There are various provisions under Federal Law no. 2 of 2015 on the Commercial Companies Law (“CCL”) which relate to directors’ and managers’ liabilities and duty of care. The CCL is the most referenced legislation when dealing with directors’ duties and day to day management of their companies. There is no uniform set of legislation for directors’ criminal liabilities. Therefore, criminal transactions and actions taken in bad faith are dealt with under several other UAE federal and local legislation such as the UAE Civil Code and the UAE Penal Code.
Managers vs. Directors
LLC’s in the UAE normally appoint general managers as opposed to directors, which is typically more common for private or public joint stock companies. However, directors of public joint stock companies may be subject to additional obligations and duties due to the nature of the company.
The general manager is in charge of the day to day management of the business, and may sometimes be referred to as the director as well. This confusion arises from the fact that in the Arabic version of the CCL, there is no distinction between a director or manager. Generally, there is no board of directors with an LLC, although the LLC can always choose to have one.
Nevertheless, the provisions in the CCL which relate to the liabilities of directors of a joint stock company equally apply to managers in an LLC (Art. 237, CCL). Therefore, references to liabilities in this article relate to either managers or directors.
Articles 22 and 23 of the CCL provide for general duties and the liability of a company for the acts of its directors. Art. 22 stipulates that a person authorized to act as a manager/director of the company shall extend the care of a “diligent person” to company matters. Such person shall do all such acts in agreement with the objective of the company by virtue of an authorization issued by the company. Art. 23 further states that the company is bound by any act or behavior arising out of its manager/director (as well as any employee acting on behalf of the company) upon conducting the affairs of management in its usual manner. Such liability cannot be exempted through the company’s memorandum or articles of association.
Management of the LLC
The CCL stipulates that the manager of an LLC company shall be authorized to exercise full powers to manage the company, and such managers’ acts shall be binding upon the company, provided that they state their capacity upon acting (Art.83, CCL). This is typically evidenced by the trade license of an LLC, which usually mentions the general manager’s name. The manager is the first point of reference for the company and is generally authorized by a power of attorney provided to him/her by the shareholders of the company or via the MOA of the company. Exceeding the powers given to the manager may generally make the manager, or the LLC itself, liable, depending on the nature of the manager’s actions. Specific and clear instructions must be given to the manager upon their appointment and whenever they are unclear with regards to their authority.
A limited liability company must appoint a “supervisory board” if the number of partners exceeds 7. If members of the supervisory board were aware of any errors committed or omitted by managers or other directors, they may be held liable by the LLC company (Art.90, CCL). Another obvious yet material issue to highlight is the inclusion of the “LLC” in the company name, including the company’s letterheads, or emails sent to clients. Failure to implement this may make the manager(s) jointly liable for the obligations of the company and for compensation.
Liability of the Board of Directors
Article 162 of the CCL is the most common provision referenced when mentioning directors’ liabilities. This provision states that members of the board shall be liable towards the company, the shareholders and third parties for all acts of fraud, misuse of power, and violations of the provisions of the CCL or the Articles of Association of the company or errors in management. Unfortunately, there is no definition of “errors in management”. Therefore, any fault or error of the board member may easily fall under this provision and make him/her liable. Companies must be aware and hold their board members and managers to higher expectations in order to avoid liability.
Such liability is extended to all members of the board if the error arises from a decision passed unanimously by them (Art. 162(2), CCL). This does not apply to those board members who reject a decision passed by majority. Furthermore, absence from a meeting which the decision has been passed shall not be a reason to be relieved from liability unless the board member can prove that he/she has been unaware of the decision or could not object. Hence, in order to protect the directors from any potential liability, any board meeting should be protocolled accordingly.
General Restrictions of Board Members
Generally speaking, the board of directors shall have all the powers required in order to fulfill the object of the company. However, there are general restrictions imposed; the directors may not (unless such acts are authorized under the company’s articles of association, or within the objects of the company nature) (Art. 154, CCL):
- Enter into loans for periods in excess of three years
- Sell or pledge the property of the company
- Mortgage the company’s movable and immovable properties
- Discharge the debtors of the company from their obligations (special decision of the general assembly required)
- Make compromise or agree on arbitration (special decision of the general assembly required)
Board members who fail to comply with the above restrictions may be liable for their actions, either severally or jointly. Therefore, any appointed board members should have a clear list of their obligations and restrictions, whether internally, or in accordance with the CCL. Failure to note their obligations may expose them to liability in the future.
Non-appointed Board-Members or Managers
Art 163 of the CCL states that a company shall be bound by the acts of its members of the board against a third party even if it is found that the procedure for electing the said member has been invalid.
Under the old UAE Commercial Companies Law, the position was unclear with regards to non-appointed employees/officers acting in managerial positions, and reference was made to various provisions of the old law to decipher such non-appointed officers/employees’ liabilities. This Article 163 of the CCL, however, has clarified the position on non-appointed employees/officers and stresses the importance of directors’ acts and behaviors, whether appointed or not.
Consequences and Penalties for Non-Compliance with the CCL
Lawsuits may be filed by the company or the shareholders against members of the board for their errors. The authorities may send a notice of de-registration to any company that ceases to conduct its business activities or is contravening the provisions of the CCL. The liability of the board of directors, managers and shareholders shall continue however even in the event the company receives a notice that it is to be de-registered (Art.303, CCL).
Furthermore, Chapters I and II of the “Penalties Section” under the CCL lists harsh penalties which will be imposed on those violating the law.
