Compulsory winding-up is the principal mechanism for bringing an insolvent or dysfunctional company to an orderly conclusion under judicial supervision. This article outlines the function and operation of compulsory winding-up in the ADGM, focusing on the statutory procedure and the role of the liquidator.
Grounds for Compulsory winding up
A company may be wound up by the ADGM Court on any of the following grounds:
- The company has resolved by special resolution that it be wound up by the Court;
- Inability to pay its debts;
- The court is empowered to make a winding-up order pursuant to any provision under ADGM legislation;
- Just and equitable ground.
Inability to Pay Debts
The most frequently invoked ground is the company’s inability to pay its debts. A company is deemed unable to pay its debts where:
- A creditor owed more than $2,000 serves a statutory demand on the company; and
- The company fails to satisfy or secure the debt within 21 days of service.
A company is also deemed unable to pay its debts if it is proven to the satisfaction of the Court that it is balance sheet insolvent; ie the value of its assets is less than its liabilities, taking into account contingent liabilities.
Presentation of a Winding-up petition
A petition for the winding up of a Company may be presented by:
- The Company or its directors;
- An administrative receiver or administrator;
- Any creditor(s) (including any contingent or prospective creditors);
- A contributory(ies);
- The Financial Services Regulator or the Registrar.
Petitions by Contributories
A contributory may present a petition only if certain requirements are met, including:
- The shares in respect of which they are a contributory were held and registered in their name for at least six months during the 18 months preceding the filing of the petition; or
- They are liable to contribute to the company’s assets in a winding-up.
Just and equitable winding up is typically a remedy for shareholders (although may also be invoked by creditors, it is less common), where a court orders the winding up of a company where it is deemed fair and just to do so; this depends on the facts of each case but commonly involves deadlock, fraud, misconduct by the directors or loss of substratum.
Consequences of winding-up order
Where the Court makes a winding up order it will appoint a liquidator who will take office immediately upon the order being made and no action or proceeding may be commenced or continued against the company or its property except by leave of the Court.
After the presentation of a winding-up petition:
(a) No person may attach, sequester, or otherwise appropriate the assets of the company. Any such action is void unless the Court otherwise orders; and
(b) Any disposition of the company’s property, any transfer of shares, or any alteration in the status of the company’s members is void unless the Court otherwise orders.
These provisions are designed to preserve the company’s position pending the Court’s determination of the petition. However, they operate retrospectively only if a winding-up order is made.
Appointment of provisional liquidator
The Court may, at any time after the presentation of a winding up petition, appoint a provisional liquidator whose powers shall be determined by the order appointing him/her. A provisional liquidator is usually appointed where there is evidence of asset dissipation, a risk of the same or evidence of fraud and the role of the provisional liquidator will be to safeguard the Company’s assets and maintain the status quo pending the outcome of the winding up petition.
Powers and duties of the Liquidator
Once appointed, the liquidator assumes control of the company’s affairs and is responsible for managing the winding up process, the liquidator’s primary duties include identifying and bringing under his/her control the assets of the company, adjudicating on creditors’ claims, realising assets, challenging any antecedent transactions, bringing or defending any legal proceedings on behalf of the company and paying a dividend to creditors.
The liquidator also has reporting obligations with which he/she must comply, reinforcing the transparency of the winding up process; where the winding up of a company continues for more than one year, the liquidator must, within two months after the end of each twelve-month period from the date of appointment, furnish the company’s contributories, creditors, and the Registrar with a report summarising his dealings and overall conduct of the winding up.
Conclusion
The compulsory winding-up process in the ADGM ensures that companies in financial distress are dealt with in a controlled and orderly manner. By placing the company under Court supervision and vesting powers in a liquidator, the process safeguards assets, protects the interests of creditors and prevents enforcement actions.
The statutory duties and reporting obligations of the liquidator allow creditors and contributories to monitor the progress of the winding-up and provide for the liquidator’s accountability. This structured approach not only facilitates the fair and efficient realisation of assets but also reinforces confidence in the integrity of the ADGM insolvency system.
Andri is on the list of approved Insolvency Practitioners of the DIFC and ADGM. She is a solicitor, Member of the Law Society of England and Wales and a Licensed Insolvency Practitioner in Cyprus.
