Business regulation in the UAE: obligations of overseers
One of the most common ways of doing business in the UAE is an onshore limited company. Companies incorporated on the mainland are separate legal entities. Generally, for any liabilities arising from the actions of the firm's directors, liability will be imposed on the company rather than on the individual directors.
The activities of individuals responsible for overseeing a business are frequently closely examined (whether by its creators, lenders, or government officials). Just like in other nations, mistakes and oversights by company leaders that amount to a violation of directors' obligations can lead to severe personal repercussions. In certain instances, such violations might lead to personal responsibility or even legal penalties.
What do I need to know before registering a company in the UAE?
Before we look at what duties directors have, it is important to ask the question of who the duties of directors in the UAE apply to.
In the context of mainland UAE company incorporation, the terms "director", "manager" and "general managers" are often used synonymously to refer to the person(s) responsible for decision-making. As we have written above, the key element of Emirati law governing the corporate governance of limited liability companies is the Commercial Companies Law.
The Commercial Companies Law bestows the stewardship of restricted accountability enterprises to overseers as delineated in the Preamble of Agreement. When inaugurating a corporation in the UAE, one or more overseers (council of overseers) may be designated. The overseers typically possess comprehensive jurisdiction to render determinations on behalf of the corporation. The Preamble of Agreement, extraordinary pronouncements of the originators, or a proxy from the originators may constrict or complement the prerogatives of the overseers.
Business in the UAE: shadow directors and controlling persons
The circumstance that a specific entity is not the chief overseer of the enterprise or a director designated to the council does not entail that it is feasible to disregard the responsibilities of directors as a collection of regulations. It is acceptable for international groups to structure UAE businesses as limited liability companies that are formally managed by a single director. Quite often the same person may be appointed as a director of other operating companies and SPVs within the group, but the whole group is actually run by the management of the parent company.
Therefore, for an individual to be considered a director under the provisions of the UAE company registration law, some form of appointment by or on behalf of the founders is required. This could be, for example, a service contract or a contract of employment. On the other hand, the position on shadow directors is clearly articulated in the Bankruptcy Law, which sets out a number of circumstances in which managers/directors of a firm declared bankrupt may be personally or even criminally liable. Section 196 of the Bankruptcy Law defines managers/directors as "any person employed by the firm" and "playing an active role in the decision-making process", including any person "in accordance with whose directions and instructions the managers act". Thus, a person, such as an outside consultant, may be considered a director of a company for purposes of the Bankruptcy Act if it can be shown that he or she plays an active role in the firm's decision-making process.
In experience, when incorporating international companies, most directors are familiar with their duties under the law of the country where the parent organisation is located. However, it is important to bear in mind that they should also be concerned about their duties and responsibilities and potential personal liability under the Bankruptcy Law if:
- are appointed as a director or chief executive officer of an Emirati subsidiary; or
- manage a subsidiary company in the UAE (even if not formally appointed as a director of such a firm).
Pondering the universal dialect employed in segment 196 of the Bankruptcy Statute, it's plausible that there's a bona fide apprehension that Emirati tribunals might be predisposed to ascribe the primary corporation accountable for the duties of a destitute inferior if this can be substantiated (the subordinate's preferences were formulated at the progenitor corporation echelon and these preferences didn't conform to the Bankruptcy Statute). Consequently, when the interrogative emerges regarding who is obligated by the commitments of overseers under the Bankruptcy Statute, it's imperative to fathom who exerts an operative role in decision-formulating within the corporation.
Meanwhile, our experts can assist in business restructuring for foreign companies.
Legal regulation of entrepreneurial activity: what responsibilities does a director have?
The duties of directors in the Emirates do not differ from those in other jurisdictions (e.g. the United Kingdom). They originate from several sources:
- UAE laws, in particular the Civil Code, the Bankruptcy Law, the Penal Code and the Commercial Companies Law;
- contractual relationships, such as a director's employment or service contract.
The Commercial Companies Law is the pivotal fragment of enactment that delineates the universal mandates and obligations of Chief Executive Officers of onshore United Arab Emirates corporations. The pivotal commitments are delineated in the tableau beneath.
Obligations of CEOs of corporations in the UAE
A CEO possesses an obligation to protect the firm's entitlements and perform with diligence. They must also execute all deeds harmonized with the enterprise's goals and within the confines of their sanctioned authorities.
A director cannot, without the consent of the general meeting, assume control of a rival firm or a company with comparable goals.
The company's leaders oversee the yearly financial statements and the yearly overview of the company's operations and financial status (within three months after the close of the financial year).
If you intend to establish a business in the United Arab Emirates (UAE), it's important to be aware that the Commercial Companies Law includes various obligations for overseers. These obligations encompass tasks such as auditing, furnishing information to government authorities, and organizing meetings for the founders. According to Article 84 of the law, each director of a company can potentially face legal liability towards the company, its creators, and external parties for:
- Any dishonest actions done by a director;
- Any financial setback or cost suffered due to any misuse of authority or violation of the provisions of the relevant law, the articles of incorporation, or the employment agreement;
- Any serious mistake.
