A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd. network

VOL 19, Issue 4 October 2017

DUTIES & LIABILITES OF DIRECTORS OF A LIMITED LIABILITY COMPANY IN THE UAE

Introduction

It is of vital importance for the partners to understand the liability of the managers and directors of a limited liability company (“LLC” or the “Company”). It is pertinent to note that the terms “Manager” and “Managing Director” and “Director” are used interchangeably for a LLC under UAE law. The UAE Commercial Companies Law (Law No. 2 of 2015) (“CCL”) is the main legislation regulating the duties and liabilities of the Manager of a LLC. Additionally, there are provisions in the UAE Civil Transactions Law (Law No. 5 of 1985) (the “Civil Code”), the UAE Commercial Transaction Law (Law No. 13 of 1993), Federal Law No. 3 of 1987 (the “Penal Code”) and Ministerial Resolution No. (272) of 2016 Concerning Implementation of Provisions Relating to Joint Stock Companies (JSCs) to Limited Liability Companies amongst others, which govern the duties and obligations of the Managers of LLCs.

We list below the provisions of the CCL which directly impact the way the manager performs his duties in a LLC:

1) Responsibilities and Liabilities of Managers:

a) Under Article 22 of the CCL, a Manager is broadly obligated to do the following:

Act in a way that is compatible with the objectives of the Company;
Exercise a degree of prudence/diligence in discharging management responsibilities;
Act within the powers granted to the management and for the purposes for which those powers were given.

b) Binding the Company

Article 23 of the CCL clearly states a Company shall be bound by any act or behavior arising out of its Manager upon conducting the affairs of management in a usual manner. The Company shall also be bound by any act of any of its employees or agents authorized to act on its behalf, and whereby a third party relies thereon in its transaction with the Company.

c) Exemption to Manager is Void

As per Article 24 any exemptions or waivers granted (in the Memorandum of Association or any other contract) to the Managers from the duties, obligations or liabilities imposed on them under any applicable legislation as a current or former officer of the Company shall be void

d) Director’s Liability Towards Others

Furthermore, as per Article 84 of the CCL, a Manager shall be liable to the Company, the partners and the third parties for any fraudulent acts by such Manager and shall also be liable for any losses or expenses incurred due to improper use of the power or the contravention of the provisions of any applicable Law, the Memorandum of Association of the Company or breach of the contract appointing the Manager or for any gross error 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 void.

e) Non – Compete Clause

As per Article 86 of the CCL the Manager shall not, without the consent of the General Assembly of the Company, undertake the management of a competing company or a company with objects similar to those of the Company or make, for his own account or for the account of third parties, deals in a trade in competition or similar to the activity of the company, otherwise the Manager may be dismissed and required to pay compensation.

2) Other Duties & Obligations of Managers

a) To conform with all regulations issued in the state (whether federal or local) especially those relating to the legal form or the commercial activities of the Company, such as the CCL and its amendments, Resolutions relating to corporate governance issued by the Ministry or the Central Bank of the UAE (depending on the activity), the provisions of the MOA, their employment or management contracts and the resolutions issued by the general assembly from time to time;

b) To submit the Company’s MOA and any amendments in the commercial register to the competent authority and to notify the latter of any amendments or changes to the details of the company, such as its name, address, capital or number of partners or even its legal form, failing which they could be jointly liable for any damages sustained by the company, its partners or third parties, as a result to such violation;

c) To prepare the annual financial statements and report about the company’s activities and its financial position and have them audited by the company’s auditor before approving and presenting them to the general assembly along with recommendations on the distribution of profits, within three months of the end of each fiscal year and to submit a copy of the latest audited statement of accounts and the latest report of the company’s auditor within a period of 10 days if so requested by one of the shareholders in writing, and to give the shareholders access to the minutes of the general assembly meetings or the company’s books and documents or any documents relating to a transaction the company entered into with a related party;

d) To call for a general assembly meeting at least once within four months following the end of the fiscal year or if requested to do so by one partner or more holding not less than 25% of the capital share of a limited liability company;

e) To call for a general assembly meeting if the losses of the company reach half of its share capital, whether it is a limited liability so that the liquidation of the company can be considered and discussed by the general assembly;

f) To register the dissolution of the company in the commercial register with the competent authority. Such dissolution will not be effective against third parties until the date of its registration and the announcement of the dissolution in two daily local newspapers (at least one of them is issued in Arabic);

g) link its name with the phrase “Limited Liability Company” or “LLC”, otherwise they could be held jointly and severally accountable for the company’s obligations; and

h) maintain within the company a special register that includes the partners’ full names, nationality, date of birth and place of residence, the transactions made on the shares with their dates, and submit a copy thereof and any changes to the competent authority at the beginning of each fiscal year

