GCC Quarterly Review - Q2 2020
The first quarter of 2020 saw a number of legal developments in the Gulf Cooperation Council (GCC) region (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates). Our GCC Quarterly Review – Q1 2020 summarises a selection of the major developments in that period, with links to further reading where available.
Download the PDF version (10 pages) or read online below.
UAE Central Bank announces further measures to mitigate the economic impact of Covid-19
Further steps taken by the UAE Central Bank in April 2020 enable banks and financial institutions to continue to support UAE businesses affected by the Covid-19 pandemic, following the introduction of the Targeted Economic Support Scheme (TESS) in March (read more…). The scheme is available to provide zero-cost funds to banks and financial institutions so that they are able to defer loan repayments for private sector companies and retail customers in the UAE and to facilitate additional lending capacity, through the relief of existing capital buffers. Key points to note include:
- The size of the TESS stimulus package is now Dh256 billion (almost USD70 billion), increased from Dh100 billion (USD27 billion).
- The duration of the TESS is extended to 31 December 2020. Banks can use the zero-cost funding facility, capital buffer relief and defer principal and interest payments on loans for eligible customers for this extended period.
- The reserves requirements for demand deposits for banks has been reduced from 14 per cent. to 7 per cent.
- Regulatory liquidity buffers are eased, allowing banks to use a third of their current liquidity buffers and the flexibility to maintain a minimum loan-to-capital (LCR) of 70 per. cent and a minimum eligible liquid assets ratio (ELAR) of 7 per cent.
- The planned implementation of further rules outlined by the Basel Committee on Banking Supervision in Basel III is postponed to 31 March 2021.
The Central Bank has urged banks and financial institutions to continue to offer relief and access to funding, in line with the TESS guidelines, and it is monitoring banks’ participation.
Guidance issued on expected loss provisions for banks in the UAE, DIFC and ADGM
New guidance has been issued for banks and financial institutions in the UAE, the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) on financial reporting in light of the economic uncertainty caused by the Covid-19 pandemic. The joint guidance on the treatment of International Financial Reporting Standard 9 (IFRS 9) expected credit loss provisions issued by the UAE Central Bank, the ADGM Financial Services Regulatory Authority (FSRA) and the DIFC’s Dubai Financial Services Authority (DFSA) in April 2020 sets out adjustments to the way the credit risk of financial instruments is assessed under IFRS9.
The IFRS9 accounting standards are a forward-looking measure of losses. Banks and financial institutions are expected to use forward-looking information to incorporate the impact of Covid-19 on borrowers into the expected credit loss (ECL) estimate which are reasonable and supportable for the purposes of IFRS9. However, regulators across the UAE acknowledge that accurate forecasting and provisioning under IFRS 9 may be more difficult at the current time. The guidance encourages banks and financial institutions to gradually change the way they estimate ECL using adjustments to models and judgmental overlays. Banks and finance companies should group clients into categories, such as those that are offered payment deferrals (under the TESS scheme or other schemes) and those that are not, those that are temporarily and mildly impacted and those that are significantly impacted. Comprehensive disclosures are required to ensure transparency on the grouping process, economic forecasting and any adjustments and overlays applied. This is an interim measure, reflecting the temporary nature of the economic shock.
UAE foreign investment ‘Positive List’ approved
The Positive List has now been issued by a resolution of the UAE Cabinet of Ministers and has come into effect. 122 commercial activities across a range of sectors listed in the Positive List will be eligible for 100 per cent. foreign ownership. The market has been anticipating the formal adoption of the Positive List since a summary was published in July 2019. This follows the introduction of the new foreign investment regime in the UAE in November 2018. Please click here to view our full alert, in which we look at the sectors and activities on the Positive List and the UAE foreign investment regime in more detail.
New clearing and depository bodies to facilitate trading in the UAE
The Dubai Financial Market (DFM) has established an independent central clearing entity and an independent central depository to support trading activities on the UAE financial market. Dubai Clear is a new central counterparty (CCP) licensed by the UAE’s Security and Commodities Authority (SCA) (under SCA Decision No. (22/R.M) of 2016 Concerning the Regulation of the Central Clearing Party). Dubai Clear’s remit is to undertake all clearing, settlement and risk management functions for securities trades executed on the DFM. As a financial intermediary for the clearing and settlement of securities, Dubai Clear should reduce risks for investors trading on the DFM. Dubai Clear operates in accordance with the regulatory standards established by the SCA. In order to be able to offer clearing services to EU counterparties, Dubai Clear will need to apply to be recognised by the European Securities & Markets Authority (ESMA), the relevant regulatory body for the EU. Currently, only the Dubai Commodities Clearing Corporation (DCCC) is an SCA-licensed CCP that is recognised by ESMA to offer clearing of certain types of derivatives to EU counterparties. Dubai CSD is the UAE’s first independent central securities depository (CSD) company. It is licensed by the SCA under SCA Decision No.(19) of 2018 on the Regulations of Central Depository Activities. Dubai CSD is responsible for the administration, safe custody, registration, depositing, and transfer of ownership of securities on the DFM.
