As the world prepares itself for the economic consequences of the Covid-19 pandemic, corporate insolvency laws are being brought into much sharper focus.
In some jurisdictions, the effect of the global crisis has been to highlight gaps in existing legislation. In others, it has drawn attention to recent developments in insolvency law that, far from being harbingers of doom, could improve the chances of rehabilitation for financially distressed businesses.
The recent amendments to the insolvency regime of the Abu Dhabi Global Market (ADGM) fall into the latter category.
On 8 July 2020, the Board of Directors of the ADGM approved a series of amendments to the ADGM Insolvency Regulations 2015. Of most interest to the restructuring community will be the introduction of a new regime that provides greater flexibility for an ADGM administrator to avail priority financing.
With its latest amendments, the ADGM has demonstrated its willingness to evolve and improve its legal framework for the benefit of all stakeholders, including creditors, in a complex distressed restructuring
In distressed restructurings, stakeholders’ interests will often be best served by the distressed company continuing to trade as a going concern. In situations where liquidity is tight, new financing may be required to assist the company in meeting its short-term business needs. Acknowledging that providing financing to a distressed company would otherwise be a difficult sell, the law will often step in to make the proposition more attractive to prospective financiers.
Similar to English law, the ADGM Insolvency Law provides a framework for an independent administrator to be appointed to manage the affairs of a financially distressed company.
Prior to the recent amendments, it was possible for an ADGM administrator to raise new financing on the basis that its repayment would rank ahead of unsecured creditors, creditors holding floating charges and certain other administration expenses.
While this regime (which tracks the equivalent regime under English law) provided a degree of protection for prospective financiers, it did not assist in scenarios where the company’s assets were already subject to fixed security. In those scenarios, the prospective financier would, in a liquidation scenario, only be paid after the existing secured creditors (unless the secured creditors positively approved such arrangements).
The recent amendments provide significant additional flexibility to an ADGM administrator seeking to avail new financing.
Drawing close parallels with the US Chapter 11 “DIP (Debtor-in-Possession) financing” regime, an ADGM administrator may now apply to the ADGM court to approve financing which ranks alongside, or ahead of, existing secured creditors – effectively promoting a new financier to the top of the priority tree. For cash-starved businesses with limited unencumbered assets, and indeed creditors that support the continuance of that business, the recent amendments are likely to provide a welcome additional route to rehabilitation.
Creditors holding existing fixed security would be right to enquire how their own interests are being protected.
The ADGM has expressly addressed this point in its recent amendments. An administrator wishing to “prime” existing secured creditors as outlined above will need to demonstrate that, firstly, all other avenues for availing financing have been exhausted and, secondly, the interests of any affected secured creditor would be adequately protected.
The ADGM court will be the gatekeeper of whether existing secured creditors are being adequately protected. This should be the case, however, where the new financing is likely to achieve a better result for each affected secured creditor than would be the case if the financing (and security) were not provided.
In practice, this is likely to involve a comparative analysis of what the affected creditor might expect to receive on an insolvent liquidation (assuming that this would happen if the new financing is not approved) versus what it might expect to receive if the new financing is approved and an insolvent liquidation avoided. The outcome of that analysis will be highly fact specific.
The new priority financing regime is likely to be most relevant (and most welcome) in complex distressed restructurings where the existing capital structure is heavily secured and the number of creditors render it impossible to negotiate a fully consensual funding solution.
With its latest amendments, the ADGM has demonstrated its willingness to evolve and improve its legal framework for the benefit of all stakeholders, including creditors, in a complex distressed restructuring.
While priority financing represents only one challenge in the rehabilitation of a distressed business, the recent changes place the administrators of distressed companies in ADGM in a much stronger position to navigate this challenge.
About the authors
This opinion piece was written by Ibrahim Yousef Mubaydeen, managing partner at Allen & Overy Abu Dhabi, and Adam Banks, senior associate with Allen & Overy’s UAE restructuring team
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