1. What are the key topics that boards should focus on to ensure proper discharge of their duties as directors, as their businesses return to work following a lockdown?
The competent authorities in the UAE have not issued any specific guidance or changes to corporate governance policies or recommendations during the COVID-19 pandemic (save for some flexibility in the form of AGMs for listed companies).
Directors should continue to act in compliance with their obligations (which will vary depending on the type of company, its jurisdiction of incorporation in the UAE, and specific obligations set out in the company's constitutional documents). In particular, directors should not exceed the limits of their authority in dealing with unusual or unprecedented circumstances.
For companies facing financial distress as a result of the COVID-19 pandemic, boards should be mindful of their obligations under relevant legislation, including the Companies Law and Bankruptcy Law; a failure to properly act can result in personal liability for the directors.
Directors should conduct a proper analysis of return-to-work logistics to ensure that relevant government regulations and precautionary measures in relation to employees returning to the workplace are followed.
2. Should boards adopt particular governance practices in this context?
The UAE introduced the Economic Substance Regulations (ESR) in April 2019, as a result of which the country was successfully removed from the EU’s blacklist of non-cooperative jurisdictions.
Under the ESR, all UAE companies, branches and partnerships with a trade, commercial or business license (so-called Licensees) must report whether they perform any geographically mobile activities. In the affirmative, the Licensee must comply with the new economic substance requirements. One of the economic substance requirements for a Licensee performing ESR-related activities is that its direction and management must take place in the UAE.
UAE Licensees part of international groups with directors scattered around the world may be concerned about the potential for non-compliance with the directed and managed requirement of the ESR as a result of continued travel restrictions due to COVID-19.
Licensees should ensure that records of meetings of directors held outside of the UAE (or by telephone or video conference) clearly state that the meeting would, but for the travel restrictions, have been held in the UAE, and that to the extent required the directors will ratify any decisions made in the meeting in the next possible physical meeting in the UAE. Licensees may also decide to postpone meetings of directors that will consider strategic decisions until a physical meeting can be held in the UAE.
In the absence of guidance from the relevant authorities that the requirements of the ESR will be relaxed due to COVID-19, and where postponement is not possible, or where travel restrictions remain in place for the foreseeable future, Licensees may need to appoint additional directors based in the UAE to ensure that they can continue to comply with their obligations under the ESR.
The boards of public joint stock companies have been informed by the Securities and Commodities Authority that shareholders should be able to attend and vote at general assembly meetings electronically. This practice is likely to continue for as long as travel restrictions remain in place, and potentially into the future.
3. To what extent are boards being encouraged to take into account corporate purpose and values in the context of COVID-19 and a return to work?
There has been no formal encouragement for boards of companies in the UAE to take into account corporate purpose and values in the context of COVID-19 and a return to work. However, such considerations should undoubtedly form part of a board's decision-making.
4. Your company is facing liquidity issues as a result of COVID-19:
a. What are the repercussions for continuing to operate your company?
Companies facing liquidity issues should have regard to (among other things) the requirements in the Companies Law and Bankruptcy Law regarding requirements where the company is insolvent, including continuing to trade while insolvent.
The Companies Law sets out relevant obligations of managers and shareholders. This includes the following obligation on limited liability companies to commence winding-up proceedings (whether the company is solvent or insolvent) based on company losses:
1. If the losses of a Limited Liability Company reach half the capital, the Managers shall refer to the General Assembly of the partners [ie shareholders] the issue of dissolution. The dissolution Resolution shall be passed by the applicable majority to amend the Memorandum of Association of the Company.
2. If the losses reach three quarters of the capital, the partners holding one quarter of the capital may demand to dissolve the company."
The Companies Law also imposes a fine of between AED50,000 and AED1 million on the chairmen of the company for failure to invite the shareholders to convene this meeting where the losses of the company have reached 50% of the share capital.