The SCA has been steadily introducing reforms over recent years towards ensuring the UAE markets satisfy standards to be considered a “developed market” according to global indicators, such as the MSCI Indices. For example, the SCA enhanced regulations on Trading, Clearing, Settlement, Transfer of Ownership and Custody of Securities in 2019 (read more…) and introduced new regulations on derivatives (including over the counter (OTC) derivatives) in 2018 (read more…). These measures are also intended to meet International Organization of Securities Commissions (IOSCO) standards.
First annual notifications due under the UAE’s economic substance regulations
Businesses in certain sectors in the UAE or a free zone in the UAE must have submitted, or must soon submit, their first annual notifications to their regulatory authorities under the UAE’s economic substance and tax reporting rules introduced in 2019 under UAE Cabinet Resolution No.31 of 2019 and Ministry of Finance Ministerial Decision No.215 of 2019 (read more…). Sectors within the scope of these new economic substance rules include banking, insurance, fund management and holding companies. Each regulatory authority onshore in the UAE or in a free zone sets its own deadline for the submission of notifications by companies which demonstrate that they were carrying out substantive economic activity in the UAE during the 2019 financial year ranging from May 2020 to June 2020. Fines may be imposed on companies for failure to file on time.
DIFC and DFSA Business Stimulus Initiative for companies in the DIFC: The DIFC’s Business Stimulus Initiative contains short term measures aimed to help companies in the DIFC deal with the immediate challenges presented by the Covid-19 pandemic. It comprises the following measures:
- Commercial leases – deferred payments in respect all properties owned by DIFC Investments for a period up to six months;
- License fees - waivers (for new licence applications) and 10 per cent. discounts (on annual renewals);
- Fees on the transfer of property – reduced from 5 per cent. to 4 per cent.; and
- Free movement - the DIFC will facilitate the free movement of labour in and out of the DIFC.
Announced in April 2020, the initiative will run for an initial period of three months ending on 30 June 2020. It forms part of a co-ordinated package of stimulus measures implemented in the UAE and its free zones to in response to the evolving nature of the Covid-19 pandemic. The DFSA is also offering temporary regulatory relief for regulated entities in the DIFC, for example through reductions or waivers of fees and additional time to make filings. Firms can request support online via a new Regulatory Relief Measures Application form which is accessible on the DFSA ePortal. Each request will be assessed on a case-by-case basis by the DFSA.
Temporary changes to employment in the DIFC
Employers in the DIFC may temporarily adjust arrangements with their employees to cope with the impact of the Covid-19 pandemic, for the period up to 31 July 2020. DIFC Presidential Directive No.4 of 2020 enables employers to enforce remote working, reduce working hours, reduce pay and enforce leave on 5 days’ notice, for example. Special sick leave arrangements apply for those employees who become ill with Covid-19 or who are required to quarantine. Employers may collect, process and share the personal data of their employees (including information regarding their health, travel and Covid-19 related symptoms) for any reasonable purpose related to the health and safety. Gratuity payment calculations for employees in the DIFC should not be affected by temporary salary reductions. Some similar changes have been made to the onshore employment regime by Ministerial Resolution (No.279 of 2020), issued by the Ministry of Human Resources and Emiratisation.
Wrongful trading rules suspended for directors of DIFC companies
Directors of DIFC companies are temporarily protected from personal liability for conduct which might otherwise amount to wrongful trading under the DIFC Insolvency Law No.1 of 2019. Until 31 July 2020, DIFC Presidential Directive No.4 of 2020 allows directors to continue to trade during the economic volatility caused by the Covid-19 pandemic, even if it is uncertain whether the company may remain solvent, without the risk of being sued for wrongful trading. Under the DIFC’s wrongful trading regime, directors can be held liable if a company continues to trade and the company becomes insolvent and the directors of the company knew or ought to have known that there was no reasonable prospect of the company avoiding going into insolvent liquidation. They may be required to repay amounts to the company or to pay compensation. Liability for wrongful trading can be avoided if a director took every step with a view to minimising the potential loss to the company’s creditors. The temporary suspension of liability recognises the difficulty directors’ face in anticipating a company’s future prospects in the midst of the pandemic. It is important to note that while liability for wrongful trading may not apply, the Directive does not release directors from any liability resulting from a breach of other statutory and common law duties, including their duty to have regard to the interests of their creditors and their duty to exercise due skill and care.
