Mar 22 2012
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Duties and liabilities of a company's director under UAE Law
22 March 2012
With great power comes great responsibility. This statement holds true for directors of a company in UAE like any other country with a forward looking corporate governance regime. Although it should be distinguished that rather than forming as a part of corporate governance code, most of the duties and liabilities of the directors are imposed as statutory duties thereby constituting a stricter regulatory regime. This article envisages to outline the duties of directors and their potential personal liability giving a brief guideline to the directors on what is expected of them under the law.
Sources of director's duty
The duties and liabilities of directors and managers in relation to limited liability companies, and the same being applied to joint stock companies, are primarily found in the Federal Law No. (8) Concerning Commercial Companies, as amended (the "UAE Companies Law"). In addition to that several provisions are also found in the Civil Code, being Law No. (5) of 1985, as amended (the "Civil Code"), the UAE Commercial Transaction Law, being Law No. (18) of 1993, as amended (the "Commercial Transactions Law") and the UAE Penal Code (the "Penal Code"). On top of that the company's constitutional documents such as the memorandum and articles of association form the main source of guide for directors of a company.
More recently Ministerial Resolution No.518 of 2009 of the Minister of Economy and Chairman of the Board of the Emirates Securities and Commodities Authority concerning governance rules and corporate discipline standards, which applies to UAE incorporated public joint stock companies listed on either the Dubai Financial Market or the Abu Dhabi Securities Exchange also provides further guidance on the duties of the directors.
In UAE companies are run by a manager or board of managers that operate like a board of directors and are required to carry out a set of positive duties ranging from financial, managerial and supervisory.
As per article 244 of the UAE Companies Law, the general assembly shall convene at least one meeting per year during the first four months after the end of the financial year upon a call by the managers, bearing that director(s) send out invitations to all the members. The meeting of the general assembly usually only deals with the issues and topics mentioned in the agenda, however Article 247 of the UAE Companies Law, also makes it important to discuss urgent and critical topics that may emerge during the meeting, making the directors obliged to accept the request for urgent discussion. The shareholders are further given the chance to appeal to the general assembly if the directors refuse to accept such request.
Moreover, it is the duty of the managers to make a clear representation of the company to the third parties as the managers of the company and are further required by Article 21 of the UAE Companies Law to have the company's name, main office address, company type and a description of the share capital in all the notices, contracts, correspondences and representations made by the company.
The directors of the company have to strictly adhere to the provisions of the UAE Companies law while executing their duties, as a failure to do so should hold the managers personally liable towards the company, the shareholders and third parties.
The key provision on director's liability is found in Article 111 of the UAE Companies Law which states:
"The chairman and members of the board of directors shall be liable towards the company, the shareholders and third parties for all acts of fraud, abuse of power, violation of the law or the company's articles, in addition to mismanagement. Any provision to the contrary is void".
Moreover, failure to comply with the UAE Companies Law may also raise criminal penalties ranging from fines of AED 10,000 up to AED 100,000 or imprisonment from three months up to two years.
Article 665 of the UAE Civil Code complements the provisions of the UAE Companies Law stating that the directors may only act within the authority granted to them by the company, and shall provide guarantee of all the damages inflicted by them to the company due to exceeding the limits of the powers granted to them by the company.
Article 667 of the UAE Civil Code further makes a restriction on the director of resigning from the company at a time where damages may occur as a result of the resignation. The UAE Civil Code does not stipulate any specific penalties or fines for the breach of its obligations and duties by the director, but Article 323 (6) imposes penalties on every company that violates the provisions of the law.
As it seen from above, the UAE law provides a more stringent set of duties and responsibilities on the directors. These set of duties are seen to be also restrictive in nature and caters for a strict adherence to the provisions of law as a breach of duty and obligations under the Law can also expose a director to criminal liability. Therefore, the directors of a company on UAE should be well aware of their duties under the law and ensure a good corporate governance practice at all times.
Shadha Zawawi is an associate in the real estate practice at The Legal Group and can be contacted on +971 4 4477044. The views expressed in this article do not necessarily constitute the views of Zawya.
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