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The Dubai International Financial Centre (the “DIFC”) is a global financial hub that has positioned itself as a leading destination for financial services, international trade, and investment.
The DIFC Courts offer a robust legal and regulatory environment, which includes an advanced insolvency framework.
DIFC Law No. 1 of 2019 (the “DIFC Insolvency Law”) and the DIFC Insolvency Regulations 2019 (the “DIFC Insolvency Regulations”) are designed to regulate the financial restructuring and insolvency proceedings of companies operating within the DIFC jurisdiction.
Rooted in transparency and fairness, the law aims to balance the interests of creditors, shareholders, and companies, to ensure financial stability while offering businesses the opportunity to recover from distressing circumstances.
A critical element is the Rehabilitation Process, which provides companies with a structured approach to restore their financial health and avoid liquidation.
Rehabilitation under DIFC Insolvency Law
Part 3 of the DIFC Insolvency Law contains provisions which establishes a court-supervised debtor-in-possession system known as “Rehabilitation”, which effectively allows a debtor to save its company by presenting a rehabilitation plan to its Creditors and Shareholders for approval.
A company is eligible for rehabilitation under Article 13 of the DIFC Insolvency Law, where it is or is likely to become unable to pay its debts and there is a reasonable likelihood of a successful rehabilitation plan being reached between the Company, its Creditors, and Shareholders.
Process of Rehabilitation
The DIFC Rehabilitation Process follows a series of clearly defined steps aimed at achieving recovery while ensuring accountability and involvement of all stakeholders of the Company.
Stage 1: Proposal of the Rehabilitation Plan[1]
The Directors of the Company are responsible for proposing a Rehabilitation Plan to its Shareholders and Creditors. This plan forms the foundation for restructuring and recovery.
Stage 2: Notification to the Court
The Company’s Board of Directors must notify the DIFC Courts of the Rehabilitation Plan in writing, accompanied by relevant documents.
If the Company is an Authorised Person, the Directors must also obtain the Dubai Financial Services Authority’s (the “DFSA”) consent before submitting the Rehabilitation Plan to the DIFC Courts.
An Authorised Person, under the laws of the DFSA, is defined as an Authorised Firm or an Authorised Market Institution which has a license granted by the DFSA.
Stage 3: Automatic Moratorium[3]
Upon notification of the Rehabilitation Plan, the DIFC Courts shall grant an automatic moratorium for 120 days, halting any actions by creditors (secured and unsecured) without their consent.
The moratorium begins on the day the DIFC Courts are notified by the Company of its Rehabilitation Plan (the “Notification Date”), which allows the Company sufficient time to implement the Rehabilitation Plan.
Stage 4: Appointment of Rehabilitation Nominee[4]
The Company’s Board of Directors must appoint one or more Rehabilitation Nominee(s), i.e., a registered insolvency practitioner, immediately before the Notification Date.
The Rehabilitation Nominee’s name and qualifications should be outlined in the Rehabilitation Plan that shall be sent to the DIFC Courts.
Stage 5: Relief from Moratorium[5]
Creditors of the Company can file an application to the DIFC Courts for relief from the moratorium period under Article 19 of the DIFC Insolvency Law.
When granting the relief, the DIFC Courts shall consider whether there is any “imminent irreparable harm” to the Company in the absence of a moratorium, and whether the Creditor would suffer any “significant loss” which the Company cannot compensate the Creditor for, and the balance of harm to the Creditor outweighs the interest of the Company.
If the conditions are satisfied, the DIFC Courts shall grant the relief after a notice of 10 days to the Company.
Stage 6: Appointment of an Administrator[6]
If the Directors of the Company are guilty of any fraud or mismanagement offences, the DIFC Courts shall appoint an Administrator to manage the affairs of the Company.
In such a scenario, the remuneration paid to the Administrator and the Rehabilitation Nominee, and their expenses are prioritised over any unsecured debts at the time of payments.
Stage 7: Termination of Moratorium Period[7]
The DIFC Courts can terminate the moratorium period prior to its expiration upon the request of any Creditor of the Company by providing a notice and hearing for cause shown including bad faith.
Stage 8: Post-Moratorium Period Actions by the Company[8]
Upon the termination or expiration of the moratorium period, the Company must:
- Seek directions[9], or
- Accept any of the alternative Rehabilitation Plans proposed by the Creditors and Shareholders of the Company, or
- Apply to the DIFC Courts to terminate the process of the Rehabilitation Plan and wind up the Company.
Stage 9: Directions under Article 24[10]
Once the Rehabilitation Plan is ready to be proposed and considered by the Creditors and the Shareholders, the Company should notify the same to the DIFC Courts and submit the voting procedures for approval.
These procedures classify the secured Creditors, unsecured Creditors, and Shareholders into groups, ensuring equitable representation in the voting process.
