All UAE business owners and managers should be aware of the very recent decision of the Dubai Court of First Instance in the matter of the Bankruptcy of Marka Holdings PJSC, which is indicative of the risk that a company's Managers and Directors may face in an underfunded bankruptcy under the provisions of the UAE Bankruptcy Law.
In Marka, the Managers and Directors were found liable to personally pay the amount of AED 448 million, representing the entirety of the company's debt. Additionally, the Court directed the transmittal of the matter to the Public Prosecutor for their further handling of any criminal acts.
This decision demonstrates the impact of judicial application of the Managers' and Directors' statutory personal liability for an insolvent entity's debt, pursuant to Bankruptcy Law Article 144, where the entity's assets are insufficient to meet at least 20% of its liabilities. Furthermore, in our view, the Court exercised its wide discretion in imposing this liability, under circumstances that may be described as less than factually compelling.
The decision notes that this liability is also found under Commercial Company Law Article 162 (applicable to Joint stock companies, and arguably to LLC's as well), which inter alia, imposes liability upon Managers and Directors where they have mismanaged the company. Likewise, the decision references the proscriptive provisions set forth in Bankruptcy Law Title 6, relating to criminal sanctions.
The decision does reference the purported failure of the Managers and Directors to provide the debtor's financial statements, commercial books, or inventory lists, which would be a significant aggravating factor (if factually accurate); however, also specifically references a failure to “justify the lack of existence of any funds despite expansion of its [the debtor companies'] activity and the large volume of its transactions”. It is this latter clause that, without any additional elaboration, could be taken for the troubling proposition that the Court believes the mere loss of significant funds without more, could lead to personal liability attaching to the responsible managers.
We expect that this decision will be appealed, as there are significant due process issues involved. Nevertheless, under any view, this decision demonstrates that the Bankruptcy Law does present serious risks in those instances where a debtor cannot achieve a recovery of at least 20% of its debts. Likewise, the criminal prohibitions of Bankruptcy Law Title 6 can be cited to support the imposition of civil liability, when funneled through the provisions of Article 144.
Currently, other than this case, there is no reported caselaw interpreting Article 144, and we anticipate that any appeal will result in establishment of judicial precedent providing guidance as to the application of this crucial provision of the Bankruptcy Law. Since the matter of Managers and Directors personal liability is a material consideration in attracting investment into the UAE, we expect any forthcoming judicial guidance in this area to be very consequential.
Having noted this, we are mindful that the Managers and Directors may avail themselves of all available appellate remedies in order to ensure that their due process rights and substantive protections as set forth in the CCL are preserved. While it is certainly a matter of both public order and maintenance of market confidence that company officers charged with prudent corporate oversight adhere to their statutory obligations, it should also be apparent that the pendulum not veer to far in the direction of applying unwarranted punitive measures, lest we create another set of challenges to sound public policy and market confidence. A balance is thus needed between the extremes of rouge corporate behavior and overzealous oversight.
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.