Liability of Director in Dubai

Introduction

In the UAE, there is no specific legislation to govern the liability of directors, but it is governed through various sources such as Company Law, Civil Code, Penal Code, and Commercial Transaction Law. The manager or director of a company is bound by various laws and regulations in addition to the Company’s Memorandum of Association (MOA) or Articles of Association (AOA). Failure to comply with said provisions, for example, by breach or violation of his duties and any act involving fraud, deception or gross misconduct, such director or manager will be personally liable to the company, its shareholders or third parties involved with the company. 

Duties derived from UAE Laws

1. The duties and obligations of directors in the UAE are drawn from diverse legislative sources, as no consolidated legislative framework addresses the same. For example; –

• UAE Civil Transactions Law No. 5 of 1985 as amended. This regulation mainly manages the contractual responsibilities of Managers and Directors, which can be based on either the employment or management contract or power of attorney and
• UAE Law No. 9 of 2016 addresses bankruptcy and includes provisions regulating Managers’ and Directors’ liabilities in certain situations. For example, when a bankruptcy proceeding has commenced against the Company or the Company has been declared bankrupt.
  • UAE Federal Law No. 2 of 2015 concerning Commercial Companies (“Company Law”).
  • Federal Law No. 5 of 1985 on Civil Transactions (“Civil Code”).
  • Federal Law No. 3 of 1987 Promulgating the Penal Code (“Penal Code”).
  • UAE Federal Law No. 18 of 1993 on Commercial Transactions (“Commercial Transactions Law”).

2. Duties that are contractual on a basis. These are duties based on management or employment contracts, i.e. from the corporate documents of the company, employment and service contracts in place, if any, between the individual and the company.

3. Duties derived from the resolution of shareholders or board and any powers of attorney granted. 

Liabilities of managers and directors

There are mainly two types of liabilities that apply to managers and directors in Dubai:

The first is the liability of “civil nature“. This type of liability has been made applicable to a majority of duties and liabilities. This type of liability is established in cases where the Director/Manager breaches the duties and liabilities that have been established in any specific legislation, regulation, law, articles of association, or memorandum of association of a company, general assembly resolutions, or in any of the management/employment contracts of the employees. 

The second type, a less common liability incurred by the managers and directors in Dubai, refers to “criminal liability”. A criminal liability shall be attracted if something is considered a crime under the UAE Commercial Companies Law. 

When is the director personally liable?

In case of fraud, deception, misuse of power, violation of law, or management error, the company director is personally liable. It is expected that the director of the company uses reasonable care and caution and acts as a prudent director while making decisions for the company.

If any provision attempts to remove these liabilities of a director, it would be held invalid under the Company Law of Dubai. If more than one director jointly passes a resolution for any decision of the company which comprises the above-mentioned wrongs, then all of them would be held liable jointly. 

The liability of a director of a company is categorized into two heads under the UAE Commercial Companies Law:

1. General Duties and Liabilities- They apply to the directors of all commercial companies.
2. Specific Duties and Liabilities- They apply only to the directors of a specific nature and legal form of a company. 

Director’s general duties and liabilities under the Company law 

The UAE Commercial Companies Law (the CCL) (Federation Law No. 2 of 2015), as amended, is the primary legislation regulation that addresses the duties and liabilities of directors for both Limited Liability Companies (LLC) and Private Joint Stock Companies (PJSCs). Unless specific restrictions are set in place under the company’s corporate documents, the primary duties and liabilities of directors are: –

1. To manage the company and preserve its rights with a standard of care like that of a diligent person.
2. To work in the agreement or within the objectives of the company without exceeding specific powers for directors.
3. While preserving the rights of the companies, they are also obligated to act by the care of a prudent person for the interest and welfare of the company and to avoid fraudulent acts. In instances where such fraudulent acts cause the company to incur losses or expenses, they can be held responsible for compensation to the company for the losses incurred.  
4. They should abstain from misusing power. In case of such misuse, they must reimburse losses or expenses incurred to the company due to misuse of the powers accorded to them or of their employment contracts or violate provisions of any applicable law or for any mistakes in managing the company.
5. They should not involve themselves in conflicts, particularly commencing the management or participating in dealings of a competing company or a company with similar objectives for his account or the account of third parties. In case such a conflict arises, such a manager will make a declaration of conflict at any board meeting and be held liable for paying compensation and dismissed from duty. 
6. They must also prepare an annual budget and calculate profits and losses. Make an annual report about the company’s activities/affairs, including the company’s financial position and ensure the same is audited before presenting it to the general assembly. 

