitution, are considered at the level of local legislation. DIFC Law provides a framework for the reorganization and liquidation of insolvent companies. The DIFC regime remains largely untested as there has yet to be a major corporate insolvency within the jurisdiction. This article provides an overview of the legal framework within the DIFC, the various insolvency procedures contained therein, and the key issues to be considered by company directors in an insolvency or potential insolvency scenario.

he DIFC Insolvency Law (DIFC Law No.7 of 2004) (the “Insol- vency Law”) sets out the procedures that result in the reorganiza- Ttion or liquidation of an insolvent company. The Insolvency Law provides for company voluntary arrangements, company receivership and both voluntary and involuntary winding-up procedures.

the Insolvency Law is supported by the DIFC Insolvency Regulations (the “Regulations”) and Article 14 of the DIFC Code (the “Code”). The Regulations are enacted pursuant to Article 116 of the DIFC Companies Law (DIFC Law No (3) of 2006, the “Companies Law”) and Article 93 of the Insolvency Law. The Code was enacted for the purposes of consoli- dating, standardizing and harmonizing the laws applicable in the DIFC. Consolidation under the Code has not resulted in the amendment of any substantive provision of the Insolvency Law or the Regulations. The Code merely seeks to make the Insolvency Law easier to read and reference. To the extent that any conflict or inconsistency exists between the Code and the Insolvency Law, the terms of the Code shall prevail. the DIFC published a draft update of the Insolvency Law and Regu- lations for consultation purposes in November 2008. The consultation period ended on 13 December 2008 and we understand that, subject to the Ruler’s approval, the revised Insolvency Law and Regulations will be enacted shortly. The updated Insolvency Law and Regulations, if enacted in the form published for consultation purposes, would not materially change the analysis of the DIFC restructuring and insolvency regime as set out in this article. the Insolvency Law is applicable to any company under the jurisdiction of the DIFC and incorporated under the Companies Law (a “Com- pany”). In addition, Part 6 of the Insolvency Law contains provisions dealing with “recognized” and “foreign” companies. Where a foreign company (being a Company incorporated in any jurisdiction other than the DIFC) is the subject of insolvency proceedings in its jurisdiction of incorporation, the DIFC court (the “Court”) shall, upon request from the court of that jurisdiction, assist the foreign court in the gathering and remitting of assets maintained within the DIFC. A recognized company (being a foreign company which is registered to carry on business in the DIFC) may be

Bryant Edwards is Office Managing Partner of Latham & Watkins’ Middle East offices. Timothy Ross is a finance partner located in the firm’s Dubai office. Chris- tian Adams is an associate in the firm’s Dubai office. The authors can be reached at [email protected], [email protected], and [email protected].

196 Restructuring and Insolvency in Dubai wound up in circumstances where it has been dissolved, deregistered or otherwise ceased to exist in its jurisdiction of incorporation. to the extent that there are any gaps in the Insolvency Law, it seems likely that the DIFC Court would consider foreign law when interpreting provisions of the Insolvency Law. DIFC Law (that is to say all of the laws in force in the DIFC rather than just the Insolvency Law) specifically provides for a hierarchy of applicable law for any civil or commercial matter as follows:

• the laws in force in the DIFC; • the laws of any jurisdiction other than that of the DIFC expressly cho- sen by any DIFC Law; • the laws of any jurisdiction as agreed between the contracting parties; • the laws of the jurisdiction that appears to the Court or the arbitrator to be the one most closely related to the facts and the persons concerned in the matter; and • the laws of England and Wales.

Insolvency Procedures Company Voluntary Arrangements Commencement Directors of a Company may make a proposal to its members and its creditors for a scheme of arrangement of its affairs (a “Voluntary Arrange- ment”). In such circumstances, the directors will appoint a DIFC registered insolvency practitioner as “nominee” to act in relation to the Volun- tary Arrangement and supervise its implementation. The directors must provide the nominee with a proposal that must include information on a wide-range of matters including: assets that will be included in the Volun- tary Arrangement; any security provided by the Company; the manner in which it is proposed to deal with liabilities; creditors (preferential, secured and unsecured); and whether the directors are aware of any transactions which would be classified as preferences, transactions at an undervalue or

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invalid security interests if the Company were to go into liquidation. The directors must also provide the nominee with a certified statement of the Company’s affairs. the nominee will then summon a meeting of the Company’s creditors to consider the directors’ proposals and choice of nominee. The Voluntary Arrangement will be accepted if 75 percent or more in value of the creditors present and voting (in person or by proxy) on the resolution vote in favor. If approved, the Voluntary Arrangement will bind all creditors who had notice of, and were entitled to vote at the meeting (whether or not they were present or represented). It is not possible to approve a proposal which affects the rights of any preferred or secured creditors without their prior approval.

