A Creditors’ Voluntary Liquidation (CVL) is a formal procedure through which an insolvent company voluntarily chooses to wind up its affairs and liquidate its assets in order to repay creditors.
In the Abu Dhabi Global Market (ADGM), this process is governed primarily by the Insolvency Regulations 2022 (IR) which provide the legal framework for managing corporate insolvency and the Companies Regulations 2020 (CR 2020) which include rules relating to director’s duties in insolvency and director disqualification.
This article explores the process of creditors’ voluntary liquidation in ADGM and the potential legal implications for directors, particularly with regard to wrongful and fraudulent trading.
The Procedure for CVL
Meetings of Members and Creditors
Directors may initiate a CVL when they recognise their company is insolvent. To do so, the directors must convene the following meetings:
- General Meeting of Members: A meeting of shareholders must be called to pass a special resolution for voluntary winding up and appoint a liquidator.
- Meeting of Creditors: The directors must convene a creditors’ meeting where they will appoint a liquidator. The liquidator shall be the person nominated by the creditors, or if the creditors do not nominate a liquidator, it will be the person nominated by the members meeting.
The directors are required to prepare and present to the creditors meeting a Statement of Affairs setting out the company’s financial position.
The liquidation process officially commences once the resolution to liquidate the company is passed at which time all the powers of the directors cease, except so far as the Liquidation Committee (or, if there is no such Liquidation Committee, the creditors) sanction their continuance.
Liquidator Duties
Within seven days of appointment, the liquidator must publish notice of his/her appointment in the ADGM and deliver to the Registrar a notice of his/her appointment for registration.
If the liquidation continues for more than a year, the liquidator must prepare annual progress reports providing an account of his acts and dealings and conduct of the winding-up during the preceding year to the members and creditors of the Company and to the Registrar.
A liquidator may apply to court for directions or convene meetings of members and creditors to ascertain their wishes.
Removal of Liquidators
The court may remove a liquidator on cause shown. Additionally, a meeting must be summoned for the removal of a liquidator (other than a liquidator appointed by the court) where at least 25% in value of creditors (excluding connected persons to the company) request it.
Misconduct by Directors
The ADGM IR also provide the statutory regime governing officer misconduct, fraudulent and wrongful trading and provide remedies against delinquent officers in respect of the offences summarised below:
i. Fraud in anticipation of winding-up – s244 IR
Past or present officers of a company which is wound up will be liable to a fine if they have concealed or fraudulently removed property, falsified books, or pawned or pledged company property within 12 months before commencement of winding up, with intent to defraud creditors or conceal the company’s position.
ii. Transactions in fraud of creditors – s245 IR
This section targets transactions (gifts, transfers, charges, concealment/removal of assets) since, or within two months before an unsatisfied judgment provided the transaction took place within 5 years before the commencement of the liquidation and provided the director fails to prove that he had no intent to defraud creditors.
iii. Misconduct, falsification, omissions, false representations – s246 – 248 IR
Past or present officers of a company which enters liquidation will commit an offence if they fail to disclose company property, falsify records, omit material information or make false representations with the intention to defraud creditors.
iv. Summary remedy against delinquent officers or liquidators – s250 IR
Where any company funds or property have been misapplied or retained by an officer or liquidator of the company, the Registrar may apply to court for the conduct of the director or liquidator to be examined and the court may compel him/her to repay or account for the money or property by way of compensation.
v. Wrongful Trading
Wrongful trading occurs when a director (or shadow director) continues to trade despite knowing, or having reasonable grounds to believe, that the company has no realistic prospect of avoiding insolvent liquidation. In such cases, the director may be personally liable to contribute to the company’s assets to mitigate creditor losses.
However, it will be a defence for a director if the court can be satisfied that after the director first knew or ought to have known that there was no reasonable prospect of the company avoiding insolvency liquidation, he took every step with a view to minimizing the potential loss to the company’s creditors after realising insolvency was likely, acting with due diligence and in good faith.
Should the court determine that an individual is liable to contribute to the company’s assets, the Registrar may, if it thinks fit, impose a disqualification order for a period of up to 15 years against the individual in question.
vi. Fraudulent Trading
If a company’s business is carried on with the intent to deceive creditors or for any other fraudulent purpose, directors or any individuals knowingly involved in such activities may be held personally liable. The key element in fraudulent trading is the presence of fraudulent intent. If such intent is proven, the director’s actions are regarded as inherently malicious and culpable.
The Registrar may issue a disqualification order of up to 15 years against any person found guilty of fraudulent trading and also make them liable to pay a fine.
Bringing wrongful and fraudulent trading claims retroactively
The decision in NMC Healthcare Limited & Ors v Bank of Baroda & Ors [2024] ADGMCFI 0007 has provided important clarification on the scope of the ADGM Courts’ jurisdiction in relation to fraudulent and wrongful trading claims. The Court held that such claims may be pursued even where the alleged misconduct occurred prior to the company’s redomiciliation to the ADGM or before the enactment of the current insolvency framework. Notably, the Court held that the statutory discretion to pursue claims for wrongful and fraudulent trading arises not at the time of the impugned conduct, but only upon the commencement of insolvency proceedings, when an office-holder may seek relief.
The decision confirms that directors cannot avoid liability by relying on the timing of the misconduct or the company’s jurisdiction of incorporation at the time. It underscores the ADGM Courts’ commitment to creditor protection and director accountability and affirms their willingness to adopt a purposive interpretation of the insolvency regime to ensure its effective application, even in cross-border or transitional contexts.
Chris is a Chartered Accountant, member of the ICAEW and on the list of approved Insolvency Practitioners of the DIFC and ADGM. He is also a UK, Cyprus and Romania licensed Insolvency Practitioner.
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.