Some of the minor penalties under the CCL which entail a fine anywhere between 20,000 AED and 500,000 AED include failure to comply with the decision of the registrar (concerning a change of name) failure to keep accounting records for the required period of time and breaching percentage of UAE contribution (Art.340-353, CCL). It is interesting to note that under the CCL, accounting records must be kept for a minimum of 5 years (Art. 26, CCL), which although was not prevalent under the old law, was always prevalent under the Commercial Code (Art. 31, Commercial Code).
Chapter II contains more serious penalties which include a jail sentence (6 months- 3 years) and/or a fine (up-to 1,000,000 AED in some instances). Some of these more serious penalties include providing false statements or statements in violation of the law whether in relation to corporate documents of the company or other documents (Art. 361, CCL), concealing true financial position for any manager or board member who deliberately provides false statements in the financial statements or other documents (Art. 364, CCL), and disclosure of secrets of the company for any employee/director who discloses a secret of the company or deliberately attempts to cause damage to the company (Art. 369, CCL). Other extensive lists of penalties related to joint-stock companies are listed such as issuing securities in violation of the law and influencing the prices of securities (Art. 370, CCL). This extensive list has been put in place in order to attempt to control and discipline the management of joint stock companies for the purpose of eradicating some of the difficulties facing these companies in the past.
The above penalties are without prejudice to other severer penalty in any other law, and so, therefore, the penalties under the UAE Penal Code and other UAE legislation must still be considered as well as the penalties under the CCL.
DIFC Companies Law
The DIFC Law no. 8 of 2018 and the companies’ regulations (“DIFC Companies Law”) has very recently replaced the old DIFC Law no. 2 of 2009 and has clarified some provisions on directors’ liabilities. Article 68(5) of the DIFC Companies Law provides that no act or omission of a director shall be treated as a breach if all the shareholders of a company authorize or ratify the act or omission, and the company remains able to discharge its liabilities as they fall due after the act or omission.
The DIFC Companies Law provides that a director has a duty to conduct the following:
- Act in accordance with the articles of association of the company and exercise his/her powers for the purposes for which those powers have been conferred (Art. 69, DIFC Companies Law)
- Promote the success of the company (Art. 70, DIFC Companies Law)
- Exercise independent judgment (Art. 71, DIFC Companies Law)
- Exercise reasonable care, skill and diligence (Art. 72, DIFC Companies Law)
- Avoid conflict of interest (Art. 73, DIFC Companies Law)
- Not to accept benefits from third parties (Art. 74, DIFC Companies Law)
- Declare interest in a proposed transaction or arrangement (Art. 75, DIFC Companies Law)
Criminal Liability of Directors
A director can be criminally liable under Federal Law no. 3/1987 (“UAE Penal Code”) in relation to breach of trust (embezzlement, fraud, etc.), breaching their professional duties (confidentiality, conflict of interests), or breaching their obligations in relation to the company’s responsibilities.
The UAE Penal Code stipulates that any individual who misrepresents to a contracting party the truth about merchandise (its characteristics, components, origin, etc.) shall be subject to a jail sentence or fine (Art. 423, UAE Penal Code).
Article. 339 of the UAE Penal Code further stipulates that any person who draws up a cheque in bad faith without sufficient funds, or if he/she deliberately writes or assigns a cheque to make it non-payable shall be subject to a prison sentence or a fine. As per the new rules in Dubai however, bounced cheques of up-to 200,000 AED are now punishable via a fine rather than a prison sentence.
Director’s Liabilities Under Other UAE Legislation
- Federal Law no. 4/2000 Concerning the Emirates Securities and Commodities Authority and Market and its regulations (“ESCA Law”): criminal offences such as using insider information and furnishing false information is punishable by imprisonment and a fine ranging between 100,000 AED and 1,000,000 AED (Art. 36-39, ESCA Law).
- Federal Law no. 9 of 2016 (“Bankruptcy Law”): directors shall be held liable for acts such as concealing company’s assets, declaring debts not due from the company, falsely declaring paid-up capital, failing to maintain sufficient commercial books, or failing to provide the required information to the appointed trustee or court. Directors found guilty as such may be punished by a prison sentence as well as a fine (Art. 198, 201, Bankruptcy Law).
- Anti-Bribery laws: Federal Decree-Law No. 11/2008 (“Federal Human Resources Law”) and Dubai Law No. 37/2009 (“Financial Fraud Law”) as well as the UAE Penal Code all contain various provisions regarding bribery, mostly relating to public officials. The UAE Penal Code stipulates that a company director found guilty of bribing a government official or accepting a bribe from any member of the public or private sector may be sentenced to up to 5 years’ imprisonment (Art. 236, UAE Penal Code). The UAE Penal Code provisions on anti-bribery have recently been amended. The law now covers foreign and domestic bribery in both the public and private sectors and international organisations. Its provisions apply outside the UAE’s territory, to anyone who commits any of the offences set out in the Code, if the criminal or victim is a UAE citizen or if the crime is committed by a public or private sector employee, or if it involves public property.
- Federal Law no. 9/2014 (“AML and Combatting Financing of Terrorism Law”): directors of financial institutions with knowledge of any act committed in connection with terrorism or any money-laundering activity or financing of unlawful organizations and those who fail to report such crimes shall be sentenced to imprisonment and/or a fine ranging between 50,000 AED and 300,000 AED (Art. 15, AML and Combatting Financing of Terrorism Law).