PROPERTY SECTOR: DO DIRECTORS NEED TO CONSIDER PERSONAL LIABILITY ISSUES?
Authored by: Michael Lunjevich
Michael Lunjevich takes a closer look at what limited liability may really mean for company directors.
- Despite the limited liability nature of companies, directors may incur personal liability for the debts and actions of the LLC if their behavior or corporate decisions are not within the boundaries of limitations set by UAE law.
- Directors can reduce their chances of being pursued for company debts and liabilities through the implementation of good corporate governance measures to ensure the commercial and legal reasons and assumptions behind their decisions are well documented to ensure there is a record to prove their actions were prudent and within the boundaries of the law.
In the current market situation, particularly as that relates to the liquidity strapped real estate sector, managers and directors should not put all their faith in the notion that the limited liability nature of the companies they own or manage will protect them in all situations. Whilst difficult for a third party to prove, there are likely to be situations where the manager and/or directors could be liable for the decisions they make, and they therefore need to be mindful of the consequences for shareholders, customers and creditors alike.
In November, Hadef & Partners released its report entitled “What is the legal state of the Dubai real estate market”. As discussed in that report and evidenced by the recent press relating to the first court appointed liquidation of a developer in the UAE, we expect the number of real estate related liquidations to increase.
Many developments across the UAE are currently on hold due to developer liquidity issues and our report shows a large number of purchasers are seeking to enforce their contractual rights in sale and purchase agreements. This purchaser default and disputes cycle is increasing the cash problems for many developers, which is in turn being compounded by the banking sectors own liquidity issues.
With current market dynamics, there is likely to become a time where the competing interests of the purchasers, other creditors (such as consultants and contractors) and shareholders may collide. The pressure will be on development companies to face the inevitable questions about how its finances became so poor. Creditors (purchasers included) will want answers to these tough questions and good corporate governance and well documented decisions that show sound commercial and legally backed strategies may well save managers and directors from personal liability.
As one respondent to our survey commented, “The reality is even if developers were obliged to pay compensation, if they haven’t got the cash, they can’t pay”. Where this situation arises, creditors will inevitably look to other pockets for relief. Under UAE law, relief can be obtained from directors in situations where fraud is present, the law or the articles of the company have been breached, or where mismanagement exists.
Creditors are likely to argue that, given the current market dynamics management should operate under an increased duty of care to ensure relevant representations are true and correct and to ensure financial resources provided to them by purchasers are appropriately used. Many purchasers want to know how the cash they injected into the project was spent: did the directors over-spend on marketing to a point that was unreasonable, did the directors use the funds solely for the project and did the directors act within their limits of power?
In light of the above issues, purchasers (especially those with sufficient financial resources) may begin to extend their pursuit of justice to the directors and management of developers who have not lived up to promises or behaved unethically. The UAE Companies Law provides the chairman and members of the board of directors shall be liable towards the company, the shareholders and third parties for all acts of fraud, power abuse, violation of the Companies Law or the company articles, and for mismanagement. Even if offshore companies have been incorporated to hold project assets, directors of such offshore entities may have some liability given the UAE Companies Law applies to foreign companies who practice their main activity in the UAE or have their main office here.
It can be very difficult, expensive and time consuming to prove liability on directors and a claimant would need to pass a high evidentiary threshold. For this reason, few purchasers may pursue such claims, however, significant creditors may see merit in these types of actions, especially where a developer has continued to lead a creditor to behave in a manner that causes the creditor additional loss. This might be by demanding, collecting, utilising money from purchasers, or allowing contractors to continue to incur costs during a period where it should have been apparent the project was not going to be delivered. This will be a question of fact and an expert may be required to investigate such.
Therefore, directors should be mindful that “limited liability” may not be all that it is understood by many to be, and they should implement good corporate governance measures to ensure the commercial and legal reasons and assumptions behind their decisions are well documented to ensure there is a record to prove their actions were prudent.
To date, Hadef & Partners is not aware of any successful cases brought by purchasers against directors pursuant to the director liability provisions of the UAE Companies Law. It is likely more developers will face solvency issues and projects may be cancelled or put “indefinitely” on hold and this may be an increasing area of interest, and directors should be taking preemptive measures to mitigate the possibility of such claims.