Commercial and operational specialization has given rise to the need for various corporate structures from the time the human race decided to capitalize on gains. Ever since governments and legal specialists have simultaneously been trying to device different entities and corporate mixtures so as to cater to the needs of the growing and dynamic economic markets. In today’s world, we can see a variety of corporate structures ranging from the (popular) limited liability companies and joint-stock companies to distinctive structures such as special purpose vehicles and companies. This article is drafted by the Corporate Practice at Fotis Legal to give the readers a quick understanding of the duties, functions and liabilities of a Manager in a company in mainland United Arab Emirates (other than a joint-stock company). Companies established in the mainland are primarily governed by the Federal Law Number 2 of 2015 on Commercial Companies (the Companies Law) and this statute is the pivotal piece of legislation that the article will focus on. The Companies Law clearly stipulates that there are the following types of entities in the UAE: –
Article 15 (4) of the Companies Law has stated that the managers and directors shall be liable to (jointly) indemnify the stakeholders of a company including shareholders and/ or third parties in the event the Memorandum of Association of the company is not registered with the competent authority in the manner prescribed therein.
The liability of a manager or director who is entrusted to overlook, administer and manage the operation, financial and other affairs of a company is twofold:
(i) civil liability; and
(ii) criminal liability.
The Companies Law has clearly stipulated under article 22 that the individual to manages the affairs of the company has the inherent responsibility to preserve and safeguard the company’s rights. He or she should, at all times, manage the company so as to meet the companies’ objectives with the power that is conferred to them. That stated, it is only obvious to assume that the concept of liability in this circumstance is a two-way street. Just like the manager is liable for the operations of the company, the company bears the liability for the actions of its managing director. The company would be liable for all the actions that the manager undertakes in the general affairs – including circumstances wherein a third party enters into a transaction with the company. Therefore, even in circumstances where the liability of an individual (officer of the company) is explicitly made exempt in its constitutive documents (such as memorandum and articles of association), such persons would be held personally liable and the provision would be deemed void.
The shareholders in a joint liability company shall be jointly liable for their monies towards the obligations of the company (in short, no cap on the liability of the shareholders). Article 45 of the Companies Law state that every shareholder shall be liable for managing the company unless the constitutive documents of the company or a separate document have explicitly delegated this responsibility to any shareholder(s). Accordingly, a shareholder who is not designated to manage the company does not have the authority to overlook or interfere in the management of the company. Nevertheless, such shareholder(s) can demand to review of the operational affairs and books of accounts of the company from the manager. The manager is prohibited from undertaking any tasks over and above the general management unless they receive consent from the shareholders of the company or with the authority granted from an explicit provision in the constitutive documents of the company. In particular, this restriction would apply to: –
Further, article 50 of the Companies Law restricts a manager from entering into a contract on behalf of the company for himself or his relatives (up to the second degree) and carrying out the same kind of activity without receiving the explicit permission of all the shareholders of the company. The manager would be held responsible for the losses of the company and its stakeholders (shareholders or third parties) in the following circumstances: –
Article 52 of the Companies Law has laid down that a manager shall only be held liable for his part of the operations of the company when there are numerous managers. Although, the decisions of the managers will not be valid when it is provided that the decisions for the management of the company shall only be valid if unanimous. That stated, it is pertinent (from time to time) for managers to take certain decisions on an urgent basis, especially in situations where a delay or lack of decision making could cause financial losses or loss of opportunity to generate profits. A clause could be included in the constitutive documents of the company to confer the managers with the authority to take such urgent decisions. If both these clauses are not mentioned or agreed upon, then the majority of votes with regards to a decision would be upheld and the matter could be referred to the shareholders if there is parity. Considering that the shareholders are placed with the responsibility to manage the company in the event managers are not designated in this type of corporate structure, it is pertinent to understand the implications of a shareholder who joins an operational company. Such shareholder(s) will be treated as normal shareholders and be liable for all the company’s past obligations as long as they have been disclosed earlier.
The management of simple commandite companies would be limited to its joint shareholders – not silent shareholders – and all the decisions should be passed unanimously. However, this rule does not apply if the constitutive documents of the company provide that the decisions can be passed by a majority vote. Pursuant to article 69 of the Companies Law, silent shareholders are not permitted to interfere or overlook the management of the company with regard to third party affairs. However, like that a non-managing shareholder in a joint liability company, a silent shareholder may demand to review the books of accounts and other documents of the company provided that there is no loss to the company. In the event a silent shareholder contravenes this prohibition, then they shall be liable for their personal assets for the losses incurred. Silent shareholders could also be deemed as liable as joint shareholders in the event third parties believe that he/ she is a joint shareholder due to their actions reflecting the management of the company.
The managers of a limited liability company are appointed by the shareholders in the constitutive documents of the company, through a general assembly, separate contract (or by third parties). There could also be a board of directors in situations where there are numerous managers for a company. Title 3 of the Companies Law states the provisions concerning a limited liability corporate structure and mentions that the manager(s) have joint liability (including their personal assets) in the event of non-compliance of the company’s name to include the expression ‘Limited Liability Company’ or acronym ‘LLC’. The manager shall be responsible to maintain a register at its head office with the prescribed details of the company. Further, such manager(s) should also notify the competent authorities if there is an increase exceeding the prescribed limit to the number of shareholders, within a period of thirty (30) days.
In a general sense, managers (s) have the full authority to manage the company unless otherwise expressly mentioned. Manager(s) have the liability towards the company itself and its stakeholders such as the shareholders and third parties for any fraudulent actions that they may have conducted or their actions above those listed in the constitutive documents of the company. The manager also has the responsibility to ensure that the books of account including the annual budget, profit and loss statement, annual report and financial status of the company, along with his advice on profit retention at the general assembly before the lapse of three months from closing books of accounts of the previous year. Another major responsibility of the manager(s) besides the operations of the company is to invite the shareholders to convene a general assembly at least one time each year within four months of closing the books of accounts of the previous year. It is also pertinent to note that all the provisions concerning directors of a joint-stock entity pursuant to the Companies Law shall also apply to the managers of a limited liability company.