United Arab Emirates: New Companies Law: Implications For Management Liability

Last Updated: 7 August 2013
Article by Brian Boahene and Oliver Williamson

This article addresses how a proposed new UAE commercial companies law will adopt stricter corporate governance requirements for businesses operating in the UAE and how this might impact upon the perception and uptake of management liability insurance in the region.

Proposed changes to the existing UAE Companies law

The existing federal legislation governing the conduct and performance of companies, the Commercial Companies Law 1984 (the Current Companies Law), contains very little specific guidance on corporate governance. Indeed, legal provisions dealing with directors' duties and performance presently exist in piecemeal legislation such as criminal repercussions following certain activities pursuant to the UAE Penal Code and civil remedies for falling foul of provisions contained within the UAE Civil Code and the UAE Commercial Code.

The new commercial companies law (the New Companies Law) was approved by the Federal National Council (FNC) in late May 2013 and seeks to bring the issue of corporate governance up to international standards and to offer a more transparent means of undertaking business in the region.

Whilst it is not clear precisely when the draft law will be issued, the general consensus is that it will be sometime later this year. It would therefore be prudent for businesses, and specifically those individuals/groups of individuals that manage them (and their insurers), to be fully aware of the anticipated effect of the New Companies Law.

Corporate governance

The New Companies Law contains express provisions regarding corporate governance and sets out in succinct, plain language, the duties of those who manage the affairs of a company.

Article 5 of the New Companies Law states that, as a general rule, the Board of Directors of a company or, as applicable, its managers "shall be responsible for the application of the rules and criteria of Governance."

Article 6 continues this theme, stating that "resolutions regulating Governance in Article 5 include penalties to be imposed on the company and their Chairmen, Directors, managers and auditors in the event of contravention provided that such shall not exceed AED 10 million [approximately US$2.75 million]."

At Article 21 of the New Companies Law, the general, internationally understood and respected duties of those that manage companies are described. Article 21 requires that "Persons authorised to manage a company shall preserve its rights and work for the benefit of the company honestly and faithfully and in agreement with the objectives of the company and the powers granted to them under an authorization issued by the company."

The expression "powers granted to [the directors] under an authorization issued by the company", takes the present position (pursuant to article 111 of the Current Companies Law), which limits powers to those derived under a public joint stock company's regulations (effectively the company's Memorandum of Association), to a much broader level. This means that powers derived from all documents conferring powers upon the directors, including the company's Articles of Association and powers of attorney also appear to be covered by the provisions of the New Companies Law.

In addition to the requirements of Article 21, under Article 22, a company shall be bound by "any act or thing by the person authorized to manage the company upon conducting the affairs of management in a usual manner."

The company shall also be bound by "any act by any of its employees or agents authorized to act on behalf of the company, [where] a third party relies thereon in its transaction with the company."

It is therefore clear that pursuant to the terms of the New Companies Law, the scope of duties owed by those that manage a company in the UAE will be significantly expanded from those that are presently expected under the terms of the Current Companies Law.

Indemnity

Under Article 23 of the New Companies Law, there is no ability to contract out of the duties/obligations mentioned in Articles 21 and 22, with any attempt to do so being deemed to be void. Depending upon how this Article will be construed, this provision could have a significant hindrance on indemnities offered by a company to the directors/persons authorised to manage it, which indemnity is currently available to directors of public joint stock companies under Article 110 of the Current Companies Law. Only time will tell how this provision of the New Companies Law will be interpreted and how the expression 'indemnification' will be construed.

What is apparent is that pursuant to Article 23, the generally recognised position of allowing a company to offer an indemnity to its directors and officers for any wrongdoing does not appear to be available under the New Companies Law. This means that greater reliance will need to be placed on insurance products protecting the interests of company directors/officers. The provision of management liability insurance has significant potential for the region and the availability of dedicated insurance protection to those exercising management functions may be the difference between decisions being made whether or not to operate in the region both on a corporate level and an individual level. Management liability insurance helps to mitigate against the personal liability of those individuals in a company who exercise management functions. One consequence of the financial crisis is that the region has become more litigious with claimants now looking at a range of possible defendants to satisfy their claims. If the region is to continue to attract and retain the talent required to make the jurisdiction a prosperous business hub, it is important that management liability cover is made properly available.

The impact on insurance

It is not compulsory for companies (private or public) in the UAE to obtain and maintain management liability insurance. This appears to be the case in most other jurisdictions in the MENA region. However, given the steps being taken by the international community to better police the operations and affairs of the corporate world, it would be prudent for a business to ensure that they have in place management liability insurance cover.

Some management liability policies available in the MENA region contain provisions that require a company to indemnify director(s) before a policy will provide the indemnity. However, indemnity provisions are often not contained within a director's service contract or even the company's governing documents, an issue further compounded when one factors into the equation that within a number of jurisdictions in the GCC, companies are expressly precluded from indemnifying management, which appears to be how the position will be in the UAE once the New Companies Law has been signed into law.

Summary

Corporate governance remains a buzz-phrase in the business world and the UAE is making attempts to upgrade its corporate legislation to a level more in line with a modern international business environment. The precise date that the New Companies Law will come into force in the UAE is currently unknown although is likely to be this year. Without the New Companies Law, the region would be at a disadvantage as it is clear that the view internationally is that the corporate world requires a better system of corporate governance to curtail the potential for events which led to the on-going global financial crisis.

It appears that the GCC region is seeing a marked increase in regulatory investigations and action being taken against companies/their managers with respect to business decisions and performance of companies. Management policies, and in particular management liability policies, can assist greatly, particularly with the associated legal costs involved in responding to action taken by the authorities which can sometimes even outweigh the penalties/fines actually imposed on conclusion of regulatory action/investigation.

Once the New Companies Law is signed into law, the repercussions for management liability insurers will not be insignificant, with exposure of businesses (and those that run them) to regulatory penalties and indeed claims in tort likely to increase sharply.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions