The Effect of Contractor Insolvency on Construction Projects in the Middle East
Why are bankruptcy laws needed?
Over the past couple of years, there have been a wave of new insolvency and bankruptcy laws introduced in the GCC. With the exception of Qatar and Kuwait, all other GCC countries have now introduced new bankruptcy laws. As for Oman, its new bankruptcy law is due to come into effect on 1 July 2020.
One of the many reasons why updating the bankruptcy laws has become necessary, is the need for inward investment. Modern fit for purpose bankruptcy laws give investors confidence by providing mechanisms for distressed companies to reorganise their structure and repay creditors with the possibility of continuing to operate. As such, all of the new bankruptcy laws contain provisions allowing for restructuring.
The risk of insolvency is present at all stages during a construction project and can have a knock-on effect on the time and costs for completing the project.
Insolvency regimes in the Middle East
The UAE was the first of the jurisdictions to implement a new bankruptcy law implementing the UAE Bankruptcy Law in 2016. It applies to all commercial companies, excluding those registered in the DIFC and ADGM as they have their own comprehensive insolvency regimes.
The UAE Bankruptcy Law has three mains parts to it:
- protective/preventative settlement;
- insolvency with restructuring; and
- insolvency with liquidation.
Protective settlement allows debtors to reach an agreement with creditors with the assistance of the court for the settlement of its debts. This is available to businesses that are not yet insolvent but are facing financial difficulties and offers a positive opportunity to enable the company to return to being profitable.
In Saudi Arabia, the KSA Bankruptcy Law was introduced in 2018. Similar to the UAE Bankruptcy Law, it also allows for protective/preventative settlement and insolvency with restructuring or liquidation.
In Bahrain, the Bahrain Bankruptcy Law, also introduced in 2018, is similar to that of both the UAE and Saudi Arabia. It was enacted to focus on modern legal mechanisms to restructure a business in distress.
Oman’s current bankruptcy law only recognises one formal mechanism, being liquidation. However, Oman issued its new Bankruptcy Law in 2019. Whilst the Law will not come into effect until 1 July 2020, the structure of the New Oman Bankruptcy Law is similar to that of the UAE. This will be an improvement and can be seen as a positive step to encourage investment.
Effect of insolvency on construction projects
Contractor insolvency is a key risk in any construction project. Whilst it is usual for a construction contract to allow an employer to terminate the contract upon insolvency, bankruptcy, liquidation, receivership, administration or similar of the main contractor, such termination may not take into account the general effects of financial difficulties (not resulting in insolvency), nor the impact on the project as a whole.
A prevalent theme in construction projects is the scenario whereby a main contractor and/or subcontractor is endeavouring to progress works while also operating within a fragile financial environment. Often this is due to late payment, non-payment and/or cash flow restrictions on other projects.
Alternatively, the main contractor and/or subcontractor may come into the project with a healthy financial backdrop only to be hindered by events arising during the contract term. All too often, parties are permitted or compelled to carry on, neither of which is commercially conducive to a successful project.
Even though employers may be aware of a main contractor’s financial difficulties, the contractor is often permitted to carry on because employers do not know how to react in these types of situations, other than through the relatively drastic step of termination of the construction contract.
One of the main considerations an employer should take into account when deciding whether to terminate the main contractor’s employment on the grounds of potential insolvency is whether the time and cost of allowing the main contractor to continue outweighs the time and cost consequences of appointing a new contractor to complete the project. This may be possible where the contactor, although in financial difficulties, is not truly insolvent, but can continue to trade. Where the contractor is insolvent, the construction contract will need to be terminated and another contractor engaged.
Formal restructuring
Once prescribed bankruptcy proceedings have been issued under the relevant bankruptcy law, one of the options is to allow for a formal restructuring of the business in distress. Given that bankruptcy legislation has recently been put into place in many GCC countries, it will be interesting to see how each of the proceedings are brought forward and dealt with by each jurisdiction. Only one firm in the UAE has successfully restructured its debt under the UAE Bankruptcy Law to date. It is therefore a relatively unknown area and it is unclear as to precisely how successful any restructuring is likely to be.
