Client Alert: ADGM Court of Appeal confirms availability of fraudulent and wrongful trading claims under ADGM law against directors for onshore conduct pre-dating continuation into ADGM and prior to enactment of ADGM Insolvency Regulations
Sign Up for PublicationsFraudulent and wrongful trading claims are well-known claims against directors / former directors of insolvent companies subject to the insolvency laws of England and other similar jurisdictions.
But can fraudulent or wrongful trading offences apply where the impugned misconduct by directors took place before the legislation creating the fraudulent or wrongful trading offences was enacted, and before the insolvent company became a company of the jurisdiction where those offences exist (and claims are being pursued)?
A recent judgment of the Abu Dhabi Global Market (ADGM) Court of Appeal (The Chief Justice (Lord Hope), Justice Kenneth Hayne and Justice Dame Elizabeth Gloster) confirmed an earlier decision by Justice Sir Andrew Smith of the ADGM Court of First Instance, holding that yes, fraudulent and wrongful trading claims under ADGM legislation can be brought against former directors of companies for conduct that took place before the ADGM legislation was enacted and before the companies became ADGM companies. The Court of Appeal, having considered English case law, further confirmed that there did not necessarily need to be a connection between the defendant and the jurisdiction (the ADGM in this case), and the question of sufficient connection was a matter of discretion for the Court in granting relief.
I. Background
NMC was one of the largest healthcare providers in the UAE and the Middle East. In late 2019, Muddy Waters (a US-based investment research firm) published a report alleging issues including fraudulent conduct and accounting irregularities regarding undisclosed debt and related party transactions at NMC. Following those reports, NMC Health PLC (then listed in London and a member of the FTSE 100) was put into administration in England in April 2020.
However, its subsidiary NMC Healthcare Limited (“NMCH”) (and other associated operating companies), which were operating healthcare facilities in the UAE, were onshore companies in the various Emirates of Abu Dhabi, Dubai and Sharjah. At the time, insolvency legislation in those jurisdictions did not provide for a similar administration procedure. Later in 2020, NMCH (and related onshore companies) were “continued” in the Abu Dhabi Global Markets (ADGM) – an economic free zone in Abu Dhabi which, for civil law matters, applies English common law,[1] contains its own civil courts system, and contains insolvency legislation modelled after the English (and to an extent, Australian) insolvency regime. NMCH and the other related companies were then placed into administration in the ADGM shortly after.
As part of efforts to recover substantial creditor losses, the Joint Administrators (“JAs”) of NMCH brought claims alleging at least US$ 5 billion in losses in the ADGM Courts against NMCH’s founder, CEO and CFO (who were also) directors, Bavaguthu Raghuram Shetty and Prasanth Manghat, as well as the Bank of Baroda, which is alleged to have been a joint wrongdoer involved in the misconduct. These claims include claims for wrongful trading and fraudulent trading pursuant to the ADGM Insolvency Regulations 2022 (“IR 2022”). These are largely similar to their counterparts under the UK’s Insolvency Act 1986.
Baroda (supported by Dr Shetty) sought preliminary determination of certain issues relating to the fraudulent and wrongful trading claims. In essence, it was contended that fraudulent and wrongful trading claims are not available to the JAs because the impugned conduct took place before NMCH was continued into the ADGM, or alternatively, took place before the ADGM’s IR 2022 were enacted, and further, there was no sufficient connection between the impugned conduct and the jurisdiction – i.e., the ADGM – such that IR 2022 ought not to apply.
A two-day trial of the preliminary issues took place before Justice Sir Andrew Smith on 3 – 4 June 2024. Justice Sir Andrew Smith gave permission to appeal. The appeal was heard over two days on 8 – 9 December 2024, with judgment handed down on 30 December 2024.
II. Court of First Instance (Justice Sir Andrew Smith)
In a 37-page judgment issued on 8 July 2024, Justice Sir Andrew Smith of the ADGM Court of First Instance answered the preliminary issues as follows:
- Issue 1: Can an order be made under sections 251 and 253 of the [IR 2022] in respect of the fraudulent carrying on of the business of a company prior to the time at which that company was continued in the ADGM? Answer: Yes.
