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UAE Bankruptcy Law Amendments: Directors' and Managers' Personal Liability

UAE Bankruptcy Law Amendments

The UAE Federal Decree-Law No. 9 of 2016, known as the Bankruptcy Law, has been amended pursuant to Federal Decree-Law No. 35 of 2021, to clarify the circumstances under which a debtor's directors and managers may be held personally liable for the company's debts if they cannot be repaid.

Bankruptcy Law Article 144 as initially promulgated, imposed this personal liability on a discretionary basis, where a debtor entity is unable to meet at least 20% of its liabilities, and where the directors' and managers' responsibility for the losses is evident under the provisions of the UAE Commercial Companies Law (the "CCL").

The new amendments remove the reference to the CCL and now attach personal liability in circumstances where, "it is established to the Court that any of them has committed any of the acts provided for in paragraphs (a), (b) and (c) of Article (147) hereof, without prejudice to paragraphs (2, 3) of the said Article."

Article 147 at paragraph (1) (a), (b), and (c) state that such liability may be incurred as follows:

"If declaration of bankruptcy is judged, the Court may order the directors of board, managers or those in charge of liquidation in liquidation procedures taken beyond the scope of this Decree Law, to pay an amount to repay the debts of the debtor, if any of them evidently commits any of the following acts, within the two years following the date of initiating the procedures, according to this Section:
  1. Adopts commercial methods without considering its risks such as disposition of commodities in prices less than its market value to receive monies to avoid or delay initiating the bankruptcy procedures.
  2. Engages in transactions with third party to dispose of properties without consideration or against insufficient amount and without certain benefit or not proportionate to the properties of the debtor.
  3. Discharges the debts of any creditor to harm other creditors, during the period of being in default of payment or in the condition of account receivable."

Initially, a review of Article 147 raises a question as to in which circumstances this liability may attach, insofar as the statutory text at paragraph (1) states that such is applicable where the proscribed acts occur, "within the two years following the initiation of the procedures" (i.e; after the case is filed), and not prior to the case initiation.

Considering this, we very much doubt that the Bankruptcy Law is intended to excuse managerial misconduct that led to the debtors' insolvency if it occurred prior to the filing of the case, especially as Article 147 sub-paragraphs (a) and (c) strongly indicate that the application period is that time prior to the filing of the case.

Furthermore, the structure of Article 144 as amended, suggests that the proscribed acts specified in sub-paragraphs (a), (b), and (c) are to be incorporated by reference into Article 144, without reference to the predicate condition set forth in Article 147 paragraph (1). Thus, in our view, the better construction of Article 144 as amended is that any act in violation of subparagraphs (a), (b), or (c) of Article 147(1) may attract liability, without reference to the time-period set forth in Article 147(1).

Nevertheless, the statutory language leaves this as a potentially open question, especially considering that the new amendments refer explicitly to Article 147 as the triggering mechanism, and said Article has not been likewise amended to clarify the import of the "following the initiation" clause. We thus anticipate that this will be an issue in any forthcoming litigation involving Articles 144 and 147, and perhaps a curative amendment will be issued in the near future.

Turning to the situations in which the combined Article 144 and 147 liability would now be triggered in Bankruptcy, these have been limited from the much broader set of possible triggers under the CCL, to these three circumstances set forth in Article 147. As already noted, these involve situations set forth in sub-paragraphs (a) and (c), where management makes risky transactions in order to avoid a bankruptcy filing as well as payments made to creditors to the detriment of other creditors while the company is in a default situation.

Having noted this, one should not discount the applicability of sub-paragraph (b), potentially imposing this liability for engaging in transactions "without certain benefit or not proportionate to the properties of the debtor". Arguably this sub-paragraph (b) could be applied in circumstances of an obviously poor business decision that led to insolvency, and may now serve as a stand-in for the no longer applicable CCL provisions, such as the gross mismanagement standard of CCL Article 84 for limited liability companies, or the mismanagement standard of CCL Article 162 applicable to public companies.

In this regard, we note that removal of that clause of Article 144 setting forth liability to accrue in Bankruptcy where such is established under the CCL, does not absolve directors and managers of their liability under the CCL, at least in any proceedings commenced outside of the Bankruptcy Law.

Other provisions of the amendments now make explicit the rights of a director or manager held liable under Article 144 to appeal the determination pursuant to the Civil Procedures Code. Similarly, the provisions of Bankruptcy Law Article 201, which impose criminal liability against a debtor's directors and managers for various enumerated acts, has been amended to explicitly reserve the charged persons' rights to obtain a stay of any provisional measures, such as travel ban or attachment of funds, "if the execution of such decision or order results in irreparable damages and the application is based on serious valid reasons".

The amendments are effective as of 1 November 2021. We note that these amendments follow very closely on the heels of the issuance of the decision of the Dubai Court of First Instance in Bankruptcy of Marka PJSC, which held certain of the debtor's directors personally liable for the entirety of Marka's almost AED 500 million debt. As the Marka decision relied upon, among other things, both Bankruptcy Law Articles 144 and 201, it is expected that the amendments may provide insolvent companies' directors and managers with certain procedural and substantive legal defenses to exposure similar to that now facing the unfortunate Marka directors, at least to the extent that the charged persons were not involved in improper activities which contributed to the debtor’s insolvency.

Read in Arabic here:أفلاس-التعديل-الأخير-مقال-2.pdf

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Jimmy Haoula Managing Partner

Michael Kortbawi Partner, Corporate

Barry Greenberg Of Counsel, Corporate

Ashraf Ibrahim Senior Associate, Litigation

Nadia El Tannir Associate, Corporate

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