By Adv. Ali Al Zarooni
As one of the most important and influential countries in the Middle East, it is no surprise that the development of the laws and regulations of the UAE have a major impact on the region. The UAE Bankruptcy Law is no exception, and it has recently been amended to bring it up to date with international standards.
The amendments are particularly relevant for board members, who have a responsibility to ensure the financial health of their companies.
In this article, we will explore the new UAE Bankruptcy Law, board member responsibilities under the new law, the case study of Marka PJSC (“Marka”), and best practices for board members when navigating bankruptcy cases.
Overview of the UAE Bankruptcy Law
The UAE Bankruptcy Law, enacted in 2017, provides a framework for companies to restructure their debts and assets in order to remain solvent. It applies to all commercial companies registered in the UAE, as well as to any company with a branch or representative office in the UAE.
The law is designed to ensure that companies have the opportunity to restructure their finances without the need for liquidation, and to ensure that creditors are appropriately compensated for their investments.
The law also specifies the responsibilities of board members in bankruptcy cases. These responsibilities are significant including the requirement for Board members to act in the best interests of the company and its creditors, and to ensure that all decisions made in the course of restructuring are in line with the company’s best interests. They are also responsible for preparing and submitting financial statements to the court, where applicable, and for providing accurate information to creditors.
Board Member Responsibilities Under the UAE Bankruptcy Law
Under the UAE Bankruptcy Law, board members have a number of responsibilities. They must adhere to the principles of good corporate governance, and must ensure that the company’s finances are managed in a responsible manner. They must also ensure that the company’s assets and liabilities are accurately recorded and reported, and that the company’s financial statements are prepared and submitted to the court in a timely manner.
Board members are also responsible for ensuring that the company’s creditors are treated fairly and equitably. This includes providing accurate information to creditors, and ensuring that they are fully informed of the company’s financial position.
Board members must also ensure that creditors are properly compensated for their claims, and must make sure that the company’s assets are used to pay off creditors in the most efficient manner possible.
In addition, board members are responsible for ensuring that the company complies with all applicable laws and regulations. This includes ensuring that the company meets all of its obligations under the UAE Bankruptcy Law, and that it is not engaging in any fraudulent or illegal activities.
Personal liability of the Board for Corporate Debt under the UAE Bankruptcy Law:
Federal insolvency law has established several articles that outline the actions and consequences for board members and managers of a bankrupt company.
Article 147 states that if the assets of the bankrupt company are not sufficient to cover at least 20% of its debts, the Court may order the board of directors or managers to pay the remaining balance if they are found to have engaged in certain activities, including adopting commercial methods without considering their risks, disposing of company assets without consideration or for an insufficient amount, or discharging the debts of a creditor to harm other creditors.
Article 201 outlines additional penalties for board members and managers who do not maintain proper commercial records, fail to provide required data to the trustee or court, dispose of company assets after cessation of payment, pay the debts of a creditor to the detriment of others, dispose of assets for less than market value, engage in activities detrimental to creditors, spend enormous sums on gambling or speculation, or make serious commitments for the benefit of parties other than the company without compensation. However, this penalty does not apply to those who can prove they were not involved in the actions in question or expressed their reservation on the decision
Case Study: Marka PJSC
The case of Marka PJSC, and its other related companies, provides a useful example of the responsibilities of board members in bankruptcy cases. Marka was a UAE-based group of companies that offered a variety of services including luxury clothing and accessories to its customers. The company was struggling financially, and was unable to meet its debt obligations. As a result, the company filed for bankruptcy in 2017.
The board of directors of Marka was responsible for overseeing the company’s restructuring process. They were responsible for providing accurate and up-to-date financial information to creditors, and for ensuring that creditors were adequately compensated for their investments. The board was also responsible for ensuring that the company complied with all applicable laws and regulations, and that it did not engage in any fraudulent activities.
The board of directors of Marka was also responsible for negotiating with creditors in good faith, and for ensuring that the company’s assets were used to pay off creditors in the most efficient manner possible.
The board was also responsible for ensuring that the company’s financial statements were accurate and up-to-date, and for ensuring that the company’s financial position was in compliance with the law.
Dubai Courts Landmark Judgment against Marka Board Members
Dubai Courts ruled on 5 October 2022 that the six board members of Marka, including the Vice-Chairman, must pay the company's debts in the amount of AED 531.2 million. The amount was to be divided equally between the Vice Chairman, who is also the managing director, and the five other board members.
The judgment was mainly based on articles 144, 147 & 201 in the UAE bankruptcy law.
The recent court ruling in Dubai included the imposition of precautionary seizure on the assets and funds of the Vice Chairman and members of the company's board of directors. This includes balances, accounts, and funds in all banks and their branches in the state, as well as real estate, shares, bonds, cars, and other vehicles belonging to them.
The seized entities must acknowledge what is in their possession within the legal term from the date of notification, while preventing their employees from paying others within the limits of the total amount of seizure.
Best Practices for Board Member Responsibilities in Bankruptcy Cases
The Marka case confirms that it is important for board members to be aware of their responsibilities in bankruptcy cases. Board members should ensure that they are familiar with the UAE Bankruptcy Law and should ensure that they understand the implications of the law for their company.
In particular Board members should:
- ensure that they are familiar with the company’s financial position and should ensure that all decisions made in the course of restructuring are in the company’s best interests;
- ensure that creditors are treated fairly and equitably and should ensure that creditors are provided with accurate and up-to-date information about the company’s financial position;
- ensure that the company’s assets are used to pay off creditors in the most efficient manner possible, and should ensure that the company complies with all applicable laws and regulations; and
- ensure that they are familiar with the potential liability they may face in bankruptcy cases. This includes potential personal liability for decisions made in the course of restructuring, as well as potential legal action from creditors if they are not treated fairly and equitably.
Conclusion
Navigating bankruptcy cases can be a complex and daunting process for board members and it is important to stay informed and up-to-date on the new UAE Bankruptcy Law and board member responsibilities. However, with the right knowledge and understanding of the UAE Bankruptcy Law, board members can ensure that their companies remain financially healthy and compliant.
If you're a board member looking for more information on your responsibilities in bankruptcy cases, contact us and our expert team will be more than happy to help.
For more information, or assistance, contact:
Ali Al Zarooni
Managing Partner
T +971 50 631 4431/ +971 4 354 4444
E a[email protected]
About Horizons & Co
Founded in 1999, with offices in Dubai and Abu Dhabi, Horizons & Co is one of the UAE’s leading multidisciplinary law firms. Led by prominent Emirati lawyer, Advocate Ali Al Zarooni, the firm’s legal experts come from a range of common-law and civil law jurisdictions, combining international experience and qualifications with expert knowledge and understanding of the UAE and surrounding Middle East region.
Licensed to practice before all courts, police stations and public prosecutions in the UAE, Horizons & Co provides experienced legal services in all areas of UAE law. They are particularly expert in dispute resolution, specialising in litigation and arbitration. The firm represents major corporate and private clients on a range of complex matters before the differing dispute resolution fora within the UAE.
The firm’s clients include local and international corporations, insurers, financial institutions, developers, contractors, oil and gas companies and Government organisations. Horizons & Co frequently serve as local counsel to international firms on multifaceted civil and commercial disputes. Many international law firms also work closely with Horizons & Co in order to gain an expert insight into all matters pertaining to local UAE laws.