Various jurisdictions around the world are making changes to their insolvency and restructuring regimes, ranging from short term measures aimed at assisting companies struggling with the immediate impact of Covid-19 and significant reforms which are intended promote a rescue culture to support viable businesses. You can read more in our tracker of Covid-19: Restrictions on creditor rights, relaxation of obligations to file and other insolvency-related reforms/proposals.
DIFC Court refuses to enforce Dubai Court decision
The DIFC Court has, for the first time, refused to recognise and enforce an order issued by the Dubai Courts. The complex case of YYY Limited v ZZZ Limited [DIFC] 2017 ARB 0051 raised questions as to the scope of the reciprocal enforcement arrangements between the Dubai Courts and the DIFC Courts and raises issues for parties facing arbitration in the UAE. The dispute focussed on an agreement relating to a hotel onshore in Dubai, which was governed by English law and in which the parties agreed to refer disputes to arbitration seated in the DIFC. The parties brought simultaneous proceedings in an arbitral tribunal (in accordance with the agreement), the DIFC Courts (for injunctive relief in support of the arbitration proceedings), the Dubai Courts (challenging the validity of the agreement to arbitrate, in breach of the agreement) and the Judicial Tribunal of the Dubai Courts and the DIFC Courts (to determine any conflict of jurisdiction between the two courts). The Judicial Tribunal allowed proceedings to continue in both the DIFC Courts and the Dubai Courts. Both the Dubai Courts and the DIFC Courts have issued judgments.
The main issue for the DIFC Court to determine was whether to recognise and enforce a Dubai Court of Cassation judgment that determined that the agreement to arbitrate was invalid for lack of authority under UAE law and ordered that the case be heard in the Dubai Courts of First Instance. In basing its decision on UAE law, the Dubai Court of Cassation failed to take account of the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958 (NY Convention), which is was required to do given the UAE is a contracting state to the NY Convention. Broadly, the NY Convention requires that the courts of the contracting states uphold arbitration agreements, unless there are grounds to refuse to do so, for example because the agreement to arbitrate is invalid. The Dubai Court of Cassation should have applied English law in determining the validity of the agreement to arbitrate, as the NY Convention requires that the court applies the governing law of the agreement in deciding this issue. As the rules on authority to bind a company under English law are different to UAE law, the outcome may have been different had English law been applied. As it was not a money judgment, any recognition and enforcement of this judgment by the DIFC Court would effectively be to declare the arbitration agreement invalid, impacting the validity of the injunction and preventing further actions in the DIFC Court (as the supervisory court in the arbitration).
The DIFC Court refused to recognise and enforce the Dubai Court of Cassation judgment. The key points to note from the DIFC Court’s judgment are that:
- Not all judgments issued by the Dubai Courts are automatically recognised by the DIFC Courts under the reciprocal enforcement arrangements between the courts, set out in the Judicial Authority Law (Dubai Law No. 12 of 2004, as amended).
- There is no automatic recognition of declaratory judgments. Only money judgments or orders enforceable by attachment of assets may be automatically recognised.
- Where a declaratory judgment is not automatically recognised, the DIFC Courts must consider whether it can be recognised at common law. Common law requires that the judgment must be final and conclusive and not capable of being set aside on grounds of fraud or public policy.
- The DIFC Court refused to recognise the Dubai Court of Cassation judgment at common law on grounds of public policy, because it breached the NY Convention which forms part of the law of the UAE. This is highly unusual, as noted by the Judge, given the courts are both courts of Dubai. If the DIFC Courts were to recognise the Dubai Court of Cassation judgment, the DIFC Courts would breach the NY Convention.
- The DIFC Court also noted that, as the arbitration agreement selected DIFC as the seat of the arbitration, any applications should have been made to the DIFC Court (as the supervisory court), and not the Dubai Courts.
In its decision, the DIFC Court also noted that the Dubai Court of Cassation did not take into consideration the DIFC-LCIA Rules, did not respect the governing law and dispute resolution procedure agreed by the parties to the agreement and did not acknowledge the fact that YYY failed to advance the argument that arbitration clause was invalid in the DIFC Courts. It also recognised that the prospect that if the DIFC Court decision is considered to result in a conflict between the Dubai Courts and the DIFC Courts, this could be referred to the Judicial Tribunal for future determination.
