The Dubai International Financial Centre (DIFC) has established itself as a creditor-friendly jurisdiction in insolvency and restructuring matters, underpinned by its alignment with English common law principles and international standards such as the UNCITRAL Model Law on Cross-Border Insolvency. With a predictable legal framework, creditors operating within the DIFC benefit from strong contractual enforceability, effective cross-border cooperation and clearly defined rights in both solvent and insolvent liquidations.
One key process within DIFC’s insolvency regime, governed by DIFC Insolvency Law No. 1 of 2019 (the Law), is Creditors’ Voluntary Liquidation (CVL). This article outlines the mechanics of CVL under the Law and explores the risks and consequences for directors and managers, particularly in cases involving fraudulent and/or wrongful trading or antecedent transactions.
Overview of the DIFC Insolvency Regime
The DIFC insolvency framework provides various pathways for winding up a company, including:
- Compulsory liquidation;
- Administration (court-supervised restructuring); and
- CVL
Commencing CVL
CVL is initiated when a company is insolvent, as determined by either:
- The cash flow test (inability to pay debts as they fall due), or
- The balance sheet test (liabilities exceeding assets).
Upon determining insolvency, the board of directors must:
- Convene a board meeting to resolve to recommend CVL to the shareholders;
- Enlist the assistance of an Insolvency Practitioner (IP) who shall assist the board to deal with all statutory matters leading to the company’s CVL and prepare the company’s Statement of Affairs;
- Convene a meeting of members.
Members’ Meeting
At the Extraordinary General Meeting (EGM), shareholders may pass a special resolution or, in circumstances as may be provided for in the articles of association, an ordinary resolution to place the company into liquidation and by ordinary resolution, nominate a liquidator. Although liquidation commences upon passing the resolution to liquidate the company, the liquidator’s powers are initially limited to asset preservation and the sale of perishable goods until the creditors decide if they wish to appoint an alternative liquidator.
Creditors’ Right to Nominate an Alternative Liquidator
Once the company appoints a liquidator, the notice of the appointment is delivered to the Registrar. Although the Law and the Insolvency Regulations 2019 (the Regulations) provide that if the creditors nominate a different person to be liquidator, the person nominated by the creditors shall be appointed, they remain silent on the exact procedure for creditors to make such a nomination. Notably, neither the Law nor the Regulations mandate the holding of a physical creditors’ meeting for this specific purpose.
In the absence of express procedural guidance in the Law, it is reasonable to infer that directors must notify creditors of the liquidator’s appointment by the company and provide them with an opportunity, within a reasonable timeframe, to nominate an alternative liquidator[1]. If such a nomination is received, the creditors’ nominee shall be appointed liquidator, and the Registrar shall be notified accordingly.
The Regulations also provide that following a creditors requisition for the convening of a meeting of creditors (MoC), the Liquidator shall fix a venue for the same. The MoC must be convened within 35 days from the requisition, and a minimum of 21-days’ notice must be given although it is not clear if there is a requirement for the meeting requisition to be supported by a minimum number of creditors in terms of value.
Powers and Duties of the Liquidator
Once appointed, the liquidator assumes wide statutory powers, including to:
- Realise company assets;
- Bring or defend legal proceedings;
- Investigate the validity of charges over assets;
- Review the conduct of directors, including shadow or de facto directors;
- Examine prior transactions for misconduct;
- Adjudicate creditor claims and make distributions;
- Hold annual and final meetings of creditors and members.
- Investigate:
- Fraudulent or wrongful trading;
- Preferential transactions;
- Transactions at undervalue.
- Apply to the DIFC Court for:
- Restoration of property;
- Personal contribution orders against culpable parties.
Fraudulent and Wrongful Trading
Fraudulent Trading
The principle established in Salomon v Salomon & Co. (1897) – that a company is a separate legal entity is well recognised under DIFC law. However, fraudulent trading presents an exception.
Under the Law, if a company has carried on business with the intent to defraud creditors or for any fraudulent purpose, the Court may declare that any persons knowingly involved are personally liable for the debts of the company or part thereof and may order them to compensate the company or make such contributions to the company’s assets as the court deems appropriate.