4) Penalties imposed on Manager or Directors

To warrant that the Managers of the LLC comply with all their duties and obligations under all legislation, the authorities have further levied numerous penalties for violations. These penalties may involve fines or even imprisonment and they include the following as specified under the CCL:

a) A fine between AED 50,000 to AED 1,000,000 may be imposed on the Manager of a limited liability company if the losses of the company reach 50% of the company’s share capital and he fails to invite the general assembly to convene;

b) A fine in the range of AED 10,000 to AED 100,000 may be imposed on a Manager or Director if he fails to provide any documents or information to the auditors of the company or to the Ministry’s or the Authority’s inspectors to enable them to perform their duties, or if he conceals information or explanations or provides misleading information;

c) Any Manager or Director who distributes to the shareholders or to others any profits or interests in contravention of the provisions of the Companies’ Law or the company’s MOA or the AOA may be subject to imprisonment for a period of not less than six months and not more than three years and/or a fine between AED 50,000 to AED 500,000. Such Manager or Director may also be subject to imprisonment for a similar period and/or a fine in the range of AED 100,000 to AED 500,000 if he deliberately provides false statements in a balance sheet, in a profit and loss account or in a financial report, or omits material incidents in such documents for the purpose of concealing the true financial position of the company; and

d) A Manager or a Director may be subject to imprisonment for up to six months and/or a fine in the range of AED 50,000 to AED 500,000 if he utilizes or discloses any of the company’s confidential information or deliberately tries to cause damage to its activities.

Miscellaneous Provisions in other legislation

4.1 Resignation Timing
Article 667 of Civil Code mandates that it shall not be permissible for a person deputed to manage the company or appointed as a manager of it to dismiss himself or to resign at such a time as would cause the company damage. The Civil Code also imposes on directors the responsibility to resign their directorship only at times which would not cause damage to the company.

Directors Liability in the Event of Insolvency
In addition to the general duties owed by a director to the company, a director may be subject to both civil and criminal liability in the event that the company is subject to an event of insolvency and is unable to meet its financial obligations.
In the event that the company becomes unable to pay its debts, the Commercial Transactions Law stipulates that the directors must, within 30 days of the date of suspension of payments of debts, file for bankruptcy. A failure to take such action may result in the in the directors being considered personally liable in any bankruptcy which may be forthcoming.
The Commercial Transactions Law and the Penal Code contain several provisions as to how courts should treat insolvent companies and their directors. Of particular importance in this respect is article 882 of the Commercial Transactions Law which provides that directors may find themselves subject to a custodial sentence in the event that:

They have failed to provide adequate details in the financial books and records of the company to reflect the true financial position of the company.
They do not supply information requested by the court or trustee in bankruptcy or if they deliberately supply false information.
If they have sold assets of the company at less than their value in an effort to delay the suspension of payment of debts or declaration of the company’s bankruptcy or if the directors have taken any action to obtain credit or funds illegally in order to achieve the foregoing.
If following the point at which the company is no longer in a position to pay its debts, the directors deal with any property of the company with a view to keeping such property beyond the reach of creditors.
If following the point at which the company is no longer able to pay its debts, the directors honor/settle the debt of any creditor to the detriment of other creditors or provides security or special benefits to any of the creditors in preference to others.

5) Conclusion

There are many duties and obligations imposed on Managers or Directors in the UAE of which they should be fully aware in order to avoid violations, as any violation or breach may expose them to substantial liabilities, whether civil or criminal.
Whereas the above legislation and provisions provide safeguards to stakeholders against the directors carrying out any action detrimental to objectives of the LLC, it also imposes a burden on the Directors which may discourage many from taking up the position. In light of the above, the Directors may be wary of taking any decision without the consent of the partners. Investors and directors may also look at the importance of directors’ insurance in the UAE in new light considering the increasing risk from exposure to personal financial liability arising from claims brought against them in connection with the discharge of their duties.
The rules and regulations mentioned above are not exhaustive but an indication of the principal duties and liabilities of a director in the UAE. Careful consideration is needed when considering taking on a director’s role and potential directors need to familiarize themselves with the risks in so acting.