In June 2019 the Dubai International Financial Centre's (DIFC's) Insolvency Law (3/2009) was repealed and replaced by DIFC Law 1/2019. The new insolvency law reaffirms the DIFC's commitment to meeting the highest international standards and practices and facilitating a more efficient and effective bankruptcy and restructuring regime.
Two months after the introduction of the new DIFC Insolvency Law, the DIFC's new Employment Law (2/2019) came into force, introducing significant changes, including:
- a cap on the penalty payment in respect of the late payment of termination dues; and
- five days' paid paternity leave.
In an insolvency context, the key employment law change has been the review of the statutory end-of-service gratuity regime, which will be replaced with a defined contribution pension scheme. This is due to come into force on 1 January 2020.
This article examines the DIFC insolvency regime in the context of employment relationships and considers what impact the proposed new pension regime will have in practice.
In the employment context, the new DIFC Insolvency Law must be read in conjunction with its supporting regulations.
The DIFC Insolvency Regulations set out the manner of distributing assets, including:
- the expenses of the winding-up process;
- any payments to preferred creditors; and
- payments of all other debts that are unsecured or secured.
Under the DIFC Preferential Creditor Regulations, employees are designated as 'preferred creditors'. Therefore, and crucially for employees, the following employment payments are classified as preferred debts and will be paid before unsecured or secured payments are paid to third-party creditors:
- any sum owed by the company which is a contribution to a pension scheme on behalf of the company's employees or any end-of-service gratuities;
- remuneration of company employees for a period of up to four months;
- payments in lieu of notice; and
- payments in respect of accrued but untaken annual leave.
In addition, the DIFC Preferential Creditor Regulations make it clear that any sums ordered by a DIFC court as payment to an employee are classified as preferential debts.
DIFC Authority Chief Legal Officer Jacques Visser has been keen to stress that, notwithstanding an insolvency situation, an employee who considers that their employer has breached its obligations under the DIFC Employment Law will still have access to the DIFC courts (including the DIFC Small Claims Tribunal, which is committed to quick and cost-effective dispute resolution).
Employee workplace savings scheme
The current statutory end-of-service gratuity system – a defined end of service benefit to which expatriate employees are entitled following the completion of one years' service – is set to be replaced with a funded workplace pensions scheme from 1 January 2020. The savings scheme – known as the DIFC employee workplace savings scheme – is meant to be more closely aligned with global retirement savings standards.
In the context of insolvency – and while pension payments are already set out as a preferred debt – the fact that the assets will sit in trust means that if a company goes into administration the money will still exist and increase on a month-by-month basis. Accordingly, the DIFC employee workplace savings scheme should help to go one step further and help employees to achieve added financial security.
The changes that the DIFC has made to its insolvency and employment laws are significant and demonstrate its commitment to being one of the most sophisticated and responsible jurisdictions in which financial services companies do business. The new provisions will provide much greater financial protection and security for the variety of local and international talent which DIFC companies wish to attract to the region. It is important that the business community is aware of these developments and incorporates appropriate policies to reflect the new laws.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