Implementation of Proposals upon approval, the nominee shall be appointed as the “supervisor” for the purposes of implementing the steps of the Voluntary Arrangement (unless a majority in value of creditors present at the creditors’ meeting resolves to appoint an alternative supervisor(s)). In implementing the proposals, the supervisor may apply to the DIFC Court for directions in relation to any particular matter arising under the Voluntary Arrangement or may apply to the DIFC Court for a winding-up or receivership order in respect of the Company. Any of the Company’s creditors or any other person dissatisfied by any act, omission or decision of the supervisor may apply to the DIFC Court for a confirmation, reversal or modification of the supervisor’s actions. the supervisor is required to keep detailed accounts and records of his actions and dealings, including records of all receipts and payments of money. At least once every 12 months the supervisor must send a report detailing such actions, receipts and payments to the Court, the Registrar of Companies, the Company, the Company’s creditors bound by the Volun- tary Arrangement and the members of the Company. within 28 days of completing the implementation of the Voluntary Arrangement, the supervisor shall send a notice to the Court, the Registrar of Companies and all of the Company’s creditors bound by the proposals

198 Restructuring and Insolvency in Dubai confirming that the Voluntary Arrangement has been fully implemented. Attached to such notice shall be a final report of the supervisor detailing all receipts and payments made by him in connection with the Voluntary Arrangement and explaining any departure from the original proposals. Upon receipt of said notice and report by all parties, the supervisor shall be permitted to vacate office.

Moratorium Application Directors of an “eligible company” may instruct the nominee to apply to the Court for an order granting a moratorium. Such application can be incorporated into the Voluntary Arrangement proposal document and should be supported by a statement of the directors as to why the moratorium would benefit the general body of the Company’s creditors together with any other relevant documentation.

Eligible Companies regulation 3.4.2 excludes certain Companies from applying for a moratorium, the most relevant of which are: any Company already subject to any insolvency procedure; any Company which has incurred a liability under an agreement of US$20,000,000 or more; or any Company which is party to certain secured or structured capital market arrangements.

Effects If the Court grants the application for a moratorium, then within the jurisdiction of the DIFC and during the period in which the moratorium is in force: no petition may be presented for the winding up of the Company; no meeting of the Company may be called except with the consent of the nominee or leave of the Court; no resolution may be passed or order made for the winding up of the Company; no administration application may be made or no administrator or administrative receiver may be appointed in respect of the Company; no landlord or other person to whom rent is payable may exercise any right of forfeiture in relation to any premises let to the Company except with leave of the Court; no other steps may be

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taken to enforce any security over the Company’s property, or to repossess goods in the Company’s possession under any hire purchase agreement, except with leave of the Court; and no other proceedings and no execution or other legal process may be commenced or continued, and no distress levied, against the Company or its property except with leave of the Court. there are certain additional effects of a moratorium, most notably in respect of the Company’s ability to apply for credit, make disposals and make payments during the period in which the moratorium is in force. The additional effects are set out in Regulation 3.7 but not discussed further in this article.

Receivership Appointment and Powers In circumstances where a creditor of a Company appoints a person to sell any part of the Company’s property or assets and use the proceeds of sale to discharge the Company’s debt(s) to that creditor, such appointed person is referred to as a “receiver.” A creditor may only appoint a receiver if it has been granted specific power to do so in an instrument executed by the Company (i.e. a credit agreement). Where the property over which the receiver is appointed consists of all or substantially all of the undertaking of the Company, the receiver shall be referred to as an “administrative receiver.” The powers of an administrative receiver are set out in Part 3 and Schedule 2 of the Insolvency Law. Most significantly, an administrative receiver has the power to:

• take possession of the property and assets of the Company; • sell or otherwise dispose of the property of the Company; • raise or borrow money and grant security over the property of the Company; • do all acts and execute in the name and on behalf of the Company any deed, receipt or other document; and • do all such other things as may be necessary for winding up the Com- pany’s affairs and distributing its assets.

