Directors’ Liability in Event of Insolvency in United Arab Emirates
The duties and obligations of directors in United Arab Emirates are drawn from various legislative sources; there is no consolidated legislative framework dealing with the duties and obligations of directors under UAE Law. We have published a summary of the principal duties and liabilities of a director in the UAE, both generally and in the event of insolvency.
The summary is limited to the laws of the UAE pertaining to limited liability companies. It does not encompass the laws of the over 40 free zones of the UAE, many of which have their own laws and regulations which impact the role of directors. In particular this summary does not discuss the role of a director under the laws applicable in the Dubai International Finance Centre (DIFC) or the Abu Dhabi Global Market (ADGM) which are, in the case of the DIFC principally and in the case of the ADGM entirely, derived from English law.
Solvency of the Company
Where the losses of the company exceed 50% of its share capital, the directors are required to notify the shareholders who may consider liquidation of the company. Where losses exceed 75% of the company’s share capital, shareholders holding greater than 25% of the company can require its dissolution.
See also our earlier alert about proposed insolvency reforms in UAE.
Directors’ Liability in the Event of Insolvency
In addition to the general duties owed by a director to the company, a director may be subject to both civil and criminal liability in the event that the company is subject to an event of insolvency and is unable to meet its financial obligations.
In the event that the company becomes unable to pay its debts, the Commercial Transactions Law stipulates that the directors must, within 30 days of the date of suspension of payments of debts, file for bankruptcy. A failure to take such action may result in the in the directors being considered personally liable in any bankruptcy which may be forthcoming.
The Commercial Transactions Law and the Penal Code contain several provisions as to how courts should treat insolvent companies and their directors. Of particular importance in this respect is article 882 of the Commercial Transactions Law which provides that directors may find themselves subject to a custodial sentence in the event that:
They have failed to provide adequate details in the financial books and records of the company to reflect the true financial position of the company;
They do not supply information requested by the court or trustee in bankruptcy or if they deliberately supply false information;
If they have sold assets of the company at less than their value in an effort to delay the suspension of payment of debts or declaration of the company’s bankruptcy or if the directors have taken any action to obtain credit or funds illegally in order to achieve the foregoing;
If following the point at which the company is no longer in a position to pay its debts, the directors deal with any property of the company with a view to keeping such property beyond the reach of creditors; and
If following the point at which the company is no longer able to pay its debts, the directors honour/settle the debt of any creditor to the detriment of other creditors or provides security or special benefits to any of the creditors in preference to others.
Click here to read the Summary of Directors’ Duties in UAE.