BusinessLive Middle East recently held a webinar on Sustaining Business Continuity and Evolution During and Post COVID-19 in which we spoke to industry experts from GCC on a variety of topics ranging from the Central Bank of UAE’s relief packages to bankruptcy, contingency planning and the recent resolutions added to the UAE Labour Law.

In the first part of the series, Mamoon Khan, partner in the Banking department at Al Tamimi & Company, answers our queries on the Central Bank of UAE’s relief packages to banks, TESS, insolvency and bankruptcy procedures, and creating pragmatic contingency plans that cover all possible scenarios.

Can you give us an overview of the Central Bank of UAE’s directives on relief packages to banks’ customers and borrowers?

“As you are aware, the UAE central bank had issued standards for its Targeted Economics Support Scheme (TESS) with the focus largely on private companies, small and medium-sized enterprises and individuals. 

“In brief, TESS targets three principal aspects. Firstly, for the banks themselves with funding relief that offers Zero Cost facility from the Central Bank up to the amount of AED50 billion, which is spread across to all the local UAE banks as well as foreign banks operating under a UAE license. 

“Secondly, there is a relaxation on capital buffers for banks, which then allows them to tap into the capital conservation buffer for up to 60 per cent, and in certain instances up to 100 per cent for local banks. With this, the scheme also imposes a temporary suspension of banks on the maximum distributable amount from their earnings, thereby ploughing the money back into their business. 

“And most importantly, this is, of course, for customers and individuals, and business owners. The banks have been directed to offer a six-month deferral on the loan repayment period to private companies, Small and Medium Enterprises (SMEs) and individuals. 

The central bank also cleared the ambiguity about interest payments by announcing a deferral of interest payments being accrued during Covid-19 to a period agreed between the customer and the bank. The banks have also been directed to extend the loan periods and not to charge any additional fees and penalties. 

“And lastly, which is very important for customers operating in this jurisdiction, there is a mandatory requirement for banks to not downgrade any customers, who are being offered relief packages, and instead report them to the central bank.

There is a very specific point I’d like to highlight at this juncture.  There is some ambiguity in the guidelines regarding unfunded facilities, which is in the form of a letter of credit or a bank guarantee. It is important to note that at the moment the guidelines talk about installment repayments but businesses, mostly trading businesses, have bank guarantees in the market or letters of credit issued on their behalf by banks, If they are invoked there is a possibility that the banks may either set off the funds, which are in their bank accounts or request money back immediately. This is something to discuss with your banks at this stage. 

If your banks are utilising the central bank’s relief scheme, they should also be offering similar stimulus packages for these unfunded facilities.

How are banks using Central Bank of UAE’s Targeted Economic Support Scheme (TESS) to actively mitigate the repercussions of the COVID-19 pandemic and provide necessary relief measures to finance businesses and other economic sectors.

“We only have anecdotal evidence supporting the directions of the central bank. From our discussions with banks, we understand that most local banks and some foreign banks are accessing the zero-cost facility. And from the central bank’s recent statement, we understand that 30 per cent of the funds have already been allocated to these banks.  So that’s the first we have in terms of utilisation of this facility. 

“It is also important to note at this stage that if the banks are accessing the stimulus package by the central bank, they would need to provide the relief to the customers and work within the parameters of the guidelines. Therefore, it is important, in terms of any contingency planning, to enquire whether their banks are part of the scheme or not. 

“From a housing finance and personal finance perspective, we understand that some banks are providing relief on a case-to-case basis. Our observation is that banks have taken a risk-based approach and are providing relief on a monthly basis, wherein the financial condition of the customer at the end of each month and then provide the requisite relief. So, it’s important to check with your relationship managers on this aspect.

You just mentioned that 30 percent of the funds have already been allocated to banks Would you be able to tell us which banks are using these facilities?

“We don’t have any specific evidence. Our understanding is that most of the larger local UAA banks are using these facilities. We are also aware of certain large foreign banks, which are licensed by the central bank, have also looked into awaiting the facilities. But the central bank has not released any names of which banks are using these facilities. There is a requirement for these banks to submit a report to the central bank at the end of the month to the central bank if they are availing this facility and how they are doing. So once that reporting is made the central bank may come out with, potentially, a list of banks availing the facilities.”

Can you give us an overview of UAE bankruptcy/ corporate insolvency laws? What are the options available to someone filing for bankruptcy during these times?

“The UAE implemented the insolvency law for commercial companies and traders back in 2016 and then more recently a new bankruptcy law for individuals. We will talk about the 2016 bankruptcy Law here. It introduced a mechanism for distressed entities in the form of what we call a preventive composition for early-stage distress as well as a debt restructuring within a court- administered bankruptcy along with distress relief to debtors during the adjudication process of the bankruptcy. The bankruptcy regime has also allowed distress companies to seek protection from certain trigger-happy creditors, who are used to the more traditional process of debt recovery in local courts.”

For those looking for guidance on the due processes, can you give us an idea of how each of these works?

Preventive Composition

“As a starting point, the bankruptcy law provides for a protective mechanism called Preventive Composition, which is, essentially, in the early stage of your distress when the borrower has not defaulted yet. So, a debtor can apply to the court for Preventive Composition prior to such customer defaulting on the debt. Under the law this is precisely 30 days prior to the debtor failing to pay its debt, which is due on account of either a financial instability of such debtor or debtor’s liabilities are exceeding his assets (balance sheet insolvency) Financial instability is essentially interpreted as depletion of revenues of a debtor. So, it a form of a cashflow test; the cash flows are completely depleted and that’s one of the conditions if they are met prior to any default under a loan or another form of debt that a debtor can file for preventive composition. It is mandatory for the debtor to file for bankruptcy under the law after the 30-day period (after the debtor having defaulted)

Restructuring within bankruptcy

“This is the second option, which can be filed either by a creditor or the debtor. This is where you have gone beyond the 30-day period, where the debtor ceases repayment of debt on their respective due days for more than 30 consecutive business days. Again, the tests include a cashflow test (due to financial instability or a balance sheet test (where the debtor’s liabilities are exceeding his assets)”

Liquidation

“This is more of a straightforward process where there is not much hope to salvage the business and the debtor can essentially file for voluntary liquidation of the company and the sale or the distribution of assets to the creditors under a court-administered process.” 

“It is important to note here that the process is very complex, but I will give you an overview of how the process is implemented, of either filing a preventive composition or restructuring within the bankruptcy.

“In order to file for either a preventive composition or bankruptcy, the debtor is required to essentially submit a shareholder’s resolution, along with certain documents which are prescribed under the law. These documents are in the form of a statement of claim, a statement of account, a list of creditors, a detailed business plan on how the company plans to revive this business. Once these documents are submitted to the court, it appoints an expert, who provides guidance to the court on whether to accept the bankruptcy or not. So, there is always a risk that the bankruptcy, if it is not accepted, may push the company into liquidation. 

“Of course, if the restructuring plan is accepted, then the appointed trustee in bankruptcy will work along with the debtor on a resolution plan, which has to be voted on by two-thirds of the creditors, including secured creditors and unsecured creditors.  Once this plan is put to vote, there is a period/scheme of approval by the court. Once approved by the court, it is put into implementation and the court oversees the restructuring process. One relief to the debtor here is that during the process of the acceptance of the application of bankruptcy and the resolution plan, all existing cases, civil or criminal, are suspended for that period. For example, the company is provided relief from any cheque bounce cases (which are quite common in the UAE) with the cases being suspended for that period.  Once the restructuring plan is implemented, there is a mandatory obligation to withdraw those cases.”