Corporate Set-up & Restructuring

Corporate restructuring refers to the process of reorganising a company’s structure, operations, or finances to improve efficiency, address financial difficulties, or adapt to changing market conditions. It may be needed when a company is facing financial distress, undergoing a merger or acquisition, seeking to optimize its corporate structure for tax or operational efficiency, or responding to regulatory changes. Restructuring can involve changes to debt, equity, operations, or legal structure.

The main types of corporate restructuring include financial restructuring (renegotiating debt terms, raising new capital), operational restructuring (improving efficiency, reducing costs, divesting non-core assets), legal restructuring (changing the corporate form, merging entities, establishing new subsidiaries), and strategic restructuring (entering new markets, changing business models). Often, a comprehensive restructuring involves elements of several types.

Corporate restructuring is a broader term that can refer to any reorganisation of a company, whether it is in financial distress. Bankruptcy, under UAE law, is a formal legal process for companies that are unable to pay their debts or meet the balance sheet test. While restructuring can be done voluntarily and privately, bankruptcy involves court supervision and follows the procedures set out in the UAE Bankruptcy Law. Restructuring is often undertaken to avoid bankruptcy.

A debt-to-equity swap is a financial restructuring technique where a company’s creditors agree to cancel some or all the debt owed to them in exchange for equity (ownership shares) in the company. This reduces the company’s debt burden and can help it avoid bankruptcy. Creditors accept this arrangement when they believe the equity they receive will ultimately be worth more than what they would recover through debt collection or liquidation.

Lawyers play a crucial role in corporate restructuring by advising on the legal options available, negotiating with creditors and other stakeholders, drafting restructuring agreements and legal documents, ensuring compliance with regulatory requirements, handling any necessary court proceedings, and protecting the interests of their clients throughout the process. Restructuring often involves complex legal, financial, and tax considerations that require specialised expertise.

Yes, a company can undertake voluntary restructuring outside of formal insolvency proceedings if it can reach agreements with its creditors and other stakeholders. This is often faster, less expensive, and more confidential than formal court-supervised processes. However, voluntary restructuring requires the cooperation of key stakeholders. If agreement cannot be reached, or if the company needs the protection of a formal process, it may need to use the court-supervised procedures under the UAE Bankruptcy Law.

A standstill agreement is an arrangement where creditors agree to temporarily refrain from taking enforcement action against a debtor company while restructuring negotiations are ongoing. This gives the company breathing room to develop and negotiate a restructuring plan without the pressure of imminent legal action. Standstill agreements are typically time-limited and may include conditions that the company must meet to maintain the standstill.

The impact of restructuring on employees depends on the nature of the restructuring. Operational restructuring may involve redundancies, changes to terms and conditions, or transfers to new entities (with the consent of the employee). UAE Labour Law (Federal Decree-Law No.  33 of 2021) provides protections for employees, including requirements for end-of-service benefits and notice periods. In a transfer of business, employees’ right to continue employment with the new owner is not automatic. Legal advice should be sought to ensure compliance with employment law during restructuring.

The tax implications of corporate restructuring in the UAE have become more significant with the introduction of UAE Corporate Tax in 2023. Restructuring transactions may have implications for corporate tax, VAT, and transfer pricing. Certain reliefs may be available for qualifying restructuring transactions within groups. It is essential to obtain tax advice before undertaking any restructuring to understand the implications and optimize the structure.

A corporate restructuring lawyer in Dubai can assess your company’s situation and advise on the most appropriate restructuring options, negotiate with creditors and other stakeholders on your behalf, draft and review restructuring agreements and corporate documents, guide you through any court-supervised processes if necessary, ensure compliance with UAE corporate, employment, and tax laws, and help protect the interests of directors and shareholders throughout the process.