A manager who neglects to meet these responsibilities could face penalties and, in certain situations, might even be subject to legal action under the Criminal Code.
The dissolution of a juridical person in the United Arab Emirates (pursuant to a proclamation of insolvency) can be executed under the stipulations of the Bankruptcy Statute, which enforces a plethora of duties on the administration of economically troubled entities and elucidates a myriad of instances where the overseers of an insolvent corporation can be subject to individual culpability and perhaps legal action. The Bankruptcy Statute incorporates the duties delineated in the chart beneath.
Consequences of non-compliance
Seeking the United Arab Emirates' legal system for an official reorganization or insolvency procedure when a company has ceased settling its obligations for over thirty (30) consecutive working days due to financial hardship or insolvency.
Leaders of a company that has not declared bankruptcy are no longer criminally responsible. Nevertheless, leaders may be prohibited from directly overseeing, directing, or participating in the management of any business established in the Emirates or engaging in any other business activity for a maximum duration of five (5) years.
Conduct a thorough examination when continuously evaluating the financial status of the company. Make certain that the company's financial records are appropriately kept following global accounting standards. Summon a gathering of the company's creators in case financial troubles arise.
Keep financial records (accounting and documents) adequate to reveal the financial status.
Sentencing of a maximum of two (2) years in prison and/or a fine of up to UAE Dh30,000 (in cases where the company is declared bankrupt due to a legally binding decision) for executives, supervisors, and liquidators who intentionally neglect to maintain the necessary business records or inventory as mandated by the law. Additionally, they may face disqualification from directly overseeing, directing, or participating in the administration of any company as specified above.
Make sure that meetings with the board, meetings with constituents, and any decisions are appropriately justified, noted, and documented.
Furnish the information needed by a trustee assigned pursuant to the Bankruptcy Act.
For a maximum of two (2) years in jail and/or a fine of up to AED 30,000 (in case the company is officially declared bankrupt by a final court decision), for executives, leaders, and administrators who intentionally neglected to furnish information or deliberately submitted inaccurate information, along with disqualification from directly overseeing, controlling, or participating in any managerial capacity within any business as mentioned.
Completely collaborate with the trustee regarding any reasonable requests for information and/or documents.
To avoid showing preference to specific lenders by settling their debts (at the expense of other creditors), even when aiming for a careful resolution or reorganization of the United Arab Emirates' business.
A maximum of two (2) years in prison and/or a fine of up to 30,000 UAE Dirhams (in the event the company is declared insolvent following a conclusive court ruling) for executives who have chosen a lender after the company has stopped making payments + prohibition from actively managing, overseeing, or participating in the governance of any company as described above.
Seek expert help from financial and legal experts when trying to reorganize the company's debts, if needed.
Make sure that certain lenders are not preferred to the detriment of others, even if some lenders begin a restructuring.
Thoughtfully weigh any conflicts of interest, especially when overseeing multiple businesses within a group (and when there are balances between different groups), and make an impartial judgment, considering all of the company's lenders.
Do not dispose of assets below their fair market value, even in the case of a delay, temporary suspension of debt repayment, or insolvency.
Imprisonment of a maximum of two (2) years and/or a fine of up to UAE Dh30,000 (if the company is declared bankrupt by a final decision) for managers if they have sold assets at a lower value for personal gain or used any harmful methods against the interests of creditors with the aim of acquiring funds to prevent or delay a situation of halted payments, bankruptcy verdict, or the end of a protective agreement or restructuring.
Make sure all deals are conducted with fairness. Thoroughly and clearly record and validate all significant deals, even those involving close associates.
Obtain consent from the creators when selling any possessions.
By the way, our firm's experts can advise on business restructuring or liquidation of companies in the UAE.
Furthermore, beyond the mentioned risks, according to section 144 of the Bankruptcy Act, if a court declares a business insolvent and its resources are inadequate to settle a minimum of 20% of its obligations, the court can instruct any or all of the company's leaders or managers to cover either all or a portion of the company's debts. This is contingent on demonstrating that:
- They employed a business approach characterized by "imprudent risk-taking," like selling assets below their true worth to evade bankruptcy or postpone bankruptcy proceedings.
- They engaged in deals with a third party to vend corporation possessions for no value or less than their actual worth, without any corresponding advantage for those assets.
- There has been a conciliation of indebtedness owed to lenders with the intent of unjustly benefiting certain lenders either when payments ceased or during a condition of pecuniary anguish.
The significance of good decision-making processes and corporate supervision practices cannot be overemphasised. It can often determine whether a company's management is protected from claims of breach of directors' duties in processes such as business restructuring and bankruptcy proceedings.