July 13, 2020

Volume X, Number 195

July 13, 2020

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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.

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume VI, Number 49

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About this Author

Douglas G. Smith, corporate attorney, private equity lawyer, Squire Patton Boggs, Dubai law firm
Of Counsel

Douglas Smith has over 30 years of experience in the Middle East, North America and Asia, Doug’s main areas of practice include corporate law, M&A, private equity, finance, corporate restructurings, joint ventures as well as corporate governance and regulatory matters.  His practice has involved him in transactional work in numerous jurisdictions in the Middle East including the UAE, Saudi Arabia, Qatar, Oman and Bahrain as well as in East and Southeast Asia, encompassing Indonesia, China, Malaysia, Thailand, Singapore, India, as well as other nations.

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+97144478737
Mark J. Gilligan Commercial Lawyer Squire Patton Boggs Abu Dhabi
Associate

Mark Gilligan specializes in corporate and commercial law. Based in the firm’s Abu Dhabi office, he provides UAE, GCC and international clients with advice on a variety of commercial transactions and arrangements, including structuring and completing commercial contracts, joint ventures and mergers and acquisitions. Having worked in both local and international law firms over the course of several years in the UAE, Mark has the technical ability and practical understanding of the legal landscape in the UAE to provide efficient and practical legal advice.

Mark has experience advising international and local clients on the legislative and regulatory considerations and alternatives applicable when operating in the UAE marketplace, including the corporate formation process both in the UAE and its Free Zones, and on distribution, commercial agency, franchising and services agreements.

Throughout his career in the UAE Mark has developed working relationships with many UAE Regulatory Agencies including the Dubai International Financial Center (DIFC), Dubai Financial Services Authority (DFSA) and Emirates Securities and Commodities Authority (SCA). Mark regularly assists clients in navigating the regulatory regimes applicable to private equity transactions, fund placement and establishment, and investment management activities in the UAE.

Experience

  • Representing a prominent engineering firm in the potential acquisition of waste treatment facilities in Dubai.

  • Assisting a privately owned, US based transportation management company in the negotiation and corporate structuring of a joint venture arrangement with a leading UAE transportation company.

  • Representing two Korean engineering firms in the formation of separate joint ventures with a publicly traded construction company in Abu Dhabi.

  • Representing a US based defence contractor with its corporate structuring requirements in the UAE, including working under an extremely tight time frames to establish multiple branch office in preparation for a government tender for the provision of cyber security related services to the UAE Government.

  • Representing one of the UAE’s prominent trading companies in the negotiation and sale of the distribution rights to an international clothing brand.

  • Advising on the sale of a strategic interest in a Dubai-based dry cleaning and restaurant group to a Qatar-based private equity fund.

  • Advising a UAE based food and beverage operation in creating a full suite of documentation for its franchising operations in various MENA jurisdictions.

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