New data protection law for the DIFC
The DIFC Data Protection Law No.5 of 2020 and new Data Protection Regulations come into effect from 1 July 2020. Companies in the DIFC must comply with the new regime by 1 October 2020, at the end of the three-month grace period. The new law aligns the DIFC’s data protection regime more closely with international best practice than the current law, DIFC Data Protection Law No.1 of 2007, which it repeals and replaces. The new framework revises rules on the collection, handling, disclosure and use of personal data in the DIFC. It includes enhanced accountability and responsibility for those controlling and processing data (with provisions relating to compliance obligations, impact assessments and data protection officers, for example). It offers greater protections for the individuals and their personal data, including where their personal data is generated, used or stored in the latest technologies such as blockchain and artificial intelligence.
Data sharing may become easier. There are new data sharing structures between government authorities within the UAE. As aspects of the new framework draw on the European Union’s General Data Protection Regulation , it should pave the way for cross-border data transfers between the European Union (and Norway, Liechtenstein and Iceland) and the DIFC without the need for additional safeguards, if the European Commission determines that the DIFC regime offers an adequate level of data protection. There are also greater controls on transferring data outside the DIFC to jurisdictions which do not provide an adequate level of protection for personal data. There are higher maximum fine limits for breaches of the new DIFC Data Protection Law.
DFM launches ESG Index
A new UAE Index for Environment, Social and Governance (ESG) launched by the DFM measures listed companies embracing ESG best practices. Currently, the Index consists of 20 companies. “ESG” in the broadest sense covers environmental, social and governance issues, such as antibribery and corruption, climate change and risk management more generally. There is a growing expectation that organisations embrace sustainability and recognise and address ESG risks to ensure their resilience and long-term viability. Many investors also consider ESG factors as part of their decision-making, even though not traditionally part of financial analysis. The Index aims to incentivise listed companies to adopt and enhance their ESG best practices. You can read more about our ESG client services and insights on our dedicated ESG site.
ADGM business support initiatives
The ADGM Financial Services Regulatory Authority (FSRA) is offering temporary relief for ADGM regulated entities through reductions or waivers of fees and extensions to filing deadlines, until 31 December 2020. The relief measures available are set out in the Guidance for ADGM Entities during the Coronavirus (COVID-19) Pandemic issued by the ADGM Registration Authority. To date, there have been no changes to the employment, data protection or wrongful trading regimes in the ADGM.
ADGM revises its Founding Law
The ADGM’s dispute resolution framework has been enhanced by recent changes to the ADGM Founding Law (Abu Dhabi Law No.4 of 2013, as amended by Abu Dhabi Law No.12 of 2020). Some of the changes provide greater clarity on certain points, for example revised provisions clearly state that parties can opt for the ADGM courts to determine their disputes provided they agree to do so in writing before or after the dispute, whether or not there is a nexus to the ADGM.
Other provisions expressly codify the ADGM law approach to jurisdiction enforcement issues between the ADGM Courts and the Abu Dhabi Courts (and other national courts) which, until now, have lacked a clear legal basis. The framework for the reciprocal enforcement of judgments, decisions and orders and the arbitral awards ratified or recognised by the onshore civil law courts in Abu Dhabi and the common law courts of the ADGM is now set out in the amended ADGM Founding Law. This gives legal force to the framework, which was previously set out in a non-binding Memorandum of Understanding dated 11 February 2018. The advantage for parties who litigate or arbitrate their disputes in ADGM is ease of enforcement onshore in Abu Dhabi - any resulting judgment, decision, order or ratified arbitral award may be referred in the prescribed manner for enforcement against assets onshore in Abu Dhabi and should be enforced without review of the merits (and vice versa). The law now recognises the relatively new ADGM Courts as courts of the Abu Dhabi judicial system should facilitate enforcement of ADGM Court judgments in the various other national courts of the UAE.
ADGM law now expressly restricts ADGM Courts being used as a conduit to recognise non-ADGM judgments, orders and arbitral awards and refer them for enforcement onshore in Abu Dhabi and the other courts of the UAE under reciprocal enforcement arrangements. There has been some discussion in the market about the legality of parties seeking to use ADGM Courts as a conduit in an effort to avoid some of the challenges in enforcing foreign judgments, orders and awards onshore in the UAE. In a recent decision, the ADGM Court recognised a London arbitral award where there were no assets in the ADGM and the judge’s view was that there was “more room for debate” on the role of the ADGM Courts as a gateway jurisdiction (read more…). It is helpful that these issues have been addressed in legislation, as similar issues of jurisdiction and enforcement between the DIFC Courts and the Dubai Courts were the subject of lengthy debate and litigation.
Also of interest is a new provision which gives effect to the protection of netting agreements in the context of proceedings to enforce non-ADGM judgments, decisions, orders and awards. This complements ISDA’s opinion on the enforceability of close-out netting under ADGM law under the 1992 and 2002 ISDA Master Agreement.
ADGM changes commercial legislation
ADGM companies and limited liability partnerships should be aware of several changes to various ADGM commercial regulations and rules enacted in April 2020. Some of the key changes include:foreigners can now own freehold land on Al Maryah Island, the geographical location of the ADGM, removing the previous restriction which limited ownership to GCC nationals and companies owned by GCC nationals;the Companies Regulations 2020 replace and repeal the Companies Regulations 2015 and its amendments)
- certificates of incorporation, and copies of materials on the register are now issued in electronic format (the ADGM Companies Registrar only issue paper versions if specifically requested);
- the term “Annual Returns” is changed to “Confirmation Statements”, so the requirement to file an annual return is now replaced with a requirement to file a confirmation statement;
- applications to register an ADGM foundation must now contain a statement of initial beneficial ownership and control;
- the scope of the definition of ‘members of the same family’ is extended and clarified in the Companies Regulations; and
- the definition of beneficial owner in the Beneficial Ownership and Control Regulations 2018 is clarified, and now refers to any person who owns or controls (in each case whether directly or indirectly), 25 per cent. or more of the shares or voting rights in the company or limited liability partnership (instead of more than 25 per cent.).
Saudi Arabia triples VAT rate
The rate of value added tax (VAT) in Saudi Arabia will increase to 15 per cent., with effect from 1 July 2020. VAT was first implemented in the Kingdom in 2018 at a rate of 5 per cent. (read more...). This should boost Government revenues at a time of economic volatility caused by the Covid-19 pandemic and falling oil prices, and as a result it should support the realisation of the Vision 2030 objectives.
Saudi Arabia signs international agreement on cross-border mediation
Saudi Arabia has signed up to The United Nations Convention on International Settlement Agreements Resulting from Mediation (known as the Singapore Mediation Convention). It will come into force in Saudi Arabia in November 2020. The convention encourages the use of mediation when dealing with the resolution of cross-border commercial disputes and should assuage concerns that a mediated settlement might not be readily enforceable other jurisdictions. Under the convention, parties will be able to apply directly to the courts of a contracting state to the convention to enforce settlement agreements resulting from mediation without needing to initiate new proceedings. It should make settlements resulting from mediation much easier to enforce, akin to the New York Convention for arbitral awards, thereby promoting mediation as a mechanism for international dispute resolution (read more…). This should help parties to resolve and enforce their commercial disputes, without recourse to the courts or arbitration, and alleviate some of the concerns around enforcing contractual rights when doing business in Saudi Arabia.
New moveable security regime and changes to the Commercial Pledge Law
In April 2020, Saudi Arabia introduced new legislation to support the taking of security in commercial and financial transactions. Royal Decree M/94 dated 15/08/1441 H. enacts a new regime for taking security over moveable property and amends the regime for taking pledges of movables under the Commercial Pledge Law issued in 2018 (read more…). It sets out the regime for taking security over present or future rights over a wide range of collateral, including receivables, bank accounts, commercial paper, vehicles (excluding ships and airplanes), inventory and other goods, animals and agricultural products in the context of certain types of transactions. These transactions include not just commercial pledges, but also other types of transactions such as retention of title arrangements and sale and leaseback arrangements. Registration of the security will be possible at a new registry, which will ensure validity against third parties and establish priority. Self-help remedies may be used on enforcement, as well as sale by public auction in the usual way. The new law overlaps to a degree with the Commercial Pledge Law, and it amends certain provisions of that law to align the two regimes, for example in relation to registration, priority and enforcement matters. Importantly, it also withdraws the ability for lenders to take a floating charge, meaning that it will be necessary for lenders to ensure that all assets secured are identified in future pledges taken under the amended Commercial Pledge Law. Saudi Arabia’s modernised security regime should improve the ability for lenders to take effective security over a range of movable assets.
An update on GCC Covid-19
Our global teams have prepared a range of guides offering practical guidance on significant commercial and legal issues, which you can access on our dedicated Covid-19 Resource Hub.
International arbitration in times of Covid-19
We have published a briefing note discussing some of the key questions that users and potential users of international arbitration are likely to be asking during the Covid-19 pandemic. The note is available via our Knowledge Portal.