By Mahmoud Hamed
On 24 October 2022, Dubai Court of First Instance declared Arabtec Holding Company bankrupt and approved the liquidation of its assets. The decision highlights the responsibilities of directors, board members and managers of all companies, and the possibility they can be held liable and accountable under UAE Laws for the mismanagement and the fallout of a company.
The Court appointed two trustees to list the assets of the bankrupt company, complete the liquidation and pay the creditors. Regarding the company’s governance, directors, managers and current assets, the Court ruled:
“Strip the directors of Arabtec Holding Company and members of its board of directors from managing the company and its subsidiaries inside and outside the UAE. They shall no longer manage, dispose, or pay any claims issued before the start of the bankruptcy procedure, or obtain any loans on behalf of the company. They shall handover to the trustees all the funds and company documents, including detailed statements of the company’s debts with the supporting evidence and statements of any pending claims for and against the company and its subsidiaries within five days of the date of this Judgement and precautionary freeze the company’s bank accounts and funds with the all the banks in the UAE, real estate, shares and bonds and vehicles.”
The company was unable to clear its financial obligations to the creditors, which amounted to billions of Dirhams, and therefore voluntarily filed a bankruptcy procedure in January 2021. The Covid pandemic clearly caused disturbance to businesses, trade interruption, construction projects cancellations and other bankruptcies. However, the Arabtec decision highlights the responsibility of the directors, board members and managers and, without doubt, some will be held liable and accountable under the legal provisions of the UAE Commercial Company Law 2021 and the Insolvency Law 2019 for the mismanagement and the fallout of the company. To avoid such situations, governance and management rules must be strictly observed and adhered to by a company’s decision makers.
Governance is defined in Article 1 of the UAE Commercial Company Law 2021 (“CCL 2021”) as “A set of controls, standards, and procedures that achieve corporate governance at the management level of the company in accordance with the international standards and practices, by determining the duties and responsibilities of Board Members and the executive management of the company, taking into account the protection of the rights of shareholders and stakeholders”. The UAE CCL 2021 places the partners and managers on equal footing regarding the company’s proper governance and management to reduce the risks of a possible insolvency or bankruptcy. The acts of the partners and managers are identified in various Articles of the CCL 2021 and subject to the scrutiny of other board members, directors, shareholders, and Creditors such as the banks.
As set out in Article 40 of the CCL 2021, “the active partner acquires the capacity of trader, and is deemed to be carrying out commercial business himself in the name of the company and declaring bankruptcy of the partnership company results in declaring the bankruptcy of all partners under the law.” As such, his actions in the name of the company do not only engage his responsibility but also the company and other partners. The actions of one reflect on the company as a legal entity and on individuals. Therefore, the decisions made by one must be wisely and carefully considered within the organisation, jointly agreed by the other partners and records must be made. Such actions and decisions taken by a partner can expose the company to the risk of financial instability. In the event of an improper use of the company’s funds and resources by one partner, the company might find itself embroiled in an insolvency procedure (as defined in Article 1 of the UAE Insolvency Law of 2019) due to the actions of one person.
Similarly, Article 84 of the CCL 2021 clearly explains the liabilities of the company’s managers: “Every manager in a Limited Liability Company shall be liable towards the Company, the partners, and the third parties for any fraudulent acts committed by such manager and shall also be liable for any losses or expenses it incurs due to abuse of power or violation of the provisions of any applicable law, the Memorandum of Association of the Company or the contract of his appointment or for any gross error made by the manager. Any provision in the Memorandum of Association or the contract appointing the manager in conflict with the provisions of this clause shall be deemed null and void”. This Article renders the managers of all companies’ types personally liable for their actions, and this regardless of their intentions, with the objective to protect not only the company but also the investors, externals creditors and even the consumers. The Court can use its discretion to determine whether the fraudulent or wrong act was intentionally perpetrated. The managers’ duties and responsibilities are set out from Article 83 to 91 of the CCL 2021. Managers in all company types should be made aware of the provisions of Article 49 which lists the prohibited Acts for managers:
“A manager may not carry out acts exceeding the ordinary management work except with the consent of all partners or by explicit provision in the Memorandum of Association. This prohibition applies in particular to the following acts:
1- Making donations other than small ordinary donations governed by the commercial norms.
2- Selling the Company's real estate unless such transaction falls within the objectives of the Company.
3- Mortgaging the Company's real estate or assets, even if the manager was authorised to sell its real estates under the Company's Memorandum of Association.
4- Guaranteeing third parties’ liabilities.
5- Selling, mortgaging, or leasing the Company's store.”
In addition, Article 51 renders the managers liable for any damage inflicted to the company, partners, and thirds parties due to the violation of the provisions of the Company’s Memorandum of Association or his appointment contract or due to any negligence or error committed by the manager upon performance of his job or due to his failure to carry out his work with due care.
The level of protection offered to third parties is very high as, suppose that the wrongdoer is financially insolvable, Article 53 renders the “General Partnership Company” liable towards third parties for compensating any damages resulting from the actions of any partners that performed with the consent of the other partners or upon the conduct of the ordinary course of business of the company. This Article raises the issue of documentary evidence and records keeping within the company. Should the company and other partners want to be cleared of their respective liabilities, they must demonstrate that the actions of one were perpetrated without their consent or outside the ordinary course of business of the company.
Partners, managers and directors should always act in the best interest of their company and within the scope of its activity and limited to the authority granted to them, failing which their liability and this of the company would be compromised. They must act carefully, tactfully and seek advice from other members of the company when necessary to make difficult decisions. The sustainability of the company is directly affected by their actions and decisions.
This article does not constitute a legal advice, but to raise awareness on the applicable laws. For further information and legal advice, please write to us or get in touch via our website.
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