THE LIMITED LIABILITY COMPANY DEFINITION IN UAE

The UAE Federal Law No. 2 of 2015 On Commercial Companies defines a Limited Liability Company as a company where the number of partners is at least two (2) but shall not exceed fifty (50). A partner shall be liable only to the extent of their share in the capital.

The rationale behind allowing shareholders in a Limited Liability Company to have no liability for their company enables them to perform risky operations and remain protected from personal liability from claims of damages owing to their risky activities.

MEANING OF LIFTING THE CORPORATE VEIL

UAE courts have received requests to "lift the corporate veil," meaning consider the shareholders liable for the actions of their companies in certain circumstances. Lifting the corporate veil enables the courts to look behind the company framework or personality to make the shareholders liable where they ordinarily would not be because of the separate personality concept.

APPROACH AT DUBAI COURT OF LIFTING THE CORPORATE VEIL IN 2010

The question of how to establish if the corporate veil has been lifted or not in UAE can be answered by the case law where the cassation court of Dubai in 2010 stated that; "The shareholders in the Limited Liability Company are not responsible for its debts and obligations of the company except to the extent of their shares in its share capital, so the creditors have no guarantee except for the company itself without the shareholders personal liabilities. Therefore, there is no capacity to file a lawsuit against the shareholders individually relating to the company's debts and obligations. However, there is an exception from this principle that the case for fraud and TRICKERY (CHEATING) was evident by the shareholders in the limited liability company. In such case, the shareholders shall be responsible for the company's debts from their personal funds. Noting that the fraud and TRICKERY (CHEATING)were apparent and not assumed, such fraud and TRICKERY (CHEATING) must be claimed and evidence established".

Based on the above judgment, Dubai Cassation Court stated an exception of the separate legal corporate personality concept and considered the partners in the limited liability company personally liable for the company dept in specific circumstances: that there must be fraud and trickery (cheating) and the same must be claimed and evidence established.

It is worth noting here that when the court stated the concept of lifting the corporate veil in the judgment mentioned above, the court mentioned it in the context of an exception; therefore, the known legal concept under the UAE law must be applicable, which is "Exceptions may not be used by analogy, nor may their interpretations be extended."

THREE DIFFICULT CONDITIONS MUST BE AVAILABLE TO APPLY THE EXCEPTION OF LIFTING THE CORPORATE VEIL IN THE 2010 JUDGMENT

  • The Case of The Fraud;

In order to understand the possibility of going behind the corporate veil in the case of fraud, we should find out the meaning of fraud under UAE laws, specifically commercial fraud.

Federal Law No (19) for the year 2016, In respect of combating commercial fraud, defined commercial fraud as deception of one of the customers by any means, whether by changing or altering the goods or their amount or nature or price or their material description or origin or source or fitness or any other matter related thereto, or presenting untrue or misleading trading information on the promoted products, which include fraud, imitation, and cheating by doing service which does not conform with the applicable laws or may include false and misleading statements.

  • The Case of The Trickery "Cheating";

The FEDERAL LAW NO (3) OF 1987 ON ISSUANCE OF THE PENAL CODE defined TRICKERY (CHEATING) that the person who seizes, for himself or another, a movable property, or obtains a document or signature thereon, cancellation or destruction thereof or amendment thereto by fraudulent means, or by assuming a false name or capacity, where such an act leads to deception of a victim and leads him to surrender.

  • Fraud and TRICKERY (CHEATING) must be claimed and evidence established

The judgment language was very clear in its restriction. Both fraud and trickery "cheating" must be available together as the court stated the "And" not "Or." Moreover, both must be claimed and approved by the claimant. In practice, it is not easy for a third party to establish such a situation before the court and claim their debt accordingly from the shareholders, as the third party has no access to the company records and financial statements.

Understanding the fraud and TRICKERY (CHEATING) meaning according to the UAE laws shall lead us to an important question, aren't there other ways that the partner might smuggle the company's money with the intention of not paying the debts of third parties, and their actions would not be fraud or TRICKERY (CHEATING)?. Indeed, the answer is yes, there are many ways to smuggle the company's money in different ways that are far from such cases, and as a result, the rights of others are lost and limited. A typical example is paying contract value to another company for services under a fictitious contract while the shareholder is the ultimate shareholder of that company.

ABUSE OF THE LIMITED LIABILITY PRINCIPLE

There is no doubt that the principle of limited liability has its sanctity, and it is a principle that cannot be dispensed with anywhere because of its positive effects on economies. However, it must be noted that this principle has led to the loss of many rights and many court rulings on companies. It has limited liability in the state, but the partners in these companies have escaped the assistance and money to avoid the payment of third party's rights.

IN 2013 THE COURTS APPROACH TO LIFTING THE CORPORATE VEIL IMPROVED SLIGHTLY.

In 2013, the Court of Cassation in Dubai issued another judgment that added to the possibility of the corporate veil concept. The court stated that "The principle of the limited liability of the shareholders in the limited liability company shall not be taken into consideration if the shareholder has exploited the principle of the limitation of the liability as a means or a veil to hide his behavior to violate the company's memorandum of association, which would harm the other shareholders or creditors taking in consideration, such behavior includes fraud or TRICKERY (CHEATING) or gross error, in such case the shareholder will be personally liable for those actions, so that their impact extends to their personal funds."

THE DIFFERENCE BETWEEN THE COURT APPROACH BETWEEN 2010 AND 2013

The difference between the court directions from 2010 to 2013 was by separating the fraud and TRICKERY (CHEATING). Both were together in 2010, but one of them was enough in 2013. Notably, the court added another option in 2013 to go behind the corporate veil in the event of a gross error of the shareholder.

In fact, the court improved the situation slightly with the possibility of lifting the corporate veil. However, lifting the corporate veil as an exception should be taken more seriously and add more circumstances, for example, the existence of an agency relationship between the shareholder and the limited liability company and the event of the sham.

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.