It is now widely recognized that the primary objective of the rescue culture adopted in many jurisdictions is to assist financially distressed companies to avoid corporate failure. This aligns with the global trend of moving away from insolvent liquidation as the default response to financial distress.
The Abu Dhabi Global Market (“ADGM”) has embraced this approach through a flexible courtsupervised restructuring framework, providing the following restructuring tools: administration, Deed of Company Arrangements and Schemes of Arrangement.
The Legal Framework
Administration
Administration is a court-supervised process in which an appointed administrator takes control of the company’s affairs. The court may make an administration order where the company is or is likely to become unable to pay its debts and the administration order is reasonably likely to achieve one of the three statutory purposes of administration.
- Rescue the company as a going concern: or
- Achieve a better outcome for creditors than liquidation would provide; or
- Realise property to make a distribution of secured or preferential creditors.
The administrator must perform their functions with the first of these objectives in mind, unless they think either that it is not reasonably practicable to achieve that objective, or that the second objective would achieve a better result for the company’s creditors as a whole.
The administrator may perform their functions with the third objective as the intended outcome only if they think that it is not reasonably practicable to achieve either of the first two objectives, and they do not unnecessarily harm the interests of the creditors of the company as a whole.
An application for administration can be filed by the Company, the directors of a company, one or more creditors or a combination of the same, although where there is a floating charge registered against the Company prior notice must be given to the floating charge holder which must consent in writing to the making of the appointment. It is also worthwhile pointing out that a floating charge holder may appoint an administrator over a company provided the floating charge is a qualifying floating charge (ie the charge, inter alia, empowers the holder to appoint an administrator).
A key advantage of an administration order by the court is that it triggers a moratorium period providing breathing space from creditor enforcement actions.
Following appointment, the administrator must prepare a statement of proposals for a compromise or arrangement to be sanctioned under Part 25 of the Companies Regulations 2020 or a proposal for a Deed of Company Arrangement with a view to achieving the purpose of the administration.
The process can involve operational restructuring, realisation of assets to stabilize the company’s financial position and negotiating with creditors and if successful can achieve business continuity and maintain the company’s value.
With regard to new financing, pursuant to s109A of the Insolvency Regulations 2022 unsecured debt may be incurred by the debtor whilst in administration, which shall be payable as an expense of the administration. In certain circumstances the administrator may apply to court to incur such debt on a secured basis.
Practical considerations are crucial for success. Early engagement with creditors is essential to foster trust and reduce potential disputes. The administrator must carefully balance the interests of secured and unsecured creditors while ensuring compliance with ADGM Court requirements through diligent reporting and transparency throughout the process.
Deed of Company Arrangement (DOCA)
A DOCA is a bespoke restructuring tool that allows a company under administration to restructure its debts. A DOCA must be approved by a simple majority (by value) of creditors present and voting at the creditors meeting and unlike under a compromise or arrangement, all creditors vote as a single class.
A DOCA binds all unsecured creditors existing on or before the date of the DOCA, secured creditors may realise or deal with secured assets unless the DOCA (where the secured creditor voted in favour) or the court, provides otherwise. The court may make such an order if satisfied that if the creditor was to realise such property this would cause a material adverse effect of achieving the purpose of the DOCA.
As a court-supervised mechanism, it seeks to ensure fairness and enforceability, giving all stakeholders confidence in the arrangement.
The primary advantage of a DOCA is its ability to preserve the company as a going concern while potentially maximizing creditor recoveries compared to liquidation. It also offers flexibility to address complex debt structures and contractual obligations, allowing the implementation of tailored solutions that fit a company’s specific financial and operational situation.
Schemes of Arrangement
Schemes of Arrangement (SoA) involve an application being made to the court by the company, any creditor or member of the company, liquidator or administrator. It is modelled on the English law SoA through which proposals are put to members and or creditors and the court may order meetings of members or creditors (or class(es) of the same).
An SoA must be approved by at least 75% in value of creditors and/or members and once sanctioned by the court the SoA shall be binding on all creditors or class of creditors as applicable. Unlike the administration process, a SoA does not involve loss of control by the management of the company, the directors of the company remain in control.
The SoA is primarily available to companies incorporated in ADGM or companies which have redomiciled to the ADGM, with the exception for certain companies from other jurisdictions which must comply with additional requirements, such as the provision of a solvency statement.
Practical Considerations
- Successful restructuring plans in the ADGM require careful planning. Early stakeholder engagement: engaging creditors and shareholders at the outset helps reduce disputes and ensures smoother approval processes.
- Structuring: Grouping creditors according to their rights is critical to maximizing the likelihood of approval and minimizing litigation risks.
- The DOCA requires approval only from a simple majority of creditors (by value) to whereas 75% approval is requires for a SoA.
- A moratorium does not apply in respect of a SoA, whereas this is automatic where administration is initiated.
Conclusion
ADGM has positioned itself as a regional hub for corporate restructuring. Its court-supervised framework, combining administration, DOCAs and Schemes of Arrangement provides a viable alternative to liquidation where a business can be rescued, supporting business continuity and maximizing creditor recoveries.
For companies and their management, this gives alternative restructuring options to avert liquidation when financial difficulties arise. For creditors, the implications are equally significant, flexibility and negotiating repayment proposals may help achieve a significant return as opposed to insolvent liquidation which often leads to minimal or no return at all.
Chris is a Chartered Accountant, member of the ICAEW and on the list of approved Insolvency Practitioners of the DIFC and ADGM. He is also a UK, Cyprus and Romania licensed Insolvency Practitioner.
Andri is on the list of approved Insolvency Practitioners of the DIFC and ADGM. She is a solicitor, Member of the Law Society of England and Wales and a Licensed Insolvency Practitioner in Cyprus.
