Posted on December 11, 2009 at 8:12 PM
“Particularly given the magnitude of the amounts at stake, the restructuring of Dubai World will stress the nascent governing legal infrastructure,” said Oliver Agha of Islamic finance firm, Agha & Shamsi. “It may result in initiatives to develop or fill in gaps in the law that are highlighted once major restructurings like this test and stress the existing legal framework.”
“This is not the first restructuring exercise in the Gulf, but it is the biggest,” commented Mark Andrews, the head of restructuring & insolvency at Denton Wilde Sapte, “It will test the local business culture very severely.”
However, there is only a slim chance that the Dubai World situation will reach litigation to test the legal framework since Dubai World is state-owned and may be subject to sovereign immunity. Actions against the Dubai government can only be done with the permission of the Ruler of Dubai.
It seems that some creditors may be preparing for action, but the unique nature of the case may deter them for now. “Creditors are naturally keen to understand their legal position, as these matters can be quite complicated,” said Philip Abbott, a partner at Simmons & Simmons. “Each creditor will have its own motivations in terms of a restructuring process, but I would expect parties will attempt for the process to be consensual rather than litigious.”
The companies involved in the case are also under different law regimes. Nakheel is incorporated in the Jebel Ali Free Zone and is, thus, subject to those laws, but its sukuk is listed in the DIFC and so is under English law. On the other hand, Dubai World is subject to UAE laws.
Abbot feel, though, that ultimately it is up to the UAE government to decide whether or not to develop its insolvency & restructuring laws, irrespective of what happens with the Dubai World situation. “The UAE has restructuring & insolvency laws; the issue is that all laws are open to interpretation and the lack of any major corporate insolvency in the UAE means there is uncertainty in the law,” he explained. “Most commentators agree the legal system would benefit from some clarity and improvement in the law. Whether this happens and the speed at which it happens will very much depend on the degree of government support for such a process. The laws would have to be changed at a UAE federal level, thus all emirates comprising the UAE would need to approve.”
Dubai World’s restructuring also has a chance to clarify some misunderstandings about Islamic finance structures. Agha & Shamsi’s Oliver Agha explained that some Islamic finance products import conventional structures and may not be Shariah-compliant. Consequently, some defaults in Islamic finance products are not Shariah-related defaults. “The restructuring of Dubai World….should result in a renewed effort to structure Islamic products from a genuine Shariah base given the potential enforceability of issues if this is not done,” he stated. “[Events like this] can actually result in a reinvigorated effort by the industry leaders to develop the Islamic finance sector … and move away from structures that replicate conventional risk profiles.”
Nonetheless, most lawyers believe that the Dubai World affair is being blown out of proportion. Denton Wilde Sapte’s Andrews stated: “It is a very significant announcement from a very large company with a huge worldwide exposure, but it has nothing like the scare factor of the implosion of a major global bank.”
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