Liability on Manager in case of Corporate Mismanagement

What do you think happens when there is a case of mismanagement in the company? Is the manager liable? What do you think the penalties are? If you come across a similar scenario, the article below will enlighten you. In the UAE, the use of the terms’ manager ‘,’ board of managers, ” chairman ‘or’ board of directors ‘is used interchangeably, particularly in cases of limited liability companies in the mainland of the UAE and in situations where express authority is not defined for a specific role or position and in most cases the scope of authority is often left for the shareholders to decide in favour of any one or more individuals. Different legislative sources set out the liabilities and responsibilities of managers and directors that relate to businesses situated on the mainland of the UAE, as well as those businesses located in free zones.

 

Duties of a Manager Under Applicable Laws of UAE

The UAE Commercial Companies Legislation (2015) (‘CCL’), the Civil Code, and the Commercial Transaction Law set down the roles and responsibilities of managers and directors in a combination of laws that state what managers and directors can do as well as what they might be personally liable for, rather than merely relying on a general notion of the fiduciary obligations owed by a company director or manager.

 

Managers and directors are generally required to:

1. Act in good conscience and integrity to achieve the best interests of the company
2. Exercise diligence, the level of care and skill expected from a fairly conscientious in similar circumstances; and
3. Powers shall be exercised for the reasons by which they are granted following relevant regulations.

The management and directors shall be fully capable of managing the company in the absence of any specific restrictions or authorizations in the law or otherwise, and any such action shall be binding on the company. Therefore, it is important to always be aware of the limits on the extent of the powers that can subject a manager/director to a possible lawsuit for breach of duty and hence personal liability.

 

Civil and Criminal Liabilities : Can a manager be held personally liable?

The CCL provides for numerous penalties for breach of its provisions that will be borne by anyone who legally represents the business. Liability would be extended to cover any losses or expenses incurred by a manager or director as a result of any improper exercise of power or infringement of the provisions of any law, company articles, fraud, or negligence.

To an extent that limitations on the scope of powers have been exceeded or misused in such a way that the company suffers damage as a result, the manager or director in question may be personally liable. Furthermore, a civil claim can be filed against a manager (or director) who breached his/ her duties, that has resulted in losses to the company.

In line with the provisions of Article 84, the CCL lays down the liability of the managers of the company responsible or held accountable for the actions taken by the manager during the activities of the company. A manager in a Limited Liability Company (LLC) shall be personally liable for all such fraudulent or deceitful acts committed by the manager against the company, partners, and third parties. The manager without the proper consent of the general assembly of the company shall not undertake on his account or on behalf of third parties, to operate a competing company or a company with similar objectives.

 

Penalties for corporate mismanagement

Managers shall be strictly responsible for any acts which contravene the provisions of the CCL and for committing any unfavourable acts which lead to fraud or deceit. On account of committing acts against the company, such a manager shall be subject to penalties. Consequently, because the rules applicable to directors in a Joint-Stock Company (JSC) apply to managers in an LLC (Article 84 of the CCL), the liability of directors in a JSC is similarly applicable to managers in an LLC.

 

Following are the penalties imposed on a manager in LLC:

1. Under Article 344 of the CCL, the manager of the LLC shall be fined AED 50,000 to AED 1,000,000 if the losses occur if the company reaches half its capital and the manager or board does not invite the general assembly of the company to convene.
2. Under Article 347 of the CCL, a fine of AED 10,000 to AED 100,000 can be levied on the manager if he fails to supply the auditors of the company/inspectors of the authority with any documentation or information that disables them from fulfilling their duties or if he offers any false information and conceals any information.
3. Under Article 363 of the CCL, a penalty of AED 50,000 to AED 500,000 is imposed on any manager who distributes any profits or interests to shareholders or others in violation of the terms of the Company’s CCL or MOA/AOA.
4. Under Article 364 of the CCL, a manager shall be liable to a fine of between AED 100,000 and AED 500,000 and/or imprisonment of between six months to three years if he intentionally makes false documents in the balance sheet, profit, and loss account, in the financial statements or omits material incidents in those documents to hide the company’s true financial status.
5. Under Article 369 of the CCL, disclosing secrets of the company or deliberately attempting to cause harm or damage to the company will be fined AED 50,000 to AED 500,000 and/or imprisonment of up to six months.

 

How to Reduce Personal Liability?

Directors and managers should always behave in what they reasonably consider to be the company’s best interests. In the case that such a person is in a position that he or she is dissatisfied with the fellow officer’s suggested course of action, his or her complaints should be reported in writing, either in a letter addressed to the other officer, or in the minutes of the meeting. It will be wise to ensure that matters or issues pertaining to the transactions of related parties and conflicts of interest are carefully recorded and monitored, as participating in a business competition with another company is usually prohibited. Thus, the directors and managers must behave within the limits of their prescribed jurisdiction, clearly and ethically, and in what they fairly consider to be in the best interests of the organization.