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an administrative receiver may dispose of charged property in circumstances where the Court is satisfied that such disposal is likely to pro- mote a more advantageous realization of the Company’s assets than would otherwise be effected. The Court may, by order, authorize the disposal of such property as if it were not subject to any security interest. Any such order will be conditional upon the proceeds of disposal being applied to- wards the discharge of the secured debt(s).

Reporting Obligations and Resignation within three months of his appointment, an administrative receiver shall circulate a report to all of the Company’s creditors detailing the events leading up to his appointment, the disposal (or proposed disposal) by him of any property of the Company, the carrying on (or proposed carrying on) by him of any business of the Company, the amounts of principal and interest payable to debenture holders and preferred creditors, and the surplus (if any) likely to be available for the payment of other creditors. Following the circulation of such report, the administrative receiver shall summon a meeting of the Company’s unsecured creditors on not less than 14 days’ notice to discuss the content of the report. an administrative receiver is also under an obligation to circulate accounts detailing all receipts and payments made during the course of the receivership. Such accounts are to be distributed to the Companies Reg- istrar, the Company, the person who appointed the administrative receiver and the Company’s creditors at least every 12 months, and in any event, within two months of the receiver vacating his position. an administrative receiver may resign and vacate his office by giving not less than seven days’ notice to his appointee, the Company and the Company’s creditors. In addition, a receiver can be removed from office at any time by order of the Court.

Winding-Up The winding-up of a Company may be either voluntary or compulsory. A voluntary winding-up is instigated by the Company and may pro-

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ceed either as a members’ voluntary winding-up or a creditors’ voluntary winding-up. A compulsory winding-up is instigated by the Court.

Voluntary Winding-Up a Company may be wound up voluntarily:

• in accordance with its memorandum and articles of association (e.g. upon expiry of a prescribed term or upon completion of the Com- pany’s stated objectives); • if the Company’s shareholders resolve that it should be wound up voluntarily; or • if the Company’s shareholders resolve that it cannot by reason of its liabilities continue its business.

a voluntary winding-up is deemed to commence on the passing of the shareholder resolution approving the winding-up. The Company shall, from the dates of commencement, cease to carry on its business (however, the corporate status and corporate powers of the Company shall not be extinguished until the Company is liquidated). Any transfer of shares or alteration in the status of the Company’s members made after the commencement of a voluntary winding-up shall be deemed void unless sanc- tioned by the liquidator. If the passing of the resolution to wind up the Company is preceded by a statutory declaration of solvency sworn by a majority of the Com- pany’s directors then the winding-up will proceed as a members’ voluntary winding up. If a majority of the Company’s directors are unable to swear such a statutory declaration then the winding up will proceed as a creditors’ voluntary winding-up. A valid declaration of solvency must be sworn within the five weeks immediately preceding the date of the passing of the resolution to wind up the Company and confirm that, having made full enquiry into the Company’s affairs, the directors (or majority of directors) have formed the opinion that the Company will be able to pay its debts in full as they fall due for the following 12 months. Directors who make the

202 Restructuring and Insolvency in Dubai declaration without having reasonable grounds to do so commit an offence and are liable to a fine of up to US$20,000.

Members’ Voluntary Winding-Up a Company, in a general meeting, will appoint one or more liquidators for the purpose of winding up the Company’s affairs and distributing its assets. Upon appointment of a liquidator, the directors’ powers will cease except to the extent that the liquidator sanctions their continuance. Upon completion of the winding-up, the liquidator shall produce a report detailing the liquidation process and how the Company’s property and assets have been disposed of to be presented to the members of the Company in a general meeting.

Creditors’ Voluntary Winding-Up a Company shall call a meeting of all of its known creditors to be held no more than 14 days after the date on which the winding-up resolution is passed by the shareholders. The Company shall also propose a person to act as liquidator. However, if the creditors resolve to nominate a different person at the creditors’ meeting, the creditors’ choice shall prevail. Once the liquidator is appointed, the creditors’ voluntary winding-up procedure mirrors that of a member’s voluntary winding-up.

Compulsory Winding-Up a Company may be wound up by the Court if:

• the Company has resolved that it is to be wound up by the Court; • the Company is unable to pay its debts; • a Court ordered moratorium has expired and no Voluntary Arrange- ment has been approved; • the Court makes such an order pursuant to any provision of DIFC Law; or • the Court is of the opinion that it is just and equitable that the Com- pany should be wound up.

