27 Jun 2017

Sole Establishments: Issues Surrounding the Succession Process

Authored by: George Khoury

Sole Establishments: Issues Surrounding the Succession Process

In brief:

  • There is considerable ambiguity as to the legal status of a sole establishment on the death of the proprietor
  • Discusses the importance of powers of attorney, and making sure that they comply with the available laws, and are correctly issued

There is a degree of uncertainty surrounding the legal status of a sole establishment upon the death of a sole proprietor, a concept which is often ambiguous under the applicable UAE laws. The very nature of a sole establishment is that there cannot be more than one owner and so the ownership is not divisible into shares. This effectively poses issues in relation to succession where there are multiple heirs, and  this article seeks to explore these issues in more detail.

Practicalities of succession of a sole establishment

In practice, the process of succession can be complex and where there are multiple heirs to a sole establishment, rather than ownership of the sole establishment devolving to those heirs, ownership temporarily remains with the deceased owner’s estate.

Once the UAE courts have been notified of the circumstances by one or more of the heirs, they will proceed to hold a hearing and subsequently issue a certificate of succession, which is an authoritative statement regarding the lawful distribution of the assets of a deceased individual among his heirs, including any shareholdings or other corporate ownership interests (“Certificate of Succession”).

Following the issue of a Certificate of Succession, the relevant authorities will then register the sole establishment under the proprietorship of ‘the legal heirs of [the deceased owner]”, in order to maintain sole ownership of the entity under the estate (as a single entity). This will effectively avoid listing multiple individuals as the owners of the sole establishment, in contravention of the provisions of the UAE Commercial Transactions Law.

This ownership status will most likely continue until such time as the entity is sold, liquidated, or converted to a civil company being held by multiple individual heirs, or until the apportionment of the deceased’s assets have been agreed by allocation of the entirety of the sole establishment to a single individual.

If succession of an entity occurs in the manner detailed above, where for example, the entity carries out consultancy activities, the Department of Economic Development in Dubai (“DED”) will conduct a review to assess the qualifications of the new owner or manager of the sole establishment in order to approve and issue the updated commercial licence. This is because the previous licence would have been based on the deceased owner’s personal qualifications in providing those activities or services. If no general manager is named on a sole establishment’s licence, it will be presumed that the respective qualifications will be that of the owner.

Should the DED not be satisfied that the new sole proprietor has the required experience to carry on the activities of the entity, a qualified manager will need to be appointed whose name will appear on the respective commercial licence.

Generally, it is understood that the DED will continue to renew a sole establishment’s commercial licence even when they are aware of the death of its owner, and would only refuse to renew it (or suspend any other actions relating to the sole establishment) pursuant to a court order.

Powers of Attorney

Powers of attorney are a key consideration during the process of succession of a sole establishment. Under the UAE Civil Code, these documents are automatically extinguished upon the death of an owner, and any action performed pursuant to a power of attorney issued by a deceased principal shall be deemed void.

However, in practical terms, a valid power of attorney issued in the UAE will not be formally revoked by the Notary Public unless and until it is instructed to do so by a UAE Court. The UAE Courts will only issue this notification in connection with the execution of an inheritance file.

An attorney could, in practice, continue to exercise the powers granted to him pursuant to the original power of attorney until such time as the power of attorney is revoked by the Notary Public. However this would be a violation of UAE law and, as stated above, any actions taken pursuant to the power of attorney, if subsequently challenged, would be deemed null and void.

From a liability perspective, it is possible for the heirs, or a third party claimant, to apply to the UAE courts to challenge the actions of an attorney and claim damages for any loss suffered as result of any particular transaction performed pursuant to the deceased owner’s power of attorney. The attorney may also be exposed to criminal liability.

Powers of attorney granted by a deceased owner are therefore no longer valid and cannot be relied upon for the purpose of representing a sole establishment within the scope of the powers granted.  Any subsequent heirs of the owner are unlikely to be able to issue a new power of attorney relating to the sole establishment until such time as a valid Certificate of Succession has been issued, an inheritance file has been opened, and the ownership of the entity has been transferred to the relevant individual or individuals and reflected on the commercial licence.

Depending on the specific circumstances, this process may take several months to be completed, which could cause significant disruption to business operations.

Powers of attorney are very important documents, and the above considerations highlight the importance of completing the process of ownership registration of the heirs of the deceased owner as soon as possible, so that they may issue necessary powers of attorney to enable management and operation of the business to continue with minimal disruption.

Local Service Agent

Consideration should also be given to sole establishments that are owned by non-UAE nationals.

Initially, when setting up a sole establishment in the UAE, a foreign proprietor must appoint a UAE national to act as a local service agent (“Agent”) who is effectively a local sponsor, and although paid a fixed fee for their services, does not receive any commission or profits from the entity.

Various corporate actions relating to the entity, including labour and immigration matters, are carried out by the Agent.

Upon the death of the owner, the Agent would continue to be registered with the DED of the relevant Emirate as the local service agent of the sole establishment, and would not likely be prevented from performing his duties as a consequence of the death of the owner.

However, the local service agency agreement between the Agent and the deceased owner would not be binding on the heirs. As such, a new agreement between the Agent and the deceased owner’s successor(s) in title should be executed before the Notary Public after the distribution of the deceased owner’s assets has been settled and ownership of the sole establishment has been properly vested in his successors in title.

Conclusion - Protecting the Business

There are a number of considerations that need to be addressed in the process of succession of a sole establishment. The relevant UAE laws are ambiguous or silent on some of these and the legal protocol or correct course of action to follow during the succession process can be confusing. However, the interests of the business should ultimately be prioritised and the appropriate action implemented to ensure there is as little disruption to the daily activities of the business as possible and that any succession in title is put into effect as soon as possible.

However, it is always advisable that such issues should be considered during the lifetime of the sole proprietor. Where possible, depending on the business and specific circumstances of the sole establishment, a corporate restructuring of the business may be possible which would avoid many of the issues outlined above following the death of the sole proprietor. It is clear that only a well-considered and thoughtful corporate structure can help protect a business from the clear disruption that will occur during an abrupt succession process, and so ensure a smooth transition to the next generation of ownership.

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.