DIFC Insolvency Proceedings

Insolvency in the Dubai International Financial Centre (DIFC) can be complex, especially when pursuing claims against related entities or individuals:

1. Investigative Powers in DIFC Insolvency

When a company enters bankruptcy (administration) or liquidation in the DIFC, the DIFC Courts appoint a liquidator or administrator who have significant powers to uncover the truth behind a company’s financial collapse. 

They can have access to records and investigate the company’s books, bank accounts, and contracts to trace assets and transactions.

Examine Directors and officers under Oath, or connected parties can be summoned to provide sworn testimony or documents.

They can apply to the DIFC Courts for orders compelling third parties, like banks or business partners, to disclose information or produce records.

As a common-law jurisdiction, the DIFC Courts can also file a Norwich Pharmacal Order (to identify wrongdoers through third parties) and has been used effectively in cases like SKAT v FFA Private Bank (CFI 004/2024) to support fraud investigations.

2. What Needs to Be Proven

To bring a related entity/successor company or individuals (e.g. directors or shareholders) into insolvency proceedings, specific legal grounds must be established:

a) Fraudulent Trading 

If directors or managers conducted business with intent to defraud creditors or for fraudulent purposes, they can be held personally liable for the company’s debts. Evidence might include forming a new company just before insolvency, asset transfers for no value, or operational continuity under a new entity.

b) Wrongful Trading

Directors may be liable if they knew, or should have known, there was no reasonable prospect of avoiding insolvency but continued trading without minimising creditor losses. The test is based on what a reasonably diligent director would do.

c) Transaction Avoidance

Liquidators can challenge transactions within a previous two-year period before insolvency:

i. Transactions at an Undervalue i.e. assets sold or transferred for significantly less than their market value.

ii. Preference actions i.e. favoring one creditor over others, and paying a connected party first.

iii. Extortionate Credit Transactions, including unfair or exorbitant credit deals that harm the company.

d) Piercing the Corporate Veil

Under DIFC’s common-law framework, courts may “pierce the corporate veil” in rare cases where the company structure was created i.e. Company B was set up to avoid Company A's creditors, then courts might treat them as one entity, as seen in cases like Akhmedova v Akhmedov [2018] DIFC CA 003.

3. Evidence

To build a case, the following evidence is critical:

a. Corporate records such as, Memorandum of Association, trade licenses, and shareholder/director registers to identify key parties and their relationships.

b. Financial bank statements, audit reports, and intercompany transfers to spot undervalued deals or preferences.

c. Contracts shall prove customer or supplier moves from one entity to another, suggesting continuity or asset-stripping.

d. Continuity or shared staff, offices, websites, branding, or clients between the old and new entities.

e. Evidence that a new entity was formed just before or after the original company’s default.

f. These can be obtained through investigative powers or court-ordered disclosures.

4. Remedies 

If a claims succeed, the DIFC Courts can grant remedies such as:

a. Set aside improper transfers to return assets to the insolvent company’s estate for creditor distribution.

b. Holding directors or shareholders personally liable and accountable for company debts under fraudulent or wrongful trading.

c. Bringing a successor company into proceedings if it’s a sham or continuation of the insolvent entity.

d. DIFC judgments may be enforced in onshore Dubai, or possibly cross-border internationally through common law in jurisdictions like the UK.

Note, these cases are complex and timing is critical due to statutory periods. 

Disclaimer: This article is for informational purposes only and does not constitute legal advice. For specific guidance, contact a qualified insolvency practitioner or legal professional in the DIFC.

Insolvency in the Dubai International Financial Centre (DIFC) can be complex, especially when pursuing claims against related entities or individuals: