Bankruptcies: Little scope for class action suit

The bankruptcy of a property developer would leave an investor with limited recourse as he is deemed to be an unsecured creditor, while class action lawsuits are not allowed under the UAE law, legal experts said.

A survey conducted by Emirates Business with five leading law firms revealed that since there were no major corporate insolvencies reported in the UAE, local laws and regulations relating to creditors' rights in the event of insolvency remain substantially untested.

Ashraf Sayed, Associate, Real Estate, Hadef & Partners, said: "Usually, an investor would be deemed an unsecured creditor, which means that the investor would only be paid from the sale of the developer's assets after secured creditors, such as banks with specific security, are repaid."

KK Sarachandra Bose, Partner and Corporate, Commercial and Contract Lawyer, Dar Al-Adalah Advocates & Legal Consultants, said: "Most of the developers are limited liability companies. In such cases, if the developer files for bankruptcy or is declared bankrupt by the court, or the developer is liquidated, the investors do not have many options other than sharing the assets of the developer with other creditors."

Raza Mithani, Senior Associate, Al Tamimi and Company; Ludmila Yamalova, Partner, Al Sayyah Advocates & Legal Consultants and Tatjana Fuhr, Legal Consultant at Fichte & Co Legal Consultancy along with Sayed and Bose agreed that a court is unlikely to club all cases filed against a developer to one court in one emirate, because the concept of a class action lawsuit has no credence under the law. Excerpts:


Can property investors in one emirate file a case against the developer in other emirates?


Mithani: The law in the UAE, in common with the laws of many other jurisdictions, prescribes in which court a claim in connection with real estate may be commenced. Article 32 of the Civil Procedure Law makes a distinction between proprietary claims, for instance those relating to ownership, and money claims. The former must be commenced in the court, which has jurisdiction over the area where the property is located. As to the latter, Article 32(2) provides that the claim may be commenced either where the property is situated or where the address of the defendant is located. However, as a matter of practice, most claims are usually issued in the court, which has jurisdiction over the area where the property is located.

Sayed: This is an issue of legal jurisdiction and depends on a combination of the UAE laws and regulations and the text of the agreement formed between the parties. It is common to include "governing law and jurisdiction" provisions in property sale and purchase agreements, which should specify the court or arbitration venue that applies in the event of a dispute. However, as a matter of the UAE Law, one cannot in certain instances, contract out of explicit provisions of the law.

In some instances, a property developer based in one emirate and constructing a project in a separate emirate may be sued in a court located in another emirate. Federal Law 11 of 1992 (as amended) "Civil Procedure Law" generally addresses the procedure for filing civil matters (as opposed to criminal cases) in the UAE. Article 32 of the Civil Procedure Law states that with respect to disputes concerning real estate possession, a legal jurisdiction lies with the court where the property is located. Whereas regarding personal real estate actions, including disputes over the sale and purchase agreement, the jurisdiction of the court would be determined by either the location of the property or the location of the defendant.

A judge may decline jurisdiction in a dispute if the judge determines that the plaintiff (person(s) who filed claim) has filed the case with the wrong court. Similarly, a defendant (person(s) defending the claim) may request the court to decline jurisdiction in a case on the basis that the plaintiff has filed the case with the wrong court. Finally, where the parties have contractually agreed that any disputes between them be settled by arbitration, then a judge may also reject any legal action filed in court provided that the defendant raises the arbitration clause as a defence in the first hearing.

Bose: Normally parties to the contract have the right to choose a convenient forum to resolve their disputes. If the subject of the dispute is real property situated in Ajman, the right court would be Ajman court. The plaintiff can file case in Ajman court and attach the properties of the developer in Dubai. The question of suing the developer in Abu Dhabi does not arise at all as the Abu Dhabi court does not assume jurisdiction over the developer in Dubai.

Yamalova: Yes, under certain circumstances, property investors in one emirate can file a legal case against a developer in a different emirate. They can do so in the following scenarios. One, the underlying sales contract was signed in the emirate where the investor wants to bring a lawsuit. So, for example, an investor in a property in Abu Dhabi, who signed the contract for that property in Dubai, can bring a suit in Dubai on the basis of the place of the signing of the contract. This applies even if the developer is based exclusively in Abu Dhabi. Two, the developer has an office or physical presence in the emirate where an investor wants to file a suit, even if it involves the property in another emirate. Thus, an investor in a property in Ajman, who invested with a developer located in Dubai, can also file a legal action against that developer in Dubai on the basis of the developer's business residence.

Fuhr: Article 32 of Civil Procedures Law states concerning the local jurisdiction of the court that in the real estate and possession actions, the court of jurisdiction shall be the court in whose circuit the property or any part thereof lies. If the said property is spread within the jurisdiction of several courts, each case has to be filed at the court of the city the property is located in.

Can a court move to club all cases filed against a developer to one court in one emirate?

Mithani: The courts have limits to their jurisdiction as outlined in the answer above. In our experience, it is unlikely that a court in one emirate would seek to consolidate cases in this manner.

Sayed: This again is an issue of jurisdiction. In general, based on the historic practice in the UAE and current laws and procedures, a court would not group all cases against the developer to one court in one emirate. We have seen instances where one court has referred all cases concerning the same project and developer to one judge to deal with the cases. Please note that this usually "only" occurs in scenarios where plaintiffs file cases at a similar time.

Bose: For administrative reasons, the court may club all cases filed against a particular developer. But this may not mean that all the cases are clubbed into one case file. Every case will be heard separately depending on the facts and grounds of each case.

Yamalova: No, this has not been done before. And since class actions are not allowed under the UAE law, it is unlikely that a court would consolidate multiple cases into one, let alone from one court to another. If anything, Dubai Courts is beginning to insist that investors file separate cases for every unit, even if there is only one agreement covering multiple units.

Fuhr: No, a court cannot move to club all cases filed against a developer to one court in one emirate. Each case has to be filed at the court where the property is situated, since in real estate actions the jurisdiction is related to the property circuit (Art 32 Civil Procedure Law).

In case a developer files for bankruptcy, what measures can an investor take?

Mithani: As with most disputes, the most sensible step is always to take immediate professional advice as each case has its own subtleties, and tactics and strategies vary according to specific facts. The sort of avenues that would need to be explored include attempting to obtain a refund from the escrow account (if one was set up) and in the event of some impropriety considering the possibility of making a criminal complaint or bringing a personal claim against the directors of the company.

Sayed: This is a very complex issue, which depends on a number of factors such as the place of incorporation of the developer, the location and types of assets of the developer, the location and stage of progress of the developments being undertaken by the developer, other relevant jurisdictions and laws and the universe and types of creditor. For example, funds deposited in escrow accounts are only available to repay purchasers and not general creditors (such as consultants and contractors) of the developer. However, other assets such as land and general funds may be available to repay all creditors and these creditors may have different rights depending on whether they are secured or unsecured. Governmental debts and certain types of obligation to employees may also have a level of priority. Finally, there is an absence of highly detailed laws and precedents relating to insolvency and bankruptcy in the UAE.

In general, investors in real estate projects would seek to file their claims with the relevant liquidator or bankruptcy court in respect of the troubled developer. The liquidator would deal with relevant assets and sell the same through public auction in order to repay creditors of the developer. Usually, an investor would be deemed an unsecured creditor, which means that the investor would only be paid from the sale of the developer's assets after secured creditors (for example, banks with specific security) are repaid. This potentially entails an investor having limited recourse in the event of bankruptcy of a developer.

Article 645 to Article No. 900 of Federal Law No. 18 of 1993 (the Commercial Transactions Law) provide certain procedures for bankruptcy.

It is important to understand that bankruptcy applies only to "traders" covered by the Commercial Transactions Law and not to civil debtors. According to Article No. 4 of the Commercial Transactions Law, a "trader" is defined as being "an individual or company that carries out commercial activities". Due to the dearth of major corporate insolvencies in the UAE, the local laws and regulations relating to creditors' rights in the event of insolvency remain substantially untested.

Bose: Most of the developers are limited liability companies. In such cases, if the developer files for bankruptcy or is declared bankrupt by the court, or the developer is liquidated, the investors do not have many options other than to share the assets of the developer with other creditors.

Yamalova: This is a complicated issue in so far as bankruptcy laws, while in existence, have rarely been tested. But theoretically, once a developer files for bankruptcy, a court would seize all of his assets and distribute among the developer's creditors. The creditors, however, would have to be prioritised. Which creditors get priority and how exactly the remaining assets are to be distributed is a very involved and drawn out process. The next several years will shed more light as to how such cases are to be resolved.

Fuhr: For the emirate of Dubai, Article 15 of Law No.8, 2007 concerning the escrow account states: "In the event of a force majeure, which prevents completion of the real estate project, the account trustee for that project after consultation with the Land Department shall take all the required action to safeguard the depositors' rights to ensure the completion of the real estate project or refund of the depositors' money. Whether a bankruptcy can be considered as "force majeure" is not clear, but in any case the investors could approach Real Estate Regulatory Agency (Rera) and ask for cancellation of the project and refund of the money if the same is in an escrow account. But it depends on Rera's discretion whether to cancel the project or not.

Thirty days after the trader ceased paying his debts, he has to apply for a declaration of his own bankruptcy. If he fails to do so, he can be criminally prosecuted under the UAE Penal Code, Federal Law 3 of 1987.

In case bankruptcy has already been filed with the court, the court will appoint a trustee to administer the bankruptcy, under the supervision of the judge. The bankrupt is immediately deprived of the right to manage his own money or property and must cease paying his debts. Every creditor the trustee is aware of will be informed by the latter and within a certain timeframe the creditor has to claim his funds back. The creditor therefore should make sure that the trustee is aware of the existence of the debtor's debts against him.

But if the sales and purchase agreement has not yet been cancelled, normally the investor owes the developer money. So before being listed in the trustee's list of creditors, the investor will have to file a case with court and after having a court order stating that the money has to be refunded, he will be listed on the list of creditors.

The bankruptcy law in UAE is relatively young and due to the economic boom it did not need to be tested in the past.

Bankruptcy of property development companies in the real estate business has never been seen before. This is why a lot of legal issues are still new and unclear. For example, do the creditors, whose funds are in an escrow account, have a priority right over the other creditors or if the bankruptcy case has not been filed by the developer himself, the investor creditor can file such a case with the court.

 

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