- Issue 2: Can an order be made under section 252 of the [IR 2022] in respect of the wrongful carrying on of the business of a company prior to the time at which that company was continued in the ADGM? Answer: Yes.
- Issue 3: Can a claim be brought under section 251 and/or section 252 in respect of the fraudulent and/or wrongful carrying on of business before the date when sections 251 and section 252 first came into effect in the ADGM pursuant to the [IR 2015], which was the predecessor of the [IR 2022])? Answer: Yes.
- Issue 4: Can a claim successfully be brought under section 251 and/or section 252 absent a sufficient connection between the defendant and the ADGM? Answer: Yes.
In reaching his answers, Justice Sir Andrew Smith accepted NMCH’s submission that the ADGM Insolvency Regulations were modelled on the UK Insolvency Act 1986, and applied statutory interpretation principles familiar to English law.
As a point of corporate law, the Court confirmed that “continuation” from the onshore emirates to the ADGM was in the nature of a change of the law of incorporation, and not a transfer of assets and liabilities to a new company.
On the insolvency points, the Court decided that “ADGM law should follow the English approach”,[2] and followed In re Howard Holdings Inc. [1998] BCC 549 (Chadwick J). In essence, the Court endorsed the recognised approach that liability for wrongful or fraudulent trading was not in the nature of enforcing a past or existing liability, but was the creation of a new liability to contribute to the estate for the benefit of creditors (through the liquidator) because, in the Court’s discretion in the circumstances, the Court may consider it just and appropriate to declare such a contribution from directors or former directors of the company were in a position to take steps to minimize potential loss to creditors at a time when they knew there was no reasonable prospect that insolvent liquidation would be avoided. The Court also added specifically that this reasoning applies “more forcefully” to fraudulent trading, quoting Templeman J in In Re Gerald Cooper Chemicals Ltd [1978] Ch 262, 268: “a man who warms himself with the fire of fraud cannot complain if he is singed”.
The Court confirmed that – consistent with English authorities – wrongful and fraudulent trading were statutory discretions (and not causes of action that arose at the time of the impugned conduct occurred or harm suffered), and that the discretionary nature was sufficiently capable of addressing any concerns with potential unfairness that might be said to occur where directors are held accountable for conduct by a law that was not, at the time, the law of the company’s incorporation or the law of the jurisdiction where insolvent liquidation was subjectively expected to take place.
On sufficient connecting factor between the defendants and the jurisdiction (the ADGM), even though. as the Court noted, the Claimants had not alleged connections between the defendants and the ADGM specifically, that did not defeat the fraudulent or wrongful trading claims. This is because, firstly, a sufficient connection was not “invariably or necessarily required” to establish such claims, and secondly, connection with other proceedings in the jurisdiction may be sufficient. In this case, the JAs and NMCH pleaded claims variously based on UAE onshore civil law, ADGM law, and English law.
Finally, the Court considered the issue of article 112 of the UAE Constitution, which is said to prohibit “retrospective” legislation. The Court held that the UAE Constitution permitted retrospective legislation in the sphere of “public order” and considering UAE case law put before the Court (by way of legal submissions, as permitted under ADGM CPR 117(2)), bankruptcy was, in the UAE, an aspect of “public order”.
III. Court of Appeal (Lord Hope CJ, Haynes, Gloster JJA)
The appeal was heard via videoconference on 8 – 9 December 2024 before a panel comprising the Chief Justice (Lord Hope), Justice Kenneth Haynes and Justice Dame Elizabeth Gloster.
The Court of Appeal dismissed the appeal in its entirety and largely affirmed the reasoning at first instance. The Court of Appeal observed that “determining what is to form part of the insolvent estate is central to all forms of insolvency law”, such that once it is accepted that bankruptcy rules are part of public order, the wrongful and fraudulent trading provisions fall within that exception or qualification to article 112 as well.
