Stock Arabtec properties Dubai
How will the wind down of Arabtec look like? For creditors, nothing will matter more than trying to get their hands on the Dh10 billion plus the company owes. Or at least part of it... Image Credit: Virendra Saklani/Gulf News

Dubai: Creditors to Arabtec, the UAE construction giant that has filed for bankruptcy, will have to wait for a Dubai court’s next judgement to see how - or whether - they can recover their dues, estimated to be in the billions of dirhams.

First, the court-appointed panel of experts will have to come up with their findings on whether Arabtec should proceed with the liquidation or whether there are other less drastic options available for the company that built the Burj Khalifa and the Louvre Abu Dhabi. But the submission by the panel itself could take time.

Once that’s done and “Assuming the panel concludes that insolvent liquidation is the correct course of action, the court is likely to accept the bankruptcy application,” said Matthew Escritt, Partner at the Dubai office of Pinsent Masons, the law firm. “The moratorium on payments and other claims starts when the application is accepted by the court.”

It was late last year that a majority of Arabtec shareholders decided that pulling the plug was the only option left to them as losses kept mounting and chances of a new or existing investor coming up with new funding turned remote. The construction company suffered some grueling losses as new project activity slowed down. Some of its non-UAE operations too took a hit, which was reflected in the first-half 2020 results.

Trustee takes control

Once the court accepts the experts’ findings, Arabtec and certain of its subsidiary companies will be placed under the supervision of a court-appointed trustee. The trustee, armed with sweeping powers, takes control of the management of these companies with the purpose of winding them down.

That’s also the time when “all other proceedings and enforcement actions against these companies will be stayed automatically,” added Escritt. It will also mean the launch of formal bankruptcy proceedings, which will set precedents in the UAE’s legal space on how ailing businesses are wound down.

Matthew Escritt, Pinsent Masons
Matthew Escritt of Pinsent Masons: “The outcome of any insolvent liquidation is that shareholders will in all likelihood lose the entirety of their investment..." Image Credit: Virendra Saklani/Gulf News

What creditors should do next?

Arabtec’s liabilities as of end June 2020 were Dh10 billion plus, and it could be that the figure has swelled further. This is why all creditors will have to keep track of whether the court appoints a trustee to take on the management of the company and its subsidiaries.

Once that’s done, creditors will be invited to submit to the trustee their claims against the companies together with supporting documents. “Creditors have 20 working days from the date of publication of the court's decision to do so,” said Escritt. “Claims will be assessed by the trustee for inclusion in the list. If a creditor's claim is not included in the list, the aggrieved creditor can initiate a grievance procedure.

“However, it is for the court to decide whether this claim will ultimately be included.”

Can Arabtec use the Bankruptcy Law changes?
Last year, the UAE amended the 2016 Bankruptcy Law to include provisions that allowed impacted companies to seek more time – up to 12 months - to meet their obligations where their financial distress had been brought about by an emergency situation such as the pandemic.

Can Arabtec use any of these provisions to come up with a new strategy?
“In these circumstances, with the permission of the court a debtor may be permitted up to 12 months to agree a debt settlement plan with creditors,” said Matthew Escritt at Pinsent Masons.

“However, Arabtec Holdings and its subsidiaries have given no indication that they intend to agree a debt settlement plan with their creditors. On the contrary, it seems these companies have applied for insolvent liquidation. This means the companies will not be continuing as going concerns.

“Instead the corporate existence of each company will be terminated and its remaining assets distributed to creditors in accordance with the procedures and priorities set out in the Bankruptcy Law, which provides that secured and other preferred creditors are paid out before unsecured creditors.”

No time to waste

Once bankruptcy proceedings commence, creditors must identify and quantify their claims against the companies. “These monetary claims will also need to be adequately supported by documentary evidence - so creditors should be using this time to collate all available documentation to support this,” the lawyer added. “This preparatory work will allow them to move quickly if and when the court decides to accept the bankruptcy application of Arabtec Holdings and certain of its subsidiaries.”

Get claims listed

In a bankruptcy proceeding, creditors’ best shot at getting back some of the sums owed to them would be to have their claim listed in the company’s liabilities. Creditors cannot take any independent action to pursue claims by other means. The court has the final say and ‘The order, priority and amount of such distribution is determined by the law,” said Escritt.

Shareholder options

Until its financial troubles overtook it, Arabtec was one of the most sought after stocks on DFM. Trade on the stock was suspended on October 1, 2020, and its final price was a measly Dh0.53.

Now, in a bankruptcy, what will shareholders be left with? “The shareholders of Arabtec Holdings decided they were not prepared to put any more capital into the business,” said Escritt. “Presumably, this decision was made for sound commercial reasons.

“However, the consequence of the decision not to recapitalize the company is that the board of Arabtec Holdings will have decided they had no choice other than to recommend the insolvent liquidation. It would seem shareholders have not objected to this given that the application to the court was made.

“The outcome of any insolvent liquidation is that shareholders will in all likelihood lose the entirety of their investment since, on an insolvency, a shareholder is the last to be paid after all other creditors of the company have been paid in full.”

Expectant banks

Some of the biggest names in the UAE banking space have had exposures to Arabtec. It’s still not clear the exact nature of their combined exposure to the construction company. “It’s understood the banks have agreed an informal standstill which means that they have agreed commercially with Arabtec not to commence enforcement proceedings under their respective financing documents, which will include enforcement of any security they may hold,” the lawyer said.

“However, this is an informal commercial arrangement. It has no bearing on Arabtec's decision to apply for insolvent liquidation. The court will take into account the various debts of the companies (including the amounts owed to the banks) when making a decision as to their continuing economic viability.

“But if the court does decide to accept the application, then the banks will simply be treated like any other creditor (though in some instances they may be secured creditors) and they will receive a distribution of the remaining assets in accordance with the priorities set out in the law.”