Hadef in the Courts: Debt subordination as security

In Brief:

1. Hadef & Partners successfully upheld a subordination agreement before the Dubai Court of Cassation.

2. The decision reinforces the possible use of subordination agreements as security for potential creditors and investors.

3. The Dubai Court of Cassation held that the obligation to show that the overriding debt has been repaid lies on the subordinated debtor.

Background

Hadef & Partners successfully defended a multi-million-dirham claim before the Court of Cassation brought by a debtor against an internationally renowned company forming part of a publically listed group.

The Commercial Court of First Instance had initially held in favour of the debtor on the basis that the debt was due and payable. At the Court of Appeal stage, Hadef & Partners was able to reverse the unfavourable judgment by showing that the debt claimed was subject to a subordination agreement entered into by the debtor and a third party investor, whereby the original debt could not be claimed until the third party investor was repaid its own entitlements. The defendant argued that no evidence had been provided by the debtor to establish that the third party investor had been repaid.

Judgment

The Court of Cassation upheld the findings of the Court of Appeal, holding that in accordance with Articles 420 and 425 of Federal Law No.5 of 1985, an obligation made subject to a condition shall not be effective until the respective condition materialises.

The Court also held that the party alleging the occurrence of a condition precedent is required to evidence the same, irrespective of whether they are a claimant or defendant, since it is that party which is alleging the existence of facts contrary to the apparent situation.

Legal significance

This judgment provides an example of the Dubai Courts holding a debtor, who decides to subordinate their entitlements, to be bound by such a decision. Moreover, where the existence of such subordination has been established, the onus shifts to the subordinated creditor to show the higher ranking debt has been paid. In this judgment, this was held to be case notwithstanding the claimant’s objections that they had no control over the repayment to the third party investor and that their debt could therefore potentially never become due.

This judgment supports the possibility of potential creditors securing their debts and gaining preference over other creditors by entering into subordination agreements and further identifying that the Dubai Courts are likely to uphold such arrangements.

If you would like more information on debt subordination as security and Dispute Resolution, or have any questions, please contact Rami Omar, Senior Associate and Mohammed Abbas, Associate, Dispute Resolution.