In brief
The DIFC Court of Appeal has handed down its seminal decision in DNB Bank ASA v (1) Gulf Eyadah Corporation (2) Gulf Navigation Holdings PJSC (CA 007/2015).
The decision confirmed the DIFC Court’s view that parties holding a money judgment or order from a foreign Court could use the DIFC Court as a conduit to recognise the foreign judgment, and then enforce the DIFC’s judgment against assets held in Dubai.
In his leading judgment, Chief Justice Hwang confirmed that “it is not wrong to use the DIFC Courts as a conduit jurisdiction to enforce a foreign judgment and then use reciprocal mechanisms to execute against assets in another jurisdiction.”
The Court’s judgment is considered in further detail below.
Implications
The implications of the DIFC Court of Appeal’s decision are that a creditor who has a favourable foreign court money judgment can apply to the DIFC Court to recognise the foreign Court’s judgment, regardless of whether the debtor has assets in the DIFC. It is a significant change to the long-standing position in the UAE, which has made it difficult (and in fact, often impossible) to enforce foreign judgments in this jurisdiction.
If the judgment debtor has assets in Dubai, the judgment creditor can now apply to the DIFC Court for referral of the DIFC Court judgment to the Dubai Courts for enforcement, through the enforcement section of the Dubai Courts (the Execution Court).
In theory, the Execution Court should enforce all DIFC judgments in the same way that it would enforce other Dubai Court judgments, without revisiting the merits of the case. However, it remains to be seen whether the Execution Court will in fact take such an approach, particularly in circumstances where it is clear that the DIFC Courts have merely been used as a means or conduit to avoid recognition of the judgment through the Dubai Courts.
As a consequence of the DIFC Court’s decision in DNB Bank ASA v (1) Gulf Eyadah Corporation (2) Gulf Navigation Holdings PJSC, we have been approached by several clients enquiring about enforcing money judgments obtained from foreign Courts through the DIFC Courts, in situations where the judgment debtor does not have assets within the DIFC but does have assets on mainland Dubai.
Last month we filed what we believe to be one of the first claims for enforcement of a DIFC Court order recognising an English Court order for default judgment with the Execution Court. The Execution Court has registered the claim and is currently in the process of serving the judgment debtor. However, it remains to be seen how the Execution Court will treat the DIFC judgment if the judgment debtor raises an argument that the DIFC Court has been used as a conduit to enforce a foreign judgment in Dubai without having had to go through the Dubai Courts.
Should assets be located in Abu Dhabi or another Emirate, it may be possible to obtain a DIFC Court judgment and then go on to ask the Dubai Execution Court to rely upon the reciprocal arrangements for enforcement between the Dubai Courts and the Courts in the other Emirates. At this time, it is not clear how the Courts of the other Emirates will treat DIFC Court judgments.
Facts of the case
DNB Bank (the Bank) obtained a judgment against the Defendants in the English Commercial Court in the sum of USD8.7m. The Bank then brought proceedings for the recognition and enforcement of the judgment in the DIFC Courts, seeking, among other things, judgment in the amount of the English judgment sum.
The Defendants filed an application disputing the jurisdiction of the DIFC Courts, arguing that there were no assets in the DIFC against which the judgment could be enforced, and there was no other connection with the DIFC which could justify the proceedings.
The Defendants also argued that the proceedings were an abuse of process. According to them, the Bank’s aim was to enforce the judgment in the DIFC and then take it for execution in the Dubai Courts, relying on the reciprocal enforcement mechanisms available under Article 7 of the Judicial Authority Law (these provide for the mutual enforcement of judgments between the DIFC Courts and the Dubai Courts). The Defendants argued this was abusive as it sought to avoid engagement with the Dubai Courts, and so avoid the more restrictive test for enforcement of foreign judgments in Dubai.
Court of First Instance
The Judge in the Court of First Instance dismissed the Defendants’ application and found in favour of the Bank.
He found that the DIFC Courts had jurisdiction to recognise and/or execute foreign court judgments within the DIFC. However, he held that the execution should not go beyond the DIFC jurisdiction, as Article 7(2) of the Judicial Authority Law only allowed judgments, decisions and orders rendered by the DIFC Courts to be referred for execution. The jurisdiction of the DIFC Courts did not allow the DIFC Courts to refer “recognised foreign judgments” to the Dubai Court for execution, and vice versa.
Article 7(2) of the Judicial Authority Law provides for the enforcement outside the DIFC of “judgments, decisions and orders rendered by the [DIFC] Courts and the Arbitral Awards ratified by the [DIFC] Courts”. The Judge noted that since there was no reference to any foreign judgment recognised by the DIFC Courts, Article 7(2) excluded “recognised foreign judgments”.
The Bank appealed.
Court of Appeal
On appeal, all three judges of the Court of Appeal upheld the Bank’s appeal, and held that the DIFC Courts had the power to refer foreign judgments to the Dubai Courts for execution.
Chief Justice Hwang held (with Justice Omar Al Muhairi agreeing) that the DIFC Court has jurisdiction to hear claims for the recognition and enforcement of foreign judgments. The Chief Justice also agreed with the finding in the Court of First Instance that the presence of assets within the DIFC was not a pre-condition to the enforcement of foreign court judgments within the DIFC.
In relation to execution, the Chief Justice used decisions from several Commonwealth Courts to decide that “a foreign judgment when granted recognition in the DIFC Courts therefore becomes a local judgment of the DIFC courts and should therefore be treated as such by the Dubai Courts (amongst others)”. He noted that in this case, it was “clear that the judgment sought to be enforced is a foreign money judgment, which is enforceable by this Court. Once it is enforced, it becomes an independent local judgment of this Court.”
Consequently, the Chief Justice held that a foreign judgment enforced by the DIFC Court would fall within the scope of “judgments, decisions and orders rendered by the [DIFC] Courts” as set out in Article 7(2) of the Judicial Authority Law, which could then be enforced in the Dubai Courts under Article 7 of that Law. It is unnecessary for Article 7 to provide for enforcement of “recognised foreign judgments”. In his short judgment, Justice Steel also agreed that a judgment issued by the DIFC Courts on recognition and enforcement of a foreign judgment “is in fact a domestic judgment and accordingly falls within the scope of Article 7(2) of the Judicial Authority Law.”
Finally Chief Justice Hwang noted that “From the perspective of the DIFC Courts, it is not wrong to use the DIFC Courts as a conduit jurisdiction to enforce a foreign judgment and then use the reciprocal mechanisms to execute against assets in another jurisdiction.” However he did note that the DIFC Courts were not concerned with what would happen in the Dubai Courts in which the Bank would seek to enforce its judgment and that “the holder of a DIFC Courts judgment recognising a foreign judgment will seek enforcement of the DIFC Courts judgment [in another jurisdiction] at its own risk”.
This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.
In brief:
Considers the New Rules issued by the SCA covering corporate governance and corporate discipline standards for public joint stock companies.
The New Rules include requirements for the calling of General Assemblies, the use of technology in board meetings, clarification of the definition of the term “related party” and requirements for the maintenance of registers.
The New Rules provide for significant improvements to the corporate environment, compared to the situation under the old rules.
On 28 April 2016 the Securities and Commodities Authority (“SCA”) issued a resolution (7/R.M.) which sets out new corporate governance rules and corporate discipline standards for public joint stock companies (“the New Rules”).
Issued pursuant to the new Commercial Companies Law of 2015 (“CCL”), the New Rules, which came into force on 1 May 2016, are intended to provide a comprehensive overhaul of the existing corporate governance regime applicable to public joint stock companies. The New Rules replace all relevant provisions in existing resolutions, circulars or regulations (“the Existing Rules”) to the extent that there is contradiction. The New Rules are intended to enhance the way public joint stock companies are managed and will therefore give investors greater confidence in the capital markets of the UAE.
The New Rules combine the Existing Rules into a single piece of legislation which will make it easier for companies to comply with the new Rules, and at the same time allow the regulator to monitor compliance, and to ensure companies are run more effectively.
