An overview on Director's Personal Liability for Corporate Debts

In the UAE, other than those companies incorporated within the Dubai International Financial Centre (DIFC) or Abu Dhabi Global Market (ADGM) are subject to Federal Law Number 9 of 2016 (Bankruptcy Law) which regulates business insolvency.

 

Director’s Liability

The root cause for forming a limited liability company or a private limited company is to limit the liability for business debt. However, in certain circumstances, the managers or the directors of a private limited company or an LLP may be held personally liable for business debts financially. And in some other cases, they will be criminally liable, if their activities are deemed fraudulent or dishonest. Federal Law Number 9 of 2016 has prescribed several penalties that can be imposed on the directors and managers of a company - if the company is declared bankrupt. Offences such as fraud, misappropriation, dispensing false profits, falsifying company books, etc. can impose serious penalties of imprisonment of up to five years and a fine of up to 1 million dirhams. And, if it is found that the Bankruptcy Law is breached by a director, he will be disqualified from managing any other companies in the UAE for up to five years.

Further, the directors and managers will be held criminally liable:

• If they did not maintain an adequate financial record of the company’s actual financial position,
• If they failed to provide any information upon the request of a court or a trustee, 
• If they sell assets at an underrate to delay the process of debt payments or declare the company insolvent,
• If they hide any property of the company from the lenders; or, 
• Pay a lender to harm others.

 

The Latest Judgment

The Court of First Instance in Dubai had issued an innovative judgment regarding the liability of directors in the context of corporate debts. In this specific matter, the Dubai Court of First Instance held that the directors and managers of the company are severally and jointly liable for the outstanding debts of the company. And the Court of First Instance has relied on Article 144 of the Federal Law Number 9 of 2016 to reach this conclusion.

According to Article 144 of Federal Law Number 9 of 2016, a court can order the directors or managers of a company to pay jointly or severally the full or a part of the outstanding debts if, 

• The company does not have sufficient assets to settle at least 20 per cent of its debts, and 
• The liability for the losses of the company is established according to the provisions of Federal Law Number 2 of 2015 (the Commercial Companies Law)

The Court of First Instance in its decision held that the above-mentioned requirements were met and hence the directors and managers of the company are liable under Article 162 of Federal Law Number 2 of 2015 and Article 201 of the Bankruptcy Law. 

In its findings, the Court of First Instance held that the directors and managers mismanaged the company and, 

• Failed to provide necessary financial and commercial information to the trustee in bankruptcy,
• Hid the assets of the company
• Failed to explain the lack of funds despite the expansion of the company’s activities and the huge capacity and value of its transactions 

 

Liability of Directors under the DIFC and ADGM Bankruptcy Law

The DIFC and ADGM are the two free financial zones within the UAE, with their bankruptcy law. The recently amended Insolvency Law of the DIFC includes the UNCITRAL Model Law, which is intended to assist in cross-border bankruptcy proceedings. 

According to the UAE Bankruptcy Law, the directors of the DIFC company will also be held liable for concealing or fraudulently removing any asset value over the US $200 or pledging, pawning, or confiscating any assets obtained on credit that has not been paid for, unless conducted within the normal course of business. If the directors breach the law the DIFC courts can order the directors to return any amount of assets that have been misapplied to compensate the company for any actus reus or breach of fiduciary duty.

The ADGM Insolvency Regulations are similar to that of the DIFC Insolvency Law. A breach of ADGM Insolvency Regulations by directors can attract a fine of up to US $50,000. Wrongful trading is an offense under the ADGM Insolvency Regulations. However, it can be avoided if the court found that the director has taken necessary steps intending to minimize the potential loss to the creditors of the company.

 

Conclusion

As Bankruptcy Law is comparatively new, it is not nonetheless been completely tested within the courts and it might so be advisable to require a conventional legal approach to avoid potential liability. Any person positioning the managerial post of a company or a director of a group of companies should be aware of their responsibilities and should take a wise approach to management decisions and also should keep significant records during times of financial distress.