While the world is dealing with the repercussions of the Coronavirus and its impact on the wider worldwide economy, SMEs and family businesses are trying to deal with the impact that this will have on their businesses in the short and long term. What is still up for debate is whether the aftermath of the Coronavirus will be as damaging as experts are anticipating.
There is definitely a lot of confusion about the future in the market and we can sense from clients’ queries that there is an immediate need to implement excessive cost-cutting and sort out short-term liabilities.
Targeted Economic Support Scheme
In this context, the UAE’s announcement of the Targeted Economic Support Scheme aiming at injecting AED 100 Billion into the market came as a breath of fresh air. Following this, the UAE Government announced other measures to increase the stimulus by AED 26 billion bringing the total to AED 126 billion.
It is of extreme importance at this time to note that the UAE was among the leading countries to issue such a generous and considerable stimulus that should be strong enough to comfort the market and to allow businesses to have some certainty vis-a-vis their local and cross border engagements and liabilities as well as their relationship with their banks.
What will this mean for businesses? It is widely believed that businesses will struggle to get back to their feet following the coronavirus outbreak which has now been categorized as a global pandemic. A stimulus like the one announced by the Central Bank of the UAE will give assurance to businesses that they can count on their banks to reschedule their liabilities or to renegotiate them. It will also provide certain liquidity to the market to address the financial repercussions of the outbreak on the local economy.
The initial AED 100 Billion stimulus will be split in two equal tranches. The first AED 50 billion from the Central Bank’s own funds, which will be offered to local banks at zero interest rates. The second AED 50 billion will be routed as collateralized loans to the borrowing banks.
Banks can benefit from the Central Bank of the UAE fund to give “temporary relief” to private sector businesses and individual clients for a period of up to 6 months.
The Central Bank of the UAE further issued a directive calling on banks to provide added flexibility on loan payments and advising banks to consider the re-scheduling of loans contracts, granting temporary deferrals on monthly loan payments, and reducing fees and commissions for affected customers.
Emirate Specific Assistance
In addition to this, and throughout the past ten days, Dubai and Abu Dhabi have issued multiple stimulus packages addressed to support companies facing the repercussions of Coronavirus.
In Abu Dhabi the stimulus package included:
- Allocating AED 5 Billion to subsidize water and electricity for citizens, and commercial and industrial activities.
- Subsidizing electricity connection fees for startups until the end of this year.
- Exempting all commercial and industrial activities from Tawtheeq fees this year.
- Allocating AED 3 Billion to the SME credit guarantee scheme managed by Abu Dhabi Investment Office to stimulate financing by local banks and enhance SME’s ability to navigate the current market environment.
- Allocating AED 1 Billion to establish a market maker fund, to enhance liquidity and sustain balance between supply and demand for stocks.
- Settling all approved government payables & invoices within 15 working days. Suspending bid bonds and exempting startups of performance guarantees for projects up to AED 50 Million.
- Reducing industrial land leasing fees by 25% on new contracts.
- Suspending real estate registrations fees for this year.
- Exempting commercial vehicles from annual registration fees to the end of 2020.
- Exempting all vehicles from road toll tariffs till the end of 2020.
- Suspending tourism and municipality fees for tourism & entertainment sectors for this year.
- Offering up to 20% rebate on rental values for the restaurants and tourism and entertainment sectors.
- Establishing a new committee headed by the Department of Finance, with members from the Department of Economic Development and local banks to review lending options to support local companies.
- Waiving current commercial and industrial penalties.
Similarly, Dubai announced an AED 1.5 billion economic stimulus package for the next three months to support companies and the business sector in Dubai. The package seeks to enhance liquidity and reduce the impact of the current global economic situation. The main features of the package include:
- Suspension of 2.5% market fees, recovery of 20% custom fees on imported products sold locally.
- Cancellation of AED 50,000 bank guarantee or cash required to exercise customs clearance activity.
- 90% reductions of the fees imposed on submitting customs documents.
- Cancellation of 25% of the down payment for requesting the installment of government fees for licensing and renewing licenses.
- Water and electricity bills will be cut by 10% for all Dubai Customers including commercial entities.
- 50% reduction of the Municipality fees on hotel sales.
- Companies will be exempted from postponement fees for tourism and sports activities in 2020.
On a federal level, the measures taken so far included:
- Suspension of collection of administrative fines by the UAE Ministry of Human Resources and Emiratization for a period of 6 months subject to extension.
- Reduction of work permit fees for establishments that have a registered workforce between 1 and 6 workers.
- Reduction of the fees of the UAE Ministry of Economy.
- Firms will get back 50% of the bank guarantee they submitted for each employee.
The collective impact of the above stimulus packages will be considerable in maintaining sustainability of the market. In the meantime, companies should be wary as to the actions they take and adopt to address their short-term liabilities and their contractual obligations towards their employees, suppliers and clients.
Is Force Majeure a Suitable Solution?
We are frequently hearing the word force majeure and the reference to force majeure circumstances as a way of justifying layoffs, termination of contracts, default or otherwise. The use of force majeure as a basis to be in default under a contractual obligation should be used with caution in such circumstances especially for businesses that were not instructed to close down in the UAE such as schools, nurseries, cinemas, entertainment parks, etc.
UAE Federal Law No 5 of 1985 also known as the UAE Civil Code defines force majeure and its effects. Article 273 of the UAE Civil Code reads as follows: “In contracts binding on both parties, if force majeure supervenes which makes the performance of the contract impossible, the corresponding obligation shall cease, and the contract shall be automatically cancelled. In the case of partial impossibility, that part of the contract which is impossible shall be extinguished, and the same shall apply to temporary impossibility in continuing contracts, and in those two cases it shall be permissible for the obligor to cancel the contract provided that the obligee is so aware.”
Based on the above, a force majeure event should render the performance of a contractual obligation impossible not just as a hardship. Potential force majeure events should be studied on a case by case basis however it is very important for corporations to seek legal advice or to understand their legal position under applicable laws before they move ahead and issue decisions that are binding in respect of their relation with third parties.
In the meantime, and in order to act properly without exposing businesses to unnecessary risks and prepare well for the post-coronavirus phase, companies should understand their immediate financial liabilities and decide on the need to:
- Engage in early discussions with their creditors, suppliers and landlords to put a plan for their upcoming liabilities;
- Openly communicate with their banks about their financial positions and expectations; and
- Discuss business as a going concern with their employees where needed so that they can jointly take responsibility to put a plan to overcome any adverse market conditions.
Early preparation and planning is key to complement any contingency plan that is in place at the moment. This will allow companies to understand well ahead of time the different scenarios they are expected to face and the best action plan they can put in place for that purpose.
We have a team dedicated to assist you analyzing your legal liabilities and options. Please feel free to reach out to us for any clarification or assistance.
Authored by Partner Rima Mrad
and Senior Associate Nadim Bardawil