Liability of Director in Dubai
- Duties derived from UAE Laws
- Director’s general duties and liabilities under the Company law
- When is the Director Personally Liable?
- Criminal Liability of a Director is Mentioned Under the Penal Code of UAE
- Penalty and Criminal Liability of a Director of a Company
- Liability of Managers and Directors – Specific Provisions
- Liability of Director Under The Civil Code
- Who can initiate a proceeding against the director?
- Insurance Policy of Director
In 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. Directors and managers are the same people, and the terms are used interchangeably. The manager or director 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.
Directors’ liabilities can be civil or criminal in nature, as stated below:
- Civil liability or liabilities of civil nature are established when a director breaches any of the duties or obligations that are prescribed in any legislation, law or regulation in the Memorandum of Association or Articles of Association of a company or its general assembly’s resolutions, or in the case where a director act outside the authorities granted in the employment contracts or Power of Attorney; and
- Of criminal nature, these liabilities occur where there is a breach that is considered a crime under the UAE Commercial Companies Law.
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 contract, i.e. from the corporate documents of the company, employment and service contract 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.
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 major 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: –
- To manage the Company and preserve its rights with a standard of care like that of a diligent person.
- To work in the agreement or within the objectives of the Company without exceeding specific powers for directors.
- 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, then they can be held responsible in terms of compensation to the Company for the losses incurred.
- They should abstain from misusing power. In case of such misuse, they must reimburse losses or expenses incurred to the Company due to such 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.
- 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.
- They are also required to 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.
When is the Director Personally Liable?
In case of fraud, deception, misuse of power, violation of law, or management error, the director of the Company is personally liable. It is expected that the director of the Company uses reasonable care and caution and acts as a prudent director while taking decisions for the Company.
If any provision attempts to remove these liabilities of a director would be held to be invalid under the Company Law of Dubai. If more than one director jointly passes a resolution for any decision of the Company which comprises 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:
- General Duties and Liabilities- they apply to the directors of all commercial companies.
- Specific Duties and Liabilities- they apply only to the directors of certain nature and legal form of a company.
Criminal Liability of a Director is Mentioned Under the Penal Code of 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 dishonoured 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 are obliged to provide the document 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 shareholder– 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, such an act 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 director of the Company 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 director of the Company 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 bankruptcy of the Company.
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 required regarding the financial 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 at lesser than the 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
There are various restrictions imposed on the performance of director duties under the Memorandum of a company 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. There is no specific definition of limits of custom and it is interpreted by the court on case to 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 director of the Company.
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.”
Insurance Policy of Director
There are insurance policies available for the director liability cover in 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 very low chances that shareholders will claim damages for failure of 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.
D&O Insurance also contains some limitations up to which it will cover the damage and liability. In the event such as intentional breach and criminal conduct, the policy does not cover the damages incurred on the director.
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 important to check if the insurance policy coverage extends to fines imposed by regulators or administrative authorities.
Also, the risks that arose in 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.
These liabilities are imposed on the director of the Company to protect the interest 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 very strict, 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 take such decisions.
Hence, there are insurance policies available for the director, which the Company generally takes for its directors to give those protections to the director of the Company.
For more information about 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!