Other duties of directors

There are various other duties that the directors are required to fulfil:

1. Preparation of Annual Accounts – Annual Accounts must be prepared for each financial year through a balance sheet and a profit and loss account for the company, which must be done per the International Accounting Standards. 
2. Conflict of Interest – It is the responsibility of the director to not engage in any activities which conflict or compete with the company’s line of business unless the company has taken explicit permission. Furthermore, directors are not allowed to vote on company resolutions that are directly or indirectly related to their interests. Hence, it becomes the duty of the director to inform the other directors in writing about such conflicts. 
3. Confidentiality – It is the duty of the company not to disclose any company secrets or anything which can damage the business of the company. If the director has violated this duty, the director may be imprisoned for up to six months and/or penalized with a fine of no less than AED 50,000. 
4. Resignation Timing – The Civil Code also imposes a duty on the director to only resign from their directorship when it doesn’t damage the company. This involves phases of extreme importance for the company or phases where the company is dealing with some criticality. 
5. Solvency of the Company – If the losses faced by the company exceed 50% of its share capital, it becomes the duty of the director to notify the shareholders of the company and propose liquidation. If the losses exceed 75% of the share capital, then the shareholding holding more than 25% of the company share capital is required for the dissolution of the company. 
6. Directors’ liability to others – If it is found that the director has committed fraudulent activities, it is possible for the director to be held personally liable against others, irrespective of whether the claim has been filed against the company and/or the shareholders. 

Directors’ liability in the event of insolvency of the company

It is possible for the director to be subjected to both civil and criminal liabilities in cases where the company is facing insolvency or cannot meet its financial obligations. As per the Commercial Transactions Law, if the company cannot pay its debts within 30 days of such occurrence, the director must file for bankruptcy. Otherwise, the director may be considered personally liable for anything forthcoming for the company. 

Several provisions under the Commercial Transactions Law and the Penal Code about how courts shall treat insolvent companies and their directors. As per Article 882 of the Commercial Transactions Law, it is possible for the directors to be subjected to a custodial sentence if they fail to provide adequate financial books and records of the company or if they do not supply information as requested by the court or trustee during bankruptcy; or if they sell the assets of the company at a value lesser than their actual market value to delay the suspension of payment of debts or for delaying the bankruptcy declaration of the company; or if the actions of the directors are intended to keep the creditors away from the company property; or if the director decides to favour a particular creditor over the detriment of other creditors for providing exceptional security or benefits. 

Case Law relating to the personal liability of directors

In October 2021, in a landmark judgment of Marka PJSC, the Dubai court ruled a director to be personally liable for a company experiencing bankruptcy for almost AED 450,000,000 (US$ 122,000,000). The reasoning provided for this judgment was that the director had not provided the bankruptcy trustee with the required information, along with mismanaging the company, resulting in a breach of director duties as per the Commercial Companies Law. 

While there is no binding judicial precedent present in the UAE, and it is always possible for this decision of the Dubai Court of First Instance to be appealed to a higher authority in Dubai, the decision highlighted the court’s willingness to underline the directors’ liabilities in corporate bankruptcy proceedings. 

Criminal liability of a director in UAE

As no laws specifically address the criminal liability of directors or managers in UAE, Most criminal offences punishable under their laws are derived from the director’s power to represent the company. Such offences cut across all employees and hence punishable to all, and they include: –

• Breach of any duty expected out of the profession;
• Fraud or embezzlement of property or a legal right;
• Unauthorized disclosure of confidential information of the company;
• Breach of obligation generated under the company’s responsibility;
• Failure to comply with health and safety measures may result in a serious incident and
• Cheque is drawn in bad faith, i.e. writing dishonored cheques on behalf of the company.

Penalty and criminal liability of a director of a company

• If a director fails to maintain an up-to-date accounting record for at least five years from the end of the financial year, such a director will be liable for a penalty of not less than AED 20,000 and, at most, AED 500,000. 
• Documents and information- the director of a company is obliged to provide the documents and information of the company to the auditor or the company and the ministry of the authority.