On the question of sufficient connection, the Court of Appeal confirmed that the position, following English authorities (Paramount Airways) is that a connection between the defendant and the jurisdiction is not “invariably or necessarily required” to establish a claim of wrongful or fraudulent trading. Relevant to the interplay between onshore jurisdictions and offshore “freezones”, the Court of Appeal opined that notions of territorial overreach have less force when the incorporation jurisdiction gave permission, and even less force when the incorporation jurisdiction is one element of a federation of which Abu Dhabi is a constituent, and the Court being asked to exercise the powers to make orders regarding wrongful or fraudulent trading (i.e., the ADGM Court) is itself a court of the Emirate of Abu Dhabi.
The Court of Appeal also further noted that certain defendants had sought to participate in the benefits of the administration by submitting proofs of debt, which the Court opined was unconditional submission to the ADGM Court’s jurisdiction and to the statutory regime for distribution of the insolvent companies’ assets, which regime includes the provisions for wrongful and fraudulent trading. As such, lodging proofs of debt provides that sufficient connection, if one is required. This is consistent with the Privy Council’s decision in Stichting Shell Pensioenfonds v Krys [2014] JCPC 41.
The fraudulent and wrongful trading claims (along with the other claims pleaded) will now proceed to trial. A 16-week trial is listed to commence in March 2026.
IV. Significance
This decision is the first decision in the ADGM considering the application of its fraudulent and wrongful trading provisions on impugned conduct that occurred before the companies were ADGM companies, and before the ADGM Insolvency Regulations containing the wrongful and fraudulent trading provisions were enacted.
On a general level, it once again affirms the applicability and force of English law authorities in the ADGM, including on fundamental principles of statutory interpretation, expressly recognising the similarities between the English and ADGM insolvency regimes. This should provide insolvency practitioners and creditors further confidence in the predictability and workability of the ADGM insolvency regime.
More specifically, the decision is important for insolvency practitioners and creditors as it means that potential misconduct by former directors and officers should be scrutinised carefully even if it involved misconduct taking place in a different jurisdiction the company was incorporated in at the time which may operate under a different system of law and which may not have identical wrongful or fraudulent trading provisions, such as various onshore Emirates.
The Court of Appeal’s comments confirming (i) the effect of submitting of proofs of debt, (ii) the integral part of wrongful and fraudulent trading offences to the insolvency regime, and (iii) the “public order” nature of insolvency legislation, all provide further welcomed clarity and certainty on how the ADGM insolvency process operates. Insolvency officeholders and their advisors– especially those operating in the various onshore and offshore jurisdictions in the UAE – should consider carefully whether the ADGM provides a potentially more efficient and effective means of conducting the affairs of insolvent estates.
As a practical matter, this was also an example of the efficiency and versatility of proceedings in the ADGM Courts, which is one of the world’s first fully digital courts. The hearing at each level took place over two days via videoconference, involving the judges and four parties’ respective legal teams appearing remotely appearing from various places around the world. In light of potential questions of UAE law, the Court also granted permission for the parties to address matters of UAE law by legal submissions (in accordance with ADGM CPR r. 117(2)).
Quinn Emanuel advised NMCH and associated companies (and their Joint Administrators) on their continuation into the ADGM and subsequent restructuring and administration, and continue to act for NMCH, related companies and their Joint Administrators in the ongoing proceedings in the ADGM Courts.
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If you have any questions about the issues addressed in this memorandum, or if you would like a copy of any of the materials mentioned in it, please do not hesitate to reach out to:
Richard East
Email: richardeast@quinnemanuel.com
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Nick Marsh
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Phone: +44 20 7653 2210
Khaled Khatoun
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Phone: +44 20 7653 2015
Matthew Tse
Email: matthewtse@quinnemanuel.com
Phone: +44 20 7653 2085
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END NOTES:
[1] On an “evergreen” basis, save to the extent varied by statute: ADGM Application of English Law Regulations 2015
[2] Judgment at [37].