The Power of the ADGM Court to Supervise Onshore Insolvencies: NMC Healthcare Limited & Ors v Bank of Baroda & Ors [2024] ADGMCFI 0007

In a significant recent judgment, the ADGM Court has clarified that it has jurisdiction to hear an action for fraudulent trading against the former directors of an onshore UAE company.

By way of background, NMC Healthcare LTD (NMC), and its various subsidiaries, were incorporated in onshore UAE. On 17 September 2020, NMC was redomiciled as an ADGM company. Shortly thereafter, on 27 September 2020, NMC was put into administration pursuant to the ADGM Insolvency Regulations 2015 and joint administrators (the Joint Administrators) appointed.

The Joint Administrators wished to take legal action for fraudulent and wrongful trading against NMC’s former management. Part 4 of the ADGM Insolvency Regulations 2022 (the Insolvency Regulations 2022) provides:

251. Fraudulent trading

• (1) If in the course of the winding-up of a Company or while it is in administration it appears that any business of the Company has been carried on with intent to defraud creditors of the Company or creditors of any other person, or for any fraudulent purpose, subsection (2) applies . . .

252. Wrongful trading

• (1) Subject to subsection (3) below, if in the course of the winding-up of a Company or while it is in administration it appears that subsection (2) applies in relation to any person being a past or present Director of the Company, the Court, on the application of the relevant Office-holder, may declare that person is to be liable to make such contribution (if any) to the Company’s assets as the Court thinks fit.

(2) This subsection (2) applies if—

• (a) the Company has gone into an insolvent liquidation or has entered insolvent administration;
• (b) at some time before the commencement of the winding-up of the Company or before the Company entered administration, as the case may be, the person knew or ought to have concluded that there was no reasonable prospect of the Company avoiding going into insolvent liquidation or entering insolvent administration; and
• (c) the person was a Director of the Company at that time . . .

253. Proceedings under Sections 251 and 252

• Where the Court makes a declaration under either Section 251 (Fraudulent trading) or Section 252 (Wrongful trading), it has wide powers to give such further directions as it thinks proper for giving effect to the declaration.

The difficulty for the Joint Administrators was twofold: (i) the Insolvency Regulations 2022 were not in force when the alleged wrongdoing took place, and (ii) NMC was not domiciled in the ADGM when the alleged wrongdoing took place. Despite these difficulties, Justice Sir Andrew Smith ruled that actions pursuant to sections 251, 252 and 253 of the Insolvency Regulations 2022 could be maintained against NMC’s former management. He found that claims by administrators for fraudulent or wrongful trading were not causes of action that accrued when they occurred but rather statutory discretions which could be invoked during insolvency proceedings. According to the judge:

• “Sections 251 and 252 give a company’s liquidator or administrator a statutory discretion to apply to the Court for relief by way of a declaration of liability to contribute to the assets of the company. Thus, they do not provide for a cause of action that accrues at the time of the impugned conduct or resultant damage, but on the commencement of the winding-up or administration, when the office-holder may apply to the Court for relief.”

Justice Sir Andrew Smith also took a purposive interpretation to the Insolvency Regulations 2022 and found that if they did not apply to conduct which occurred before a redomicile, “office-holders of foreign companies wound-up in the ADGM, as well as companies re-registered here, would lack important powers to make good for creditors’ estates that had been wrongfully depleted. I cannot accept that the legislators intended the powers to be restricted as [the Defendants] contend.”
 
Overall, the judgment in NMC Healthcare Limited & Ors v Bank of Baroda & Ors [2024] ADGMCFI 0007 confirms that the ADGM Courts will continue to play an important role in supervising the actions of directors of onshore as well as ADGM companies.
 
For further information please contact Keith Hutchison, William Prasifka or Tayler Wright.