It also imposes criminal liability (six months’ to three years' imprisonment) and/or civil liability (between AED100,000 and AED500,000) on managers, directors or auditors for deliberately providing false statements or making material omissions in the company financial statements for the purpose of concealing the true financial position of the company.
Under the Companies Law, if the company is found to have ceased conducting business, or conducts business in contravention of the Companies Law, the relevant ministry or government authority is obliged to notify the company that it shall be deregistered within three months from the date of the notice "unless a good reason not to deregister the company is provided." If no reason is provided, the matter is referred to the court for liquidation of the company.
Under the Bankruptcy Law, the court can reverse transactions that occurred up to two years before a bankruptcy petition and that are harmful or prejudicial to creditors. These transactions include:
- gifts or donations;
- transactions at an undervalue;
- payment of debts before maturity;
- payment of debts in kind;
- creating new security over existing debt; and
- other transactions prejudicial to creditors.
The Bankruptcy Law also provides a defence if the relevant transaction above was carried out in good faith for the benefit of the business.
Under the Bankruptcy Law, civil liability may be imposed on parties engaging in:
- risky commercial practices leading to bankruptcy;
- preferences (i.e. transactions that prefer certain creditors over others); or
- transactions defrauding creditors.
The Bankruptcy Law provides defences against civil liability for taking actions to reduce company losses or dissenting against such acts. Additionally, any person engaging in business in the company's name for their own interest may be made bankrupt by the court, and if company funds are insufficient to repay 20% of creditor liabilities, the court may order directors to contribute to the company's losses.
Criminal liability may also be imposed under the Bankruptcy Law as follows:
- up to five years imprisonment and/or a fine of up to AED1 million may be imposed on directors/managers/liquidators if they:
- hid all or some of the company's books and records, or destroyed or amended those books and records with the intent to cause prejudice to the creditors;
- embezzled or concealed any part of the company's assets;
- declared/acknowledged debts that were not due from the company while being aware of that fact, whether the declaration was in writing, verbally or in the accounts or they refrained from submitting evidence or clarifications while being aware of the outcome of such inactions;
- obtained preventive composition or restructuring (within the meanings of the Bankruptcy Law) for the company by way of fraud; or
- made false declarations concerning the subscribed or paid-up capital, distributed fictitious profits or seized bonuses exceeding the amount set out in the law, the company's memorandum of association or articles of association
- up to two years’ imprisonment (no fine) may be imposed on directors/managers/liquidators if they:
- did not maintain commercial books sufficient to reveal the company's financial position or assets;
- refrained from providing the data required by the bankruptcy trustee or the court, or intentionally provided incorrect data;
- disposed of the company's assets after becoming cashflow-insolvent with the intent of depriving the creditors of those assets;
- paid the debt of a creditor, while cashflow-insolvent, to the detriment of the other creditors or treated a creditor preferentially to other creditors, even if such acts were conducted with the intent of achieving a preventive composition or restructuring procedure;
- disposed of company assets at a value less than their market price, or acted in a manner detrimental to the interest of the creditors with the intent to obtain funds in order to avoid or delay cashflow-insolvency, the adjudication of bankruptcy or the termination of a preventive composition or restructuring procedure;
- spent disproportionate or excessive sums in "gambling" or speculative activities outside the company's usual business; or
- entered into disproportionate undertakings in favour of a third party without having regard to the financial status of the company at the time such acts were decided.
The Bankruptcy Law provides defences for directors/managers not involved in the crime or who vote against resolutions approving such acts.
b. Do you have to file for insolvency if your company cannot pay all its debts as they fall due?
Under the Bankruptcy Law, a company is required to file for bankruptcy if:
- the company ceases to repay debts for more than 30 consecutive business days; or
- the company is balance-sheet insolvent.
In practice, however, this requirement is rarely followed, and no specific sanctions are provided for failure of the debtor to initiate bankruptcy procedures (though there are offences and sanctions that may be triggered by certain behaviours while trading in an insolvent position).
