Dubai courts: A stark warning for directors of companies in liquidation

On 10 October, the Dubai Court of First Instance issued a potentially ground-breaking judgment in respect of directors’ liability in the context of corporate insolvency.

In particular, in the matter of the liquidation of the public company Marka PJSC (“Marka”), the Court held the company’s board of directors and managers personally and jointly liable for the company’s outstanding debts, totalling close to AED 450 million. 

To reach 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, emphasising the extent of liability for directors and managers of UAE-based companies and the potential for significant personal consequences. 

The judgment

Pursuant to Article 144 of the Bankruptcy Law, board members and managers of UAE-based companies may be jointly or severally liable to pay all or a portion of a company’s debts if the following conditions are met: 

  1. if the company’s assets are insufficient to pay off at least 20% of its debts; and 

  2. the directors / board members’ liability for the losses of the company is established pursuant to the provisions of the UAE 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 Article 162 of Federal Law No. 2 of 2015 (the “Companies Law”) and Article 201 of the Bankruptcy Law.

In particular, the Court held that these individuals mismanaged the company and: (i) failed to provide the trustee in bankruptcy with the necessary financial and commercial information; (ii) hid Marka assets; and (iii) failed to justify the lack of any funds despite the expansion of Marka’s activities and the large volume and value of its transactions. 

The Court further held that the above breaches resulted in harm to the company, as well as its subsidiaries, shareholders and creditors.  

Several aspects of the judgment are particularly interesting. Firstly, the Court ordered the directors and managers to pay the company’s debts of its own motion: none of the parties to the liquidation proceedings had specifically sought such an order.

Secondly, five former directors were also held liable in addition to the current Marka directors/managers, despite the fact that directors/managers can avoid liability under the Bankruptcy Law if they took all possible precautionary measures to reduce the potential losses, did not participate in the acts in question and/or proved their reservations regarding the acts (Article 147).

Finally, the Court held the directors liable, despite making no finding relating to fraudulent behaviour. This demonstrates that personal liability does not result only from the most egregious forms of commercial mismanagement.

Further developments are likely, since the parties can appeal the judgment before the Court of Appeal.

What the judgment means for you

This is the first time a Dubai court has ordered directors and former directors to personally make good their company’s losses. It is too soon to say whether this is an exceptional case or whether the approach taken will be adopted more widely by local courts in all bankruptcy cases. Additionally, it is unclear whether these provisions of the Bankruptcy Law will be applied as strictly in liquidations of private companies. (It is important to note that this case applies to onshore UAE companies; the DIFC and ADGM free zones have their own insolvency regimes.)

Nonetheless, directors and managers of both public and private companies must remain mindful at all times of their duties and obligations under the Bankruptcy Law and Companies Law.

Under the Companies Law, a manager or director of a company can also be held personally liable where there is evidence of fraudulent acts, improper use of powers, and gross error (Article 84).

Liability can also arise if there has been error in management of the company (Article 162). As with the Bankruptcy Law, managers and directors who can evidence that they did not participate in the relevant acts or took all possible measures to reduce the company’s potential losses will not be liable.

Should you require any advice regarding this decision or director liability more generally, please contact Lucas Pitts or Yannick Hefti.

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