In what could prove to be a landmark judgment, a Dubai court ruled earlier this month that the directors of a company in bankruptcy should be personally liable for the company's debts, to the sum of almost AED 450,000,000 (around US$ 122,000,000).
Article 144 of Federal Law No.9 of 2016 (the "Bankruptcy Law") allows a court to order directors to pay a bankrupt company's debts where:
- the company's assets are insufficient to settle at least twenty percent (20%) of its debts; and
- liability for the losses of the company is established pursuant to Federal Law No.2 of 2015 (the "Commercial Companies Law").
Article 201 of the UAE Bankruptcy Law also entitles a court to order imprisonment in certain circumstances, including where there has been a failure to share information with a bankruptcy trustee. In both cases, the mere absence of a director from a particular board meeting is not sufficient to avoid liability.
In the instant case of Marka PJSC, the court found that the directors of the company had failed to provide the bankruptcy trustee with the necessary information and had otherwise mismanaged the company in a way that breached their duties under the Commercial Companies Law.
Notwithstanding that (i) the decision is from the Dubai Court of First Instance and therefore may be subject to appeal, and (ii) there is no system of binding judicial precedent in the UAE, the fact such an order was made of the Court's own volition (without any petition) shows a willingness on the part of the courts to take a very active role in corporate bankruptcy proceedings. Directors of UAE-incorporated companies would therefore be well advised to ensure that:
- they comply with their duties as directors under the Commercial Companies Law;
- any objections that they have to particular transactions (particularly those that could be considered financially risky) are noted in board minutes and, even if such transactions are approved, all steps to protect the company are taken; and
- where a company is in bankruptcy already, there is full transparency in their dealings with the court and any trustee appointed in those bankruptcy proceedings.
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