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a Company will be deemed unable to pay its debts if a statutory de- mand for a sum in excess of US$2000 remains unpaid three weeks after receipt, any judgment in favor of a creditor is unsatisfied, or it is otherwise proved to the satisfaction of the Court that the Company is unable to pay its debts as they fall due. A Company will also be deemed unable to pay its debts if it is proved to the satisfaction of the Court that the value of the Company’s assets is less than the value of its current liabilities. the Company, its directors or any creditor can petition the Court for a winding-up order. The Dubai International Financial Centre Author- ity may also present a petition if it considers it in the best interests of the DIFC to do so. Any disposition, attachment, sequester or appropriation of the Company’s property, transfer of shares or alterations to the status of its members occurring after the commencement of compulsory winding-up proceedings shall be deemed void unless the Court orders otherwise. In circumstances where the Court is satisfied that one of the conditions set out above is met it will issue a winding-up order in respect of the Com- pany. From the date of the winding-up order, any ongoing action or proceeding against the Company shall be automatically stayed and no action or proceeding may be commenced without leave of the Court and subject to such terms as the Court may impose. the Court will appoint a liquidator whose objective is to ensure that the assets of the Company are collected or otherwise secured, realized and distributed to the Company’s creditors. The liquidator has the power to do all things that are necessary for the winding-up of the Company and distributing its assets, and is entitled to access the Company’s accounts, books and records. creditors are required to prove their debts in a compulsory winding- up in writing to the liquidator. Secured creditors must also provide details of their security interest. A creditor may only participate in the winding- up if it has lodged a proof of debt and the claim has been admitted, and its debt is liquidated and ascertained (unless an exemption is applied and an estimated value is submitted). Secured creditors may only participate in the winding-up in respect of the balance due to them from the Company after deducting the value of the security held, and failure to disclose the security interest results in the secured creditor being required to surrender

204 Restructuring and Insolvency in Dubai his security interest (unless the Court permits otherwise). If a secured creditor realizes its security interest, it may prove for the balance of its debt or it may prove for the whole if it surrenders its security interest for the benefit of the creditors. A creditor has 21 days in which to appeal against the liquidator’s decision to accept or reject a debt.

Power to Disclaim Onerous Property In a creditors’ voluntary winding-up or a compulsory winding-up, the liquidator may disclaim the following “onerous property”: (i) any unprof- itable contract; and (ii) any other property of the Company that is not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act. A liquidator in a members’ voluntary winding-up may not disclaim property.

DIRECTORS’ DUTIES AND PROTECTION OF ASSETS Directors’ General Duties the Companies Law requires that directors and other officers ofC om- panies, in exercising their power and discharging their duties, act honestly, in good faith and lawfully, with a view to the best interests of the Com- pany; and that they exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Directors must not act outside the power of the Company and must act within the limits of their powers imposed by the Company’s memorandum and articles of association. Directors also owe fiduciary obligations to their companies under DIFC Law. Many of these fiduciary duties overlap with the generalC om- panies Law duties of directors described above but others extend these duties to cover additional matters, including a duty to avoid conflicts of interest, a duty not to misuse Company property, a duty of loyalty to the Company and a duty of confidentiality. failure to comply with directors’ duties may result in an individual director being liable to civil penalties under DIFC Law including personal liability and disqualification.

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Fraudulent and Wrongful Trading and Delinquent Actions the Insolvency Law defines fraudulent trading as carrying on a business “with intent to defraud creditors of the Company or creditors of any other person, or for any fraudulent purpose.” Any person who is know- ingly a party to carrying on a business in such a manner may be guilty of the offence of fraudulent trading. the offence of wrongful trading occurs when a Company is in insolvent liquidation and at some time before the commencement of the winding-up of the Company one or more of the directors of the Company ought to have known that there was no reasonable prospect of the Com- pany avoiding insolvent liquidation. the Insolvency Law also recognizes and imposes sanctions on fraudulent behavior in anticipation of a winding-up. Any past or present director or other officer of the Company who, within the 12 months immediately preceding the commencement of the winding-up, has committed one of the following acts in each case with the intention of defrauding the creditors of the Company or concealing the state of the Company’s affairs will be guilty of a delinquent action:

• concealed any part of the Company’s property to a value of US$200.00 or more or concealed any debt due to or from the Company; • fraudulently removed any part of the Company’s property to a value of US$200.00 or more; • concealed, destroyed, mutilated or falsified any book or paper affecting or relating to the Company’s property or affairs; • made any false entry in any book or paper affecting or relating to the Company’s property or affairs; • fraudulently parted with, altered or made any omission in any document affecting or relating to the Company’s property or affairs; or • pawned, pledged or disposed of any property of the Company which has been obtained on credit and has not been paid for (unless such act was carried out in the ordinary course of business).

