A company or partnership is a legal entity formed by an agreement between multiple individuals or companies to undertake a specific activity, usually for commercial purposes. Each participant contributes an amount (Capital), which serves as the financial foundation of the company. These contributors, known as the general assembly, have the right to determine the company's purpose, contributions, profit and loss distribution, management, and other key details.
This general concept of a company or partnership is governed by the UAE Commercial Companies Law under Federal Law No. (32) of 2021. The law is comprehensive and was drafted in a clear and robust manner, aligned with the significant growth of the country and its economic role, facilitating business operations and protecting the rights of companies and others.
One of the key types of companies in the UAE, as specified by this law, is the (Limited Liability Company) (LLC), which is defined in Article (71) of the UAE Commercial Companies Law under Federal Law No. (32) of 2021 as a company with no fewer than two partners and no more than 50 partners, where each partner is only liable to the extent of their share in the capital.
The law also introduced a new type of limited liability company
which was not present in the previous federal company law, allowing
a single natural or legal person to own a limited liability
company. This individual will not be personally liable for the
company's obligations except to the extent of the capital
specified in the company's founding contract.
This exceptional form of (LLC) is subject to the same provisions
as if it was formed by more than one partner.
The law establishes a general principle for liability in (LLC), stating that each company has an independent legal identity separate from its partners.
A partner is not liable for the company's debts and obligations beyond their share in the capital. Creditors have no recourse beyond the company's assets, not the personal assets of the partners.
The company has legal standing to sue or be sued independently of its partners. As a legal principle, the company enjoys independent legal personality, meaning it is subject to legal obligations and entitled to legal rights, enabling it to conduct its activities after being registered in the commercial register with the relevant governmental authority (Department of Economic Development) in the emirate where the company is established.
However, there is an exception to the general rule of partner liability in a company, making the partner personally liable for the company's obligations if they exploit the principle of the company's legal personality to engage in fraud or gross negligence. In such cases, those claiming rights against the company and its partners can prove this before the court using legal evidence.
Furthermore, according to judgments issued by the Dubai Court of Cassation in many cases, a partner may be held personally liable if they:
- Guarantee the company's debts,
- Sign a personal guarantee agreement, confirming they would ensure the company repaid its borrowed funds.
The Commercial Companies Law also requires, under Article (83), that a (manager) be appointed for LLC upon the formation, whether this manager is one of the partners or someone external, and more than one person may also manage the company.
If a manager is not appointed in the founding contract, the general assembly (all the partners) will appoint a manager, enabling the company to conduct its business, manage the capital, and supervise operations.
In this general sense, the manager is considered an (employee tasked with management) of the company and they are responsible for the decisions, actions and operations.
Generally, if a liability arises, the manager in LLC is not personally liable unless in one exceptional case mentioned in Article (84) of the law.
A manager is liable to the company, its partners, and others for any fraudulent activities and must compensate the company for any losses or expenses incurred due to misuse of authority, violation of any applicable laws, the founding contract, their appointment contract, or any serious error on their part.
Thus, the manager may be sued:
- if they engage in fraud or mismanagement by the company's partners, who are entitled to the company's assets.
- By the company itself, as it enjoys legal personality under the law
- By third parties, whether natural or legal persons, where they may file lawsuits if the manager's fraudulent actions or mismanagement result in losses for them during the company's operations.
The Court of Cassation has ruled on several cases, including the legal principle established in 2023 in Commercial Cassation No. 9/2023, The court's ruling in this cassation concluded that:
According to Article 72(2) of Federal Decree-Law No. 32 of 2021 on Commercial Companies, the failure to mention the statement that the company is a limited liability company and to specify its capital amount results in the manager being personally liable for all obligations arising from any transaction concluded by the company, as if he were a general partner. However, such joint liability does not arise merely due to the omission of this statement itself. The manager's liability is only established if the third party dealing with the company proves that they suffered harm as a direct result of this omission and that this omission was the proximate and effective cause of the damage. The damage must have resulted directly and inevitably from the omission, without being attributable to other factors related to the company itself, such as its closure, liquidation, or bankruptcy for reasons beyond the manager's control. Additionally, the damage must be contemporaneous with the transaction between the parties and not arise at a later date.
These are the same principles previously established by the Court of Cassation regarding the liability of partners and managers under the previous Companies Law. Since the legal text has not changed, the principle of liability remains the same. In Cassation No. 92/2012, the Court of Cassation ruled that:
Pursuant to Article 218 of the Commercial Companies Law No. 8 of 1984, as amended by Federal Law No. 13 of 1988 and Laws No. 25 of 2001 and No. 18 of 2006, and in accordance with the established jurisprudence of this Court, a partner in a limited liability company shall only be held personally liable for its obligations—including employees' rights—if the partner has exploited the principle of the company's separate legal personality as a means or a façade to carry out acts or transactions in violation of the company's contract, causing harm to the company, its partners, or its creditors. Such acts must involve fraud, deceit, or gross negligence.
Similarly, a manager of LLC shall be held personally liable for their obligations only if there is a breach of managerial duties, a violation of the law, the company's memorandum of association, or its articles of incorporation, resulting in damage to the company or any of the aforementioned parties.
The manager's liability also arises if their management involves fraud, misrepresentation, or gross negligence. From a procedural standpoint, if it is proven that the actions of the partner or manager were carried out in bad faith with the intent to harm the rightful claimant, the court, when issuing a judgment against their personal assets, will treat them as a direct party to enforcement.
Consequently, enforcement measures will be taken if the judgment is rendered against them.
A separate enforcement file may be opened against them, and enforcement may be carried out on their personal assets after they have been formally served with an enforcement notice, granting them (7) seven days from the date of receipt to make payment.
If this period expires without payment, enforcement actions may proceed, including freezing bank accounts, seizing vehicles, attaching shares in companies and commercial licenses, and placing attachments on real estate and other assets.
In conclusion, for enforcement to extend to the personal assets of a partner or manager, it must first be proven before the competent court handling the case, if a judgment is subsequently issued against their personal assets, enforcement can be carried out accordingly.
Ultimately, these are matters of proof that vary from case to case and depend on the specific circumstances of each matter.
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.