A bankruptcy application may also be initiated under the Bankruptcy Law by creditors with an unpaid debt of at least AED100,000.
The Bankruptcy Law applies to:
- companies organised under the Companies Law;
- companies that are government-owned if they have opted in to the Bankruptcy Law in the company's Articles of Association or enabling legislation;
- companies established in free-trade zones that have enacted their own comprehensive insolvency legislation (such as the Dubai International Financial Centre and Abu Dhabi Global Markets);
- any individual defined as a "trader" under the UAE's Commercial Transactions Law; and
- licenced "civil companies" carrying out professional activities.
c. Are there any steps that should be taken to minimise the risk of your actions as director being challenged?
Practical steps to consider include:
- holding regular board meetings to authorise actions;
- considering recapitalisation;
- documenting all actions taken and maintaining full records (including minutes of board meetings);
- ensuring that the board has accurate financial information (in the form of up-to-date management accounts).
- whether any particular methodology should be employed in the context of ongoing trading, with an overriding objective of minimising losses to creditors including:
- incurring credit;
- entering into customer/supplier contracts;
- using bank facilities;
- creating contingent liabilities; and
- disposing of assets outside the ordinary course of business;
- investigating suspected misconduct and recording findings - and ensuring that any relevant evidence is preserved;
- preparing up-to-date cashflow statements, management accounts and projections, and considering availability of existing facilities (e.g. checking events of default that may prevent drawdown);
- considering alternative means of support (e.g. stakeholders, key customers, government-backed facilities, disposals of assets); and
- considering whether outflow of cash to creditors can be managed/delayed – in particular, speak to landlords and key suppliers.
Although current UAE public policy is designed to inject liquidity into the economy, directors should still carefully consider the items discussed above and the requirements of relevant laws (including the Companies Law and Bankruptcy Law). They should consider whether adding more burden to the balance sheet will ultimately benefit the company's stakeholders (including creditors).
We recommend directors implement strategies that have a reasonable prospect of avoiding insolvency proceedings and minimise loss to creditors. Decisions to continue to trade must be carefully justified and require careful navigation with the aid of expert advice from lawyers and insolvency practitioners. Such strategies and the reasons for them should be regularly monitored and properly minuted at board meetings.
d. Will your company be wound up if you fail to make payments when due?
A creditor or group of creditors with a total value of unpaid debt of not less than AED100,000 may apply for a bankruptcy declaration. Further, a public prosecutor may make an application for bankruptcy procedures if it is in the public interest.
Though the Bankruptcy Law contains provisions for the insolvent liquidation of the company, the law also provides for bankruptcy restructuring procedures and a preventive composition procedure, each aimed at rescuing the company and rehabilitating it as a going concern.
Preventive compositions is a court-supervised procedure available to a company that has not ceased payment of its debts when due for a period exceeding 30 consecutive business days (which would trigger the requirement to file bankruptcy procedures under a cashflow-insolvency test under the Bankruptcy Law) as a result of financial instability or insolvency. The procedure is designed to facilitate the continuance of a company through compromises between the company and its creditors.
If, however, the company has failed to make payments for a period of more than 30 consecutive days, the company is required to file for bankruptcy, which may specify whether the application is for restructuring or liquidation.
If the court accepts the application, a bankruptcy trustee is appointed who (among other duties) must prepare a report on the financial position of the company and include an evaluation of the possibility of restructuring and/or the possibility of a sale of the debtor's business.
The court may decide to proceed with a restructuring, in which case the trustee in consultation with the debtor prepares a restructuring plan to be approved by the creditors and the court.
If, however, the report suggests a restructuring is inappropriate, or the court decides to reject a report that suggests restructuring is appropriate, the court can order the insolvent winding-up of the company.
The Bankruptcy Law is relatively new and underused, and the approach courts will take is uncertain. UAE courts do not follow a system of binding precedent, unlike common-law jurisdictions.