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transactions in fraud of creditors, material omissions from statements relating to a Company’s affairs and false representations to creditors are also considered to be delinquent actions.

Remedies Against Delinquent Directors Any director or officer of a Company guilty of fraudulent trading, wrongful trading or any other of the delinquent actions set out above risks Court sanction. The Court may, on application by an aggrieved person (including a liquidator or administrative receiver) make any order as it sees fit in relation to the delinquent director or officer including one or more of the following:

• an order to return or pay to the Company any money or other property of the Company which has been misapplied or retained or become ac- countable for; • an order to compensate the Company in respect of any misfeasance or breach of any fiduciary or other duty relating to the Company; • an order to make such contributions to the Company’s assets as the Court thinks proper; or • an order requiring the director / officer to do, or not to do, any act or thing.

Voidable Transactions Transactions at an Undervalue the Insolvency Law provides that where a receiver or administrative receiver is appointed, or where a Company goes into liquidation or a provisional liquidator is appointed, and where the Company has at a “relevant time” (discussed below) entered into a transaction with any person at an undervalue, the DIFC court may, on application of the receiver, administrative receiver, liquidator or provisional liquidator, make an order to set aside the transaction. Transactions at an undervalue include gifts and transactions where the Company either receives no consideration or receives consider-

207 Pratt’s Journal of Bankruptcy Law ation the value of which is significantly less than the value of the consideration provided by the Company. The Insolvency Law provides a defense in circumstances where the Company that entered into the transaction did so in good faith and for the purposes of carrying on its business and where there were reasonable grounds for believing that the transaction would benefit the Company at the time of entry into the transaction.

Preferences where a Company has given a preference to a person at a “relevant time” (discussed below) such “preferred” transaction may also be set aside. A Company is considered to have given a preference to a person where: such person is one of the Company’s creditors or a surety or guarantor for any of the Company’s debts or other liabilities; the Company does anything or suffers anything to be done that, in either case, has the effect of putting that person into a position that, in the event of the Company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done; and provided that the Company was influenced to give the preference by a desire to put such third party in a better position than if that thing had not been done. a Company that has given a preference to a person connected with the Company (otherwise than by reason of being its employee) at the time the preference was given is presumed, unless the contrary is shown (for exam- ple, by receiving additional material consideration therefore), to have been influenced in deciding to give it by a desire to put such person in a better position than it would have been had the act or sufferance not occurred.

“Relevant Time” the “relevant time” for the purposes of transactions at an undervalue and preferences is: two years prior to the onset of insolvency in respect of transactions at an undervalue and preferences involving connected persons; six months prior to the onset of insolvency in respect of preferences involving unconnected persons; and in the case of transactions at an undervalue and preferences, at any time between the presentation of an administration petition and the making of an order.

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Voidable Security Interests the Insolvency Law provides that a security interest in all or substantially all of the Company’s property is invalid where: the security interest is created in favor of a person connected with the Company and was created after a date two years before the onset of insolvency; or the security interest is created after a date one year before the onset of insolvency and the Company was either at the date of the creation, or became pursuant to the transaction in respect of which the charge was created, unable to pay its debts as they fell due; or the security interest was created after the commencement of a company voluntary arrangement. However, this provision does not invalidate a security interest to the extent of the value transferred to the Company or liabilities of the Company released as a result of the transaction giving rise to the grant of the security interest.

RANKING OF CREDITORS the DIFC Preferential Creditor Regulations apply to any Company to which the Insolvency Law applies. The combined effect of the Insolvency Law and the Preferential Creditor Regulations ensures that, in the winding- up of a Company, its “preferential debts” shall be paid after the expenses of the winding-up in priority to all other debts that are unsecured or secured by an interest over all or substantially all of the assets and undertakings of the Company. “Preferential debts” are categorized as follows:

• any sum owed by the Company which is a contribution to a pension scheme on behalf of the Company’s employees or any end of service gratuities; • remuneration of Company employees for a period of up to four months preceding the date of the appointment of a provisional liquidator or the winding-up order in the case of a compulsory winding-up; or the passing of the resolution approving the winding-up in the case of a voluntary winding-up; • any payments due in lieu of notice; and • compensation in respect of accrued holiday entitlement.

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