09 May 2024

Holding directors liable and piercing the corporate veil

Authored by: Khalid El Sherif, Hayfaa Nasri & Abdulla Alhosani

In brief

  1. Hadef & Partners successfully obtained a final decision extending the liability of a company to its directors based on evidence of deceitful conduct by the directors. 
  1. The result was achieved by relying on Article 84 of the UAE Commercial Companies Law which can extend liability to managers and seemingly directors of an LLC for fraudulent acts committed as a result of abuses of power, gross errors, or violations of the law, the Memorandum of Association or the contract appointing the manager.
  1. By reaffirming it is possible to potentially pierce the corporate veil in the UAE under certain conditions, this decision provides significant assistance to stakeholders seeking to make key decision-makers of a company liable for their misconduct.

Body

The claimant filed a lawsuit demanding the defendant and its directors refund an amount of approximately AED 10,000,000 invested and paid in respect of a project cancelled shortly after such payment was made. The claimant argued that the directors should be jointly liable with the defendant company as a result of their fraud and deception in securing the investment.

The default position is that managers or directors of a limited liability company  are not liable for the debts of a company. However, Article 84(1) is an exception to this general rule and, in relevant part, states that: 

“Every manager in a Limited Liability Company shall be liable towards the Company, the partners, and the third parties for any fraudulent acts committed by such manager and shall also be liable for any losses or expenses it incurs due to abuse of power or violation of the provisions of any applicable law, the Memorandum of Association of the Company or the contract of his appointment or for any gross error made by the manager.

Accordingly, a manager or director can be personally liable in respect of any of the following:

  1. Fraudulent acts
  2. Acts in breach of the Memorandum of Association
  3. Acts in breach of the managers contract of appointment
  4. Acts in breach of the law
  5. Any gross errors.

The UAE Courts have rarely held managers personally liable based on Article 84 due to relatively onerous evidentiary requirements. Evidence of managerial misconduct can be difficult to obtain as it may be primarily in documents that are not publically available. Nevertheless, this recent decision reinforces that it remains possible to hold a manager liable if there is evidence of one or more of the actions set out in Article 84.   

In the present case, Hadef & Partners was able to obtain and submit evidence showing that directors had defrauded and deceived the claimant by inflating the value of the company prior to the investment. Additionally, it was shown that the directors had taken no actual steps in respect of the proposed joint venture and closed the company’s bank accounts shortly after the investment was received from the claimant.

As a result of the above, Hadef & Partners was able to overcome an unfavourable Court of First Instance decision by succeeding before the Court of Appeal in extending personal liability to the relevant directors.

Conclusion

The resulting judgment is an important reaffirmation by the UAE Courts that the corporate veil will not be permitted to be used to defraud creditors. This outlines the positive trend seen in the UAE Courts of expanding protections available to creditors and ensuring they can pursue culpable parties in order to be made whole. This trend was similarly seen in another recent landmark victory obtained by Hadef & Partners in pursuing assets dissipated to third-party debtors [click here to read about the Landmark Dubai judgment unwinding dissipation of assets and protecting creditors].  

For more advice on directors’ liability, piercing the corporate veil, or debt recovery, please contact Walid Azzam, Partner.

 
 

This article, together with any commentary, does not constitute legal advice. It is provided solely for information purposes on a complimentary basis, without consideration of any specific objectives, circumstances or facts. It reflects then current views of the writer which may modify in time and based on differing objectives, circumstances or facts. A writer's view may differ from views of colleagues and/or the firm. You should seek legal advice on each specific matter. Access to this article does not form an attorney-client relationship.