If a main contractor is successfully restructured following such proceedings, it could potentially continue on site to work towards finishing the project. However, a restructuring process is likely to take considerable time and, as such, an employer may prefer to terminate the main contractor’s employment if there is an alternative contractor available who would be able to successfully complete the project.
This article was written by Partner Paula Boast and Associate Jodie Martyndale-Howard. For more information please get in touch at paula.boast@crsblaw.com or on +973 17 133212 or Jodie at jodie.martyndale-howard@crsblaw.com or on +973 17 133213.
Our thinking
Martin Wright
Joint Venture Opportunities
Join our panel where we will discuss various topics including Joint Venture structuring and Partner procurement.
Rupa Lakha
Construction & Infrastructure Seminar
Join our experts who will give insights and analysis on the latest sector updates.
Patricia Nathan-Amissah
The Ayes have it - Collateral Warranties can be a ‘Construction Contract’
The Court of Appeal handed down its judgment in the case of Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP
Rebecca Davies
Islamic Finance News reports on the appointment of Rebecca Davies to Legal Director in our Middle East team
Islamic Finance News reports on the appointment of Rebecca Davies to Legal Director in our Middle East team
Peter Smith
Building the Case for Family Business Arbitration in the GCC Region
The GCC has one of the highest concentrations of family businesses anywhere in the world.
Ghassan El Daye
The Business Breakfast interviews Ghassan El Daye on the legal procedures surrounding international extradition
The Business Breakfast interviews Ghassan El Daye on the legal procedures surrounding international extradition
Glenn Bull
The balance between Fairness and Certainty in UAE Construction Contracts
Articles 106 and 390(20) arguably make the UAE more focused on fairness than some of its counterparts in the GCC.
Carolyn Davies
Carolyn Davies and Oliver Park write for Property Week on the key property points in the Building Safety Act
The key property points in the Building Safety Act
Simone Sancandi
Sports Arbitration Rules and Roster of Dedicated Arbitrators
The Bahrain Chamber of Disputes Resolution publishes a brand-new set of Sports Arbitration Rules.
Carolyn Davies
Carolyn Davies writes for Construction News on stakeholders new duties under the Building Safety Act
“The act brings some of the most significant changes to the construction industry in years”
Steven Carey
Steven Carey writes for Building Magazine on the new Building Safety Act and the associated changes
Steven Carey writes for Building Magazine on the Building Safety Act
Sara Sheffield
Developments in the UAE
The rising strength of the United Arab Emirates as a commercial powerhouse has continued as the Covid-19 pandemic recedes.
David Savage
David Savage writes for PBC Today on the end of rebated fuel
David Savage writes for PBC Today on the end of rebated fuel
Simon Green
International Bar Association quotes Simon Green on the future of the legal sector in Hong Kong
International Bar Association quote Simon Green on the future of Hong Kong's legal sector
Ghassan El Daye
Enforcement of Foreign Judgments 2022 - UAE
Ghassan El Daye and Ahmad El Sayed write for Lexology's Getting The Deal Through on the enforcement of foreign judgments in UAE.
Patrick Gearon FCIArb
Dispute Yearbook 2022
Bahrain has played an important role in the development of the international dispute resolution sector.
Patrick Gearon FCIArb
New era, new rules
In its first update since 2007, DIAC has unveiled a new set of arbitration rules this year.
Lesley O’Leary
Briefing publishes Lesley O’Leary 's comments on hybrid working and the impact on collaboration
Briefing publishes Lesley O’Leary 's comments on hybrid working and the impact on collaboration
Sara Sheffield
DFSA & Whistleblowing: Merely lip service to speak up will not be enough
On 7 April 2022, the DFSA became the first financial regulator in the UAE to implement a regulatory regime for whistleblowing (WB Regime).
Mark Hill
Mark Hill quoted in the Daily Mail discussing Ed Sheeran’s copyright court case win
Mark Hill quoted in the Daily Mail discussing Ed Sheeran’s copyright court case win