The applicability of the New Rules has been clarified so that it now clearly applies to all listed UAE companies, their board members, managers, chairman, and auditors. An exception is that Chapter Two of the New Rules in relation to corporate governance does not apply to banks, financial investment companies, money exchange and financial brokerage firms where these are subject to the regulation of the central bank and its corporate governance regulations.
Key Features of the New Rules:
The New Rules address a number of areas that were previously not codified. For example, clear rules have been introduced in relation to calling a general assembly. Unless approved by 95% of the shareholders, a board can no longer call a general assembly with less than 30 days’ notice. The Notice convening the general assembly must be disclosed to the market via the market’s regulatory news service and published on the company’s website. The Notice must also provide shareholders with sufficient detail to understand the purpose and agenda of the meeting. Although SCA approval will still be required to convene the general assembly, the creation of the 30-day notice period should help maximise shareholder participation in the decision-making of the company.
The way in which businesses operate today has changed significantly. The quickening pace and international nature of work, combined with the introduction of new technologies, means that working methods in all companies have changed. The procedures of many boards are therefore materially different from those boards that existed previously. Under the New Rules only a majority of directors are required to hold board meetings in person. Subject to the Articles of Association of a company, board meetings may be held using methods such as video conferencing. The SCA clearly views technology as an enabler which serves the corporate governance needs of fast-moving corporations.
The definition of ‘related party’ has been widened under the New Rules. This means that more transactions will fall within the scope of the ‘related parties transaction’ restrictions. Under the New Rules, when deciding if a counterparty to a transaction is a related party, consideration must be given to whether the counterparty is a board member, chairman, director, senior executive or employee (each a “Relevant Person’) or any company (‘Relevant Company’) in which any Relevant Person has a 30% (or greater) interest and any affiliate, subsidiary or parent of any such company. This replaces the previous test as to whether a Relevant Person maintained a controlling interest in a Relevant Company. This is a subtle but important change and will require listed companies to maintain up-to-date lists of Relevant Companies as well as lists of their parent companies, subsidiaries and affiliates.
Under the New Rules, listed companies are also now required to maintain registers of conflicts of interest, insiders and related party matters. These registers are to be maintained by the companies themselves to ensure effective compliance. This will create further transparency to shareholders and provide further confidence to investors.
In summary, the New Rules represent a significant improvement on the previous legislation, and bring with them several welcome changes and clarifications. Companies affected by the New Rules are recommended to seek legal advice and update their internal policies and checklists as soon as possible.
This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.
In brief:
Ministerial Resolution 272 of 2016 has been issued to address issues of interpretation in respect of Article 104 of the Commercial Companies Law (Federal Law No. 2 of 2015) (“CCL”), in order to clarify the application of provisions of the CCL relating to joint stock companies (“JSCs”) in relation to Limited Liability Companies (“LLCs”).
Some provisions are confirmed to apply to LLCs, whilst others shall not apply, including financial assistance and certain aspects of management.
However, other parts of the CCL may require future clarification, including the issue of loans to directors.
Article 104 has been the subject of much debate since the new UAE Commercial Companies Law (Federal Law No. 2 of 2015) (“CCL”) came into force last year. According to Article 104, all provisions in the CCL relating to joint stock companies (“JSCs”) apply equally to Limited Liability Companies (“LLCs”), unless otherwise stated in the law.
In the absence of guidance, different interpretations have developed on how Article 104 should be applied. As a consequence, application has been inconsistent. Coupled with contradictory interpretation, the overreaching application of Article 104 has created a number of anomalies that may not be applicable to LLCs. For example, applying the prohibition on financial assistance to LLCs in the context of acquisition finance could result in difficulties particularly for businesses where ownership and management are not separate.
In recognition of the myriad of issues relating to the application of Article 104, the Ministry of Economy recently issued Ministerial Resolution 272 of 2016 (“Resolution”) to clarify the intended application of Article 104.
Having come into force on 29 April 2016, the Resolution clarifies which provisions relating to JSCs also apply to LLCs and which provisions do not apply to LLCs:
New (or amended) provisions that apply to LLCs:
1. Liability of the board of managers. Managers of LLCs can now be held liable to the LLC and/or its shareholders for ‘errors in management’ and these errors no longer need to be ‘gross errors’.
