Articles

Managers and Directors’ Liabilities in the UAE

31 March 2019

OVERVIEW:

The key legislative instrument that governs liabilities of managers and directors is UAE Commercial Companies Law No. 2 of 2015 (CCL) also known as the ‘Companies Law’. Other legal instruments such as the UAE Civil Transactions Law No. 5 of 1985 (regulates contractual responsibilities of Managers and Directors), the UAE Commercial Transactions Law No. 13 of 1993 (regulation of liabilities in specific situations such as bankruptcy/insolvency), the Federal Penal Code No. 3 of 1987 and resolutions issued by Security and Commodities Authority and the Ministry of Economy also contribute towards the obligations list.

A unique aspect of the law regulating governance in the UAE is that it does not clearly distinguish between managers and directors. LLC’s in the UAE typically appoint general managers as opposed to directors and on a general basis, there is no requisite board of directors in an LLC, the choice exists regardless. The general manager is in charge of the day to day management of the business. Due to the absence of distinctions between the two positions, the majority of laws on liability apply equally to both Managers and Directors (in the Arabic version of the CCL).

WHAT THE LAW SAYS:

The general duties and the liability of a company for its directors/managers are set out in Articles 22 and 23 of the CCL wherein the standard of care for a person authorised to act as a manager/director of the company is that of a “diligent person” (Article 22) and requires the appointed person to act in agreement with the objective of the company due to authorisation granted by said company.

There are certain acts restricted to either Managers/Directors unless authorized under Articles of Association:

  • Enter into loans for periods in excess of three years
  • Sell or pledge company property
  • Mortgage the company’s properties
  • Discharge debtors of company from their obligations
  • Make compromise or agree to arbitration

Failure to comply will result in liability for those found in default of the law. There are two categories of liabilities that apply to managers or directors in the UAE: Civil Liability, which are general liabilities associated with the position and Criminal Liability which includes liabilities arising due to breach of governing legislation.

CIVIL LIABILITIES:

The Companies Law mandates compliance of managers/directors with all legislation issued in the resident state especially those relating to the legal form or the commercial activities of the company (Article 3) and necessitates the registering of companies’ MOA and AOA and amendments in commercial register (Article 15). And failure to include the company form of “LLC” in official company documents could render manager liable for the obligations of the company and for compensation (Article 72).

And it is imperative that the managers/directors comply with terms of the Memorandum and Articles of Association and the employment/management contracts and resolutions issued by concerned authorities (Article 84).   The liability that Directors/Managers hold are laid out in Article 162 and 84 which states that they shall be liable towards the company, the shareholders and third parties for all acts of fraud, misuse of power, and violations of the provisions of the Commercial Companies Law or the Articles of Association of the company or for ‘errors in management’. No specific definition of ‘errors in management’ is provided and hence, it is assumed that any fault or error of manager/director in question may come under scope of provision and render them liable.

CRIMINAL LIABILITIES:

Regarding criminal liability of Managers/Directors, there are heavy fines imposed for

  • Rejecting to disclose minutes of meeting of General Assembly or company’s books to shareholders
  • Failing to invite the general assembly to convene when the losses of the company reach 50% of the company’s share capital
  • Failing to provide any documents or information to the auditors of the company or to the Authority’s inspectors to enable them to perform their duties
  • Concealing information or explanations or providing misleading information
  • Violating any provision of the Companies’ Law or the regulations

There may be also be imprisonment terms and/or fines in certain serious offences for those who:

  • Distribute to the shareholders or to others any profits or interests in contravention of the provisions of the Companies’ Law or the company’s MOA or the AOA
  • Deliberately provide false statements in a balance sheet, in a profit and loss account or in a financial report or omits material incidents in such documents for the purpose of concealing the true financial position of the company
  • Utilize/disclose any of the company’s confidential information or deliberately tries to cause damage to its activities
  • Participate, directly or indirectly, with any entity for the purpose of influencing the prices of securities issued by the company

There are further provisions that list criminal offences for managers and directors corresponding to bankruptcy proceedings, bribery and financial terrorism crimes, dealing in insider information, fraud, forgery and breaches of trust.

 

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