The Rehabilitation Nominee or the Administrator must file a statement to the DIFC Courts in their opinion which considers the prospects of the Rehabilitation Plan being approved, the funds that are available with the Company, and the meetings conducted between the Company and its Creditors and Shareholders to consider the Rehabilitation Plan.
Stage 10: Directions Hearing[11]
The DIFC Courts shall hold a Directions Hearing at which the Creditors and Shareholders of the Company will be able to voice their opinions on the Rehabilitation Plan, upon a 10 days’ notice, and may approve or reject the proposed notice and voting procedures or may approve it after modifying the procedures. The DIFC Courts may also extend the moratorium period to accommodate further discussions on the proposed plan.
Stage 11: Voting Process by the Creditors and Shareholders[12]
The Creditors and the Shareholders will receive a notice for the voting in writing along with a copy of the proposed Rehabilitation Plan. The Rehabilitation Plan needs at least 75% of the Creditors of each class to support the Rehabilitation Plan to get it approved.
Stage 12: Challenges to the Rehabilitation Plan[13]
The Creditors and the Shareholders may challenge the Rehabilitation Plan if they consider the arrangement to be unfairly prejudicial, or that the Rehabilitation Plan was not proposed in good faith, or that there had been a material violation of the notice and voting procedures approved by the DIFC Courts at the Directions Hearing. Subsequently, the Creditor or the Shareholder can file a written application to the DIFC Courts stating their objection anytime until 10 days prior to the Post-Plan Hearing.
Stage 13: Post-Plan Hearing[14]
At the Post-Plan Hearing, the DIFC Courts shall sanction the Rehabilitation Plan if the 7 conditions set out under Article 27 of the DIFC Insolvency Law are satisfied.
These are namely to ensure that the Rehabilitation Plan has been proposed in good faith; that it complies with Part 3 of the DIFC Insolvency Law; that the arrangement is not unfairly prejudicial; that there is no material violation of the notice and voting procedures approved by the DIFC Courts; and so forth.
If the DIFC Courts sanction the Rehabilitation Plan, it shall be binding upon all persons who have a claim and hold an interest in the Company; however, if the DIFC Courts do not sanction the Rehabilitation Plan at the hearing, the DIFC Courts shall then immediately proceed to take steps to wind up the Company.
Stage 14: Application for Discretionary Relief[15]
The Company can file an application to the DIFC Courts after providing a 10-day notice to the Creditors and Shareholders, seeking any relief, which may be authorised upon the DIFC Courts’ discretion.
Stage 15 – Completion of the Rehabilitation Plan[16]
Upon completion or termination of the Rehabilitation Plan, the Company must notify the same to the Creditors and Shareholders within 28 days of the completion or termination of the Rehabilitation Plan. A copy of the notice should also be sent to the Registrar of Companies and the DIFC Courts.
Summary
The Rehabilitation Process under the DIFC Insolvency Law and the DIFC Insolvency Regulations offers a sophisticated approach to corporate recovery, balancing creditor protection with business rehabilitation opportunities.
Through its structured 15-stage process, the framework ensures transparency and fairness whilst providing distressed companies with a viable path to recovery.
The incorporation of key features such as the automatic moratorium, qualified supervision, and robust voting procedures, all under careful judicial oversight, demonstrates the DIFC’s commitment to international best practices in insolvency regulation.
Notably, the entire process takes approximately 7-8 months from the proposal of the Rehabilitation Plan, offering a relatively swift resolution timeframe.
This comprehensive framework not only enhances the DIFC’s standing as a global financial centre but also provides businesses with a clear and efficient mechanism for addressing financial distress, ultimately promoting market stability and sustainable business practices.
Authors
Robert Whitehead – Partner I Head of DIFC & International Arbitration
Fahad Khalid – Associate
Payal Jain – Intern
Footnotes
[1] Article 15(1) of the DIFC Insolvency Law
[2] Article 15(2) of the DIFC Insolvency Law
[3] Article 16 of the DIFC Insolvency Law
[4] Article 20 of the DIFC Insolvency Law
[5] Article 19 of the DIFC Insolvency Law
[6] Article 22 of the DIFC Insolvency Law
[7] Article 23 of the DIFC Insolvency Law
[8] Article 23 of the DIFC Insolvency Law
[9] under Article 24 of the DIFC Insolvency Law
[10] Article 24 of the DIFC Insolvency Law
[11] Article 24 of the DIFC Insolvency Law
[12] Article 25 of the DIFC Insolvency Law
[13] Article 26 of the DIFC Insolvency Law
[14] Article 27 of the DIFC Insolvency Law
[15] Article 30 of the DIFC Insolvency Law
[16] Article 3.2 of the DIFC Insolvency Regulations 2019