2. Calling general assembly meetings. Previously under Article 92 of the CCL, the management of LLCs had to call a general assembly meeting if requested to do so by shareholders holding at least 25% of the share capital of the LLC. The Resolution however has reduced this threshold to 20%.
3. Suspending the implementation of general assembly resolutions. In limited circumstances and based on a specific procedure, minority shareholders (i.e. those holding at least 5% of the issued share capital) can now request that the Department of Economic Development (“DED”) suspend the implementation of shareholder resolutions which have a detrimental effect on them. The DED will only agree to suspend a resolution if the grounds for suspension are sufficiently serious.
4. DED appointed boards. If shareholders fail to appoint a manager or a board, or do not appoint managers in two consecutive meetings, the DED may, in certain circumstances, appoint temporary management for the LLC for a period of one financial year. If after one year the shareholders have still not appointed a new board then the DED and its temporary board may, amongst other things, dissolve the company.
5. Auditors. Auditors of an LLC cannot be appointed for a term longer than 3 years. The auditor must be independent and must not, directly or indirectly, own shares in the LLC. The auditor must report to the DED if the LLC has violated the CCL. The auditor should each year, at the general meeting, read to the shareholders the annual audit report which sets out key information on the LLC. The auditor’s report should be submitted to the DED (although, in practice, companies still do not file their accounts or reports with the DED, and it remains to be seen whether the DED will, going forward, move to facilitate such filings). Any suggestion that an LLC is required to replace its auditor each three years can, based on the introductory wording to the relevant provision, be interpreted to only apply if it does not ‘conflict with the nature of the company’. Although there is no guidance on such conflict, it should be expected that many closely held or small businesses will determine that they are not be required to rotate their auditors.
Provisions that do not apply to LLCs:
1. Management. Articles relating to the formation, election, number, nationality, and, remuneration of the board of directors of JSCs shall not apply to LLCs. LLCs cannot, however, call their general assembly before the Board has held its own meeting, which must take place at least 30 days prior to the proposed date of the general meeting. Notice of the meeting must be given to the shareholders along with a detailed agenda for the meeting and, amongst other things, details on voting rights and relevant quorum.
2. Related party transactions. The provisions of the CCL on related party transactions do not apply to LLCs.
3. Restriction on the authorities of the board. Unless otherwise stated under the LLCs constitutional documents, management powers are not restricted in the same way as they are for JSCs. For example, management in LLCs have the power to discharge debtors, make compromise agreements or agree to arbitration and, among other things, enter into loans for periods exceeding 3 years without the need to first seek shareholder approval (or to have such powers enshrined in the Memorandum of Association). It is still permitted, however, to include in the Memorandum of Association a restriction on the exercise of such power without prior shareholder approval.
4. Financial assistance. It is not prohibited for financial assistance to be given in relation to the acquisition of the shares in an LLC. Although the Resolution is silent on this point, we believe that financial assistance would be prohibited by an LLC in respect of the acquisition of a parent PJSC’s shares.
Additional rules which apply to LLCs
The Resolution also contains additional rules which apply to LLCs. These include the following:
1. A special resolution is now needed for the sale of 51% or more of the LLC’s assets by one or more transactions in any one-year period.
2. A special resolution is now needed for any assignment of voluntary contributions for community service purposes (i.e. charitable contributions).
3. Shareholders holding 10% of the share capital of an LLC can now call an urgent general meeting by application to (and with approval from) the DED. Shareholders now also have a prescribed procedure for adding items to the agenda of a general meeting either before or during those general meetings.
4. If the LLC is managed by a board of managers, then the chairman and deputy must be appointed at a general meeting.
Despite the additional rules and clarifications highlighted above, a number of issues remain. For example, the prohibition on loans to directors and their family members has not been addressed by the Resolution. As such, on the face of it, loans to directors would continue to be prohibited by virtue of Article 104 of the CCL.
Notwithstanding this, the Resolution is a welcome development and has provided further guidance on the applicability of the CCL to LLCs.
This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.