In case they fail to provide such information or, conceal such information or provide misleading information, the director will be held liable for a fine that is a minimum of AED 100,000 and a maximum of AED 300,000. 

• Distribution of profit and interests to shareholders– the director has to distribute the profit and interest of the company with the shareholder complying with the Companies Law or the Article or Memorandum of the Company.

In case they distribute it in contravention of the law, they are liable to be punished for imprisonment between 6 months to 3 years and a fine between AED 50,000 and AED 500,000. 

• Refusal to grant an opportunity to any shareholder access to review the shareholders’ assemblies’ minutes of the meeting or any related party agreements or company records will attract a fine of at least AED 10,000 and at most AED 50,000.
• Disclosure of Confidential Information– The director gets to have much confidential information about the company, and it is his duty not to disclose it to others as it would harm the business of the company.

If the director discloses any such information or intentionally causes damage to the company business, then he will be punished with imprisonment for up to 6 months and/or a fine between AED 50,000 and 500,000. 

• Participation with other entities– if the company director gets involved with another entity that might influence the price of the securities issued by the company, then he is liable and can be punished for up to 6 months and a fine between AED 1,000,000 and AED 10,000,000. 
• Insolvency– The company’s director is under civil and criminal liability when a company goes under insolvency. It comes under the general duties of the director.

The director must file for bankruptcy within 30 days of the date of suspension of the payment of debts. If he fails to perform this duty, he is personally liable for any company bankruptcy.

Liability of managers and directors – specific provisions

• Article 65 of the UAE Federal Penal Code No. 3 of 1987 states that corporate persons are liable for any criminal act committed for their account or in their names by their managers, directors, representatives, or agents. In such an instance, the corporate person may be imposed fines, confiscations and other criminal measures per the law. On the other hand, if the criminal sanction requires additional principal sanctions to a fine, the applicable fine will be an amount not exceeding AED 50,000.
• Under Article 882 of the Commercial Transaction Law, the directors are subject to custodial sentence if they; –
  • Fail to supply the information requested by the court or trustee in bankruptcy.
  • Fail to provide adequate information about the books and records of the company. 
  • Have sold the company’s assets at less than the asset value with intentions to deliberately delay either the suspension of payment of debts or declaration that the company is bankrupt. 

They are subject to custody if they sell the company’s assets for less than their original value due to a delay in the declaration of the bankruptcy of the company. 

Under Article 144 of the Bankruptcy Law, the director may be directed by the court order to pay the debt of a bankrupt company where the asset of the company is insufficient to settle at least 20% of its debts.

Liability of director under the civil code

Various restrictions are imposed on the performance of director duties under the company’s memorandum and other documents. Apart from all those restrictions, the Civil Code, also known as limits of custom, provides that the court may deem any action of the director as exceeding ‘limits of custom’, and the director would be held liable under the Civil Code. Please note that the limits of custom aren’t defined, and courts interpret them on a case-by-case basis. 

Who can initiate a proceeding against the director?

In case of any wrongdoing by the director, he is liable towards the company, shareholders, and third parties. 

Under Article 166 of the CCL, each shareholder may individually pursue a liability claim against the board of directors of the company if not filed by the company, provided that the error may cause damage to him personally as a shareholder and that such shareholder shall notify the company of his intention to pursue the claim. The claim is limited to the damage only.

The shareholder cannot claim a specific performance or declaratory relief against the director. The shareholder has to prove that the director has acted in bad faith or gross negligence and that such an act is detrimental to the interest of the company. A strict burden of proof lies with the claimant shareholder against the company’s director. 

In case the company fails to file for insolvency when its debts become overdue, the creditors can bring a claim on this ground under Article 162(1) of the Commercial Companies Law. 

In case there is a dishonoured cheque due to insufficient funds maintained by the director, a suit can be initiated under Bankruptcy law by the cheque holder/creditor, who is the unsecured creditor.

If the company fails to distribute declared profit to the shareholders, the shareholders can initiate a claim against the company as well as the director of the company if the director has committed an act of gross negligence and/or a serious mistake.

Under Article 8 of the Commercial Company Law, “A Company is a contract whereby two or more persons agree to participate in an economic profit-making venture by contributing a share of capital or work and splitting among themselves the profit or loss resulting from the venture.”

How can directors reduce their personal liability?

The best way for the directors to reduce their personal liability is to act in the best interests of the company and within the authorizations that have been provided to them by the company. Therefore, if there is a situation where the director feels uncomfortable with a course of action that someone is proposing, the objections of the directors must be recorded in writing. The same can be done either through a letter addressed to the person who proposed such a course of action or is directly recorded in the minutes of a company meeting. 

One of the best ways to be prudent as a director is to carefully monitor any related party transactions or potential conflicts of interest. Acting or participating in any activity which introduces direct or indirect competition with the company is prohibited. Hence, it becomes the duty of the director to adequately disclose such transactions to the company within a reasonable period. This not only helps the directors mitigate potential risks for the company but also protects them from any criminal proceedings that might be initiated against them later. 

Insurance policy of director

There are insurance policies available for the director liability cover in the UAE. The company can obtain insurance for the director to indemnify a director for his actions in the ordinary course of business.

Such insurance is taken by the financial institution more often nowadays as there has been a rise in the regulatory framework. They are not taken by family companies because there are meagre chances that shareholders will claim damages for failing the director’s duty in such companies.

When a director takes a decision and acts as per it, certain duties arise. If the director fails to comply with the duty, personal liability and expenses are imposed on the director of the company. Insurance policies are taken to protect the director from such consequences. 

So, the director must look in detail at the limitations of the insurance policy they are getting. The directors must also consider how ‘claim’ is defined and the extent to which any policy covers awards, losses, or expenses. 

For example, if a court settlement has been made against the director, it is essential to check if the insurance policy coverage extends to fines imposed by regulators or administrative authorities. 

Also, the risks that arose in the UAE must be covered by the insurance policy of the UAE itself because they don’t consider global policies in case of indemnifying the liability of a director. 

Conclusion

These liabilities are imposed on the director of the company to protect the interests of the company, shareholders, and third parties. There must be restrictions on the director in the performance of his duties.

Thus, there are various civil and criminal liabilities imposed on directors under the various legislatures of the UAE. But if the liability is stringent, then the director would fear taking actions even in the interest of the company.

There are situations in a company when a director has to make risky decisions that may or may not work well for the company. The director should be protected in a certain way to let them make such decisions.

Hence, insurance policies are available for the director, which the company generally takes for its directors to give those protections to the company’s director.

For more information about the director’s remuneration in UAE and the UAE’s new commercial laws, see our detailed article on UAE commercial laws, which discusses the latest changes in the power of the manager, supervisory responsibilities, etc. Alternatively, you can hire the services of LegaMart’s legal professionals to obtain case-specific services and solutions relevant to understanding the legalities present at the local level. Refer to our lawyers page today itself. 

Frequently asked questions (FAQs)

What is the distinction between managers and directors of a company?

For laws governing governance in Dubai, there is no clear distinction between managers and directors of a company. Typically, LLCs appoint general managers instead of directors, which is why no board of directors exists in an LLC. On the other hand, directors are more common in public or private joint-stock companies. Usually, the general manager is also referred to as the director of the company and is responsible for managing the day-to-day functioning and management of the company. Therefore, the liability laws are applied equally to both managers and directors due to the absence of any specific distinction between the 2 roles under the Company Law (UAE Federal Law No. 02 of 2015). 

Who appoints the board directors of a company in Dubai?

A board director may either be appointed by the board of directors of a company through the passing of a 50% ordinary resolution at a general meeting of shareholders, or the shareholders may decide to appoint a board director by passing a similar resolution. 

What is the role of a nominee/local director in Dubai?

A nominee or a local director is usually appointed as an alternative to foreign business owners without a resident manager in Dubai. In other instances, they might also be appointed for specific beneficial protection reasons in the company. Their primary role is to act as a regular manager for a certain period with certain restrictions. They are mainly appointed for the following reasons:

• For acting in the best interests of the company and its shareholders. 
• For representing the business in aspects which have been explicitly allowed by contracts by the company. 
• To comply with any legal requirements.
• For respecting other agreements as have been agreed by the company shareholders.