Such claims may be brought by the liquidator, creditor, shareholder or any other person liable to contribute to the to the assets of the company. The DIFC recognises the “blue-sky” defense, whereby directors are not held liable if they genuinely believed the company was about to recover.
Wrongful Trading
The directors of a company may be held personally liable for wrongful trading if, at some time before the commencement of a company’s winding up, they knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation. To avoid liability, directors must demonstrate that they took every step to minimize potential losses to creditors once they became aware of the company’s financial distress. The standard of care expected is that of a reasonably diligent person with the general knowledge, skill, and experience that may reasonably be expected of someone in the director’s position, along with any additional knowledge, skill, and experience that the director has.
If the court determines that a director has engaged in wrongful trading, it may order the director to contribute to the company’s assets. This contribution is intended to compensate creditors for losses incurred due to the director’s actions. The court has discretion in determining the amount and manner of the contribution, considering the circumstances of the case.
Moreover, where it appears to the Registrar that it is in the public interest that a person should not be a company director, the Registrar may apply to court for a disqualification order to protect creditors and other stakeholders from individuals unfit to be involved in the management of a company. The primary provisions are found in the DIFC Companies Law (Law No. 5 of 2018), in conjunction with Operating Law (Law No. 7 of 2018). Unlike the UK, where there are ample cases of reported disqualification orders, no such orders have been issued, to the best of my knowledge, by the DIFC Court. The process is initiated by the Registrar of Companies.
When liquidators consider action for wrongful trading, they will be well advised to furnish the Registrar with the necessary “ammunition” to achieve a disqualification order thus making it much easier to apply to the court for restitution as being found guilty of unfit conduct by the court, goes a long way towards achieving a successful outcome.
An individual acting in the capacity of a director, de facto or shadow director, may be fined if he/she is found to be acting whilst disqualified, for an amount up to US$25,000.
Antecedent Transactions
Preferences and Transactions at Undervalue
Under Articles 132 and 133 of the Law, the liquidator may challenge:
- Transactions at undervalue, where assets are transferred below market value to the detriment of creditors. The Court shall not void such a transaction if it is satisfied: (a) that the Company which entered into the transaction did so in good faith and for the purpose of carrying on its business; and (b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the Company.
- Preferences, where a person (creditor, surety or guarantor for the company’s debts) is put into a position which, due to the company’s liquidation, will be better than the position they would have otherwise been in. The look-back period for preferences is 6 months for unconnected parties, 2 years for connected parties, before the Company enters into liquidation.
Piercing the Corporate Veil
In cases of fraud, the DIFC Courts may lift the corporate veil, holding individuals—such as directors, shadow directors, or beneficial owners personally liable. Although Salomon firmly established the corporate veil, common law recognises that it may be pierced where:
- The company is acting as an agent for another;
- The company is used to evade legal obligations;
- The veil must be lifted to enforce a court order.
Case Law and Application
In Dublin County Council v Elton Homes Limited, the court granted an injunction against both the company and its directors. Courts remain cautious but will intervene when legal personality is used as a sham, fraud, or concealment.
In practice, complex structures designed to shield wrongdoings such as the diversion of funds for personal gain or concealment of liability—are vulnerable to this remedy. Directors and shareholders should be mindful that limited liability is not absolute.
Additionally, liability may arise without piercing the veil through standard legal doctrines:
- Contractual liability,
- Agency, or
- Tortious liability, where directors personally commit a wrong.
CVL as a Strategic Tool for Creditors
CVL is a powerful mechanism for creditors in order to control an insolvent company. It allows them to influence the choice of liquidator, monitor the realisation of assets and have the conduct of the directors investigated by an independent professional.
Directors and managers must proceed with caution once insolvency becomes evident. Misconduct, if uncovered, can give rise to personal liability, including civil or even criminal consequences. The DIFC’s framework offers both legal certainty and robust remedies for abuse, aligning with international best practices and reaffirming the principle that those who misuse the corporate form will be held accountable.
[1] Albeit the directors’ powers cease upon the passing of the resolution to liquidate and the appointment of the liquidator
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.
