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Hedge fund’s pursuit of Drydocks offers test case for Dubai

TheNational – Decree 57 was a piece of Dubai legislation that was never really intended to be used. When the decree was issued in 2010 as part of the process of restructuring the US$25 billion debts of Dubai World, it was hoped that the mere threat of bankruptcy procedures would persuade creditors to the company to negotiate a mutually acceptable solution.

As an instrument of persuasion, it was more stick than carrot. Creditors holding out against an agreed settlement would be forced by the new legal process to accept the terms on offer to the majority of creditors.

It worked. There were no “holdouts” in the Dubai World restructuring.

However, the decree was eventually used by another Dubai company, Drydocks World (DDW), which had got in trouble over repayment of a $2.2bn loan taken out before the financial crisis to fund expansion in South-east Asia. When DDW effectively declared itself bankrupt and invoked the decree, it probably expected creditors would follow the example of Dubai World, and fall in line with settlement proposals.

The vast majority did. The notable exception was (and remains) a United States hedge fund, Monarch Alternative Capital, which specialises in distressed debt. While nearly 98 per cent of DDW creditors went for the new repayment terms, Monarch exercised its right to pursue recovery in legal actions against DDW wherever it thought it might be able to have its claims against assets enforced.

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