On October 10, the Dubai Magistrate’s Court issued a potentially groundbreaking judgment regarding directors’ liability in a company’s insolvency.
In particular, with regard to the liquidation of the public company Marka PJSC (“Marka”), The Court held the board of directors and the officers of the company personally and jointly and severally liable for the outstanding debts of the company, totaling nearly AED450 million.
In reaching this conclusion, the Court relied on Article 144 of Federal Law No. 9 of 2016 (the “Bankruptcy law“).
The potential impact of this decision is considerable, highlighting the extent of the liability of directors and officers of UAE-based companies and the potential for significant personal consequences.
In accordance with Article 144 of the Bankruptcy Law, members of the board of directors and officers of companies based in the United Arab Emirates may be jointly or severally liable to pay all or part of a company’s debts if the conditions following are met:
- if the company’s assets are insufficient to repay at least 20% of its debts; and
- The liability of directors / board members for losses of the company is established in accordance with the provisions of the United Arab Emirates Commercial Companies Law (Federal Law No. 2/2015).
In the Marka decision, the Court held that the above requirements were met. In particular, the Court held the directors and managers liable under section 162 of Federal Law No. 2 of 2015 (the “Corporate law”) And section 201 of the Bankruptcy Act.
In particular, the Court ruled that these people mismanaged the company and: (i) did not provide the bankruptcy trustee with the necessary financial and commercial information; (ii) concealed the assets of Marka; and (iii) did not justify the lack of funds despite the expansion of Marka’s activities and the large volume and value of its transactions.
The Court further ruled that the above-mentioned breaches had caused damage to the company, as well as to its subsidiaries, shareholders and creditors.
Several aspects of the judgment are particularly interesting. First, the court ordered the directors and managers to automatically pay the debts of the company: none of the parties to the liquidation proceedings had expressly requested such an order.
Secondly, five former directors were also held liable in addition to the current directors / managers of Marka, despite the fact that the directors / managers can escape their liability under the bankruptcy law if they have taken all measures. precautionary measures to reduce potential losses, did not participate in the acts in question and / or have proved their reservations about the acts (Article 147).
Finally, the court held the directors accountable, even though it did not find fraudulent behavior. It shows that personal liability does not only result from the most egregious forms of business mismanagement.
Further developments are likely, since the parties can appeal the judgment to the Court of Appeal.
What the judgment means to you
This is the first time that a Dubai court has ordered directors and former directors to personally repair their business losses. It is too early to say whether this is an exceptional case or whether the approach taken will be more widely adopted by local courts in all bankruptcy cases. Moreover, it is not clear whether these provisions of the bankruptcy law will be applied so strictly in the liquidations of private companies. (It is important to note that this case applies to onshore companies in the UAE; the DIFC and ADGM free zones have their own insolvency regimes.)
Nevertheless, directors and officers of public and private companies should remain aware at all times of their duties and obligations under bankruptcy law and company law.
Under company law, a manager or director of a company can also be held personally liable where there is evidence of fraudulent acts, abuse of power and serious error (Article 84).
Liability can also arise if there has been an error in the management of the company (article 162). As with bankruptcy law, officers and directors who can prove that they did not participate in the relevant acts or take all possible steps to reduce the potential losses of the business will not be liable.