Rebuild and reboot

Catherine Blackmore.

Holman Fenwick and Willan solicitor Catherine Blackmore discusses the legalities behind restructuring a business in the UAE.

Amid the current financial crisis, where demand and assest values are dramatically decreasing, there has never been a more pertinent time for construction companies to consider restructuring or consolidating business operations to ensure that the company is best placed to weather the downturn.

Motivations for restructuring

Many companies who restructure their business operations are motivated by a desire to separate profitable areas of the business from potentially underperforming areas.

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Restructuring can also facilitate the raising of capital by separating out parts of a business, which are likely to be attractive to investors or lenders, from the risky parts of the company.

The common example is when a subcontractor finds themself with substantial assets on paper, but difficulties with cash flow due to delays in payment.

By structuring the business so that employee salaries, supplier obligations and rent are the responsibility of a service company, whilst more lucrative income producing contracts are entered into by a separate entity, a company may be able to present a more attractive corporate vehicle.

In addition, restructuring can assist construction companies to streamline operations and cut costs.

A common method of separating out profitable business and assets is to create a subsidiary company to which the relevant business and assets can be transferred.

Following the transfer, the newly formed company should be protected from the liabilities and risks associated with the existing company.

In addition, in the event that the existing company is placed into liquidation, its creditors will not have recourse to the asset of the newly formed subsidiary.

In the UAE it is also possible to use offshore companies as the parent company of a local business in order to minimise the exposure of the main operating company.

Whilst law requirements dictate that construction companies operating in the UAE must be incorporated locally (commonly as a limited liability company in which the foreign party can own a maximum of 49% of the shares), and must be able to demonstrate that the local partner has substantial construction experience, a branch of an offshore company can be a useful corporate vehicle through which ancillary/service activities can be conducted.

If a key motivation is to protect the physical assets of a company, then the creation of a new business entity to which the relevant assets can be transferred is common.

Legal considerations

When separating different aspects of a business, the original entity being restructured must be viable at the time its various divisions are hived off. Failing that, such transactions may be invalidated and/or considered fraudulent.

In many jurisdictions, determining if a restructure can be challenged commonly involves examining whether the transfers took place at less than market value.

However, under Article 696 of the UAE Commercial Transactions Law, local courts are empowered to set aside transactions, which are “detrimental to a trader’s combined creditors” if the other party was aware, at the time of entering into the contract, that the insolvent trader had ceased to pay its debts.

A “suspect period” runs from the date on which the cessation of payments commenced and the Commercial Code provides that this period may be fixed to a maximum of two years before bankruptcy.

Since the scope of these provisions is broad, the extent to which a local court would be willing to set aside transactions, which involve either the transfer of assets or business from an entity which is no longer able to pay its debts, remains uncertain.

Who is Catherine Blackmore?
Blackmore graduated from Durham University in 2001 with a degree in law. She qualified at Hill Taylor Dickinson (London) in 2005, and joined Holman Fenwick and Willan, Dubai in December 2006. She acts on behalf of foreign banks, buyers and sellers, as well as acting for investors in respect of corporate restructuring, company formation, licensing, shareholder arrangements. She also handles a range of asset finance transactions.