25 Oct 2023
In the landmark judgment of the Marka case in the Dubai Court of First Instance, it was held that former and current managers and directors of the company were personally liable towards the creditors of the Company, when the assets of the Company were insufficient to cover twenty percent of the Company’s debts. The judgement was considered a landmark case for certain reasons, namely: i. the approach towards personal accountability does not appear to have been previously applied in practice by UAE courts; and ii. the extent to which such personal liability applied, was extended.
Pursuant to the judgment in the Marka case, the UAE Federal Decree Law Number 9 of 2016 (the UAE Bankruptcy Law) was amended by the Federal Decree-Law Number 35 of 2021. Under the new amendments, the liability of the directors and managers is limited to the debts they contributed towards, in situations where a Court determines that their actions fall under Article 147(a), (b) and (c), and where their actions have contributed towards the losses that have rendered the company insolvent.
Under Article 147 of the UAE Bankruptcy Law, the Court may order directors of board, managers or those in charge of liquidation proceedings to disperse off the debts of the Company, and expresses that such liability may be incurred as follows:
"If declaration of bankruptcy is judged, the Court may order the directors of board, managers or those in charge of liquidation in liquidation procedures taken beyond the scope of this Decree Law, to pay an amount to repay the debts of the debtor, if any of them evidently commits any of the following acts, within the two years following the date of initiating the procedures, according to this Section:
- Adopts commercial methods without considering its risks such as disposition of commodities in prices less than its market value to receive monies to avoid or delay initiating the bankruptcy procedures;
- Engages in transactions with third party to dispose of properties without consideration or against insufficient amount and without certain benefit or not proportionate to the properties of the debtor; and
- Discharges the debts of any creditor to harm other creditors, during the period of being in default of payment or in the condition of account receivable."
The recent amendment specifies that a choice to impose personal responsibility can be appealed without affecting the bankruptcy process. However, it's important to note that Article 147 still seems to impose time constraints on this matter
In the Marka case, the Court made a distinction between decision-makers who contributed to a company's losses and insolvency and subsequently appointed managers who genuinely tried to improve the company's financial situation before bankruptcy proceedings, the latter would not be held liable. To reduce the risk of liability, managers and directors should seek guidance on permissible actions before filing for bankruptcy. Practicing record-keeping and good corporate governance is also crucial. Moreover, debtors planning bankruptcy should prepare all necessary documents outlined in the Bankruptcy Law, along with a detailed explanation of the company's financial status. This preparation helps minimize doubts about the company's financial position during court proceedings.