All is fair in recession - that's what some shop owners in the UAE seem to believe in as the times get tough.
With the increasing number of 'shop for sale' adverts cropping up in the Emirates, investors are urged to tread carefully into new ventures.
Interestingly, these ventures are legally documented. And yet, the unfortunate victims end up knocking the legal doors.
A number of small establishments, including groceries and limited liability companies in Dubai, Sharjah, Ajman and other emirates, which are up for 'sale', owe huge amounts to the distribution companies and other creditors.
Most distribution companies, which supply food and other products to groceries and restaurants, are left in the lurch as many of their clients, who owe huge dues to them, have sold their establishments and have left the country.
And the new owners are unaware of the liabilities.
Abdul Khader, a salesman of a distribution company, is one such unfortunate victim. He says: "Most groceries purchased items on credit, which used to be 90 days.
But due to the economic crisis and the sales slowing down, some owners sold or transferred their shops, mostly at throw-away prices and left the country without paying creditors.
As there is no change in the name of the shop, the location or in the business activity, the salesmen are in for a shock only when they confront the new owners and request for the dues. In most cases, the new owners disown the past dues accumulated by the original shop owner."
Now it is easy to fall into such a trap because the shrewd owners usually advertise smartly.
For instance, if the shop has goods worth Dh300,000, the owner will ask for only Dh175,000. Investors will eagerly enter such a deal without detailed investigation, as they see it as a 'value for money' transaction.
In most cases the goods would have been bought on credit and there could also be other liabilities to banks.
Another interesting aspect is that these 'absconding' grocers transfer their establishments legally following documentation with the court.
According to the rule, an ownership change should be advertised in a local newspaper. Khader says: "The shop owner will complete all transfer procedures from the court and publish it in a not-so-widely read Arabic daily or one without much circulation.
The salesmen of the distribution company, which would have outstanding dues from such a company, would not see this advert, and in most cases being an expatriate would be unable to read the Arabic. So on his part, the original owner did his part and cannot be blamed."
Therefore, even the police or court cannot help the distribution company as the documentation is pretty legal.
An expatriate grocery owner in Sharjah says: Trade licence for small shops and groceries are issued in the name of a local sponsor - a UAE national - and the expatriate manager will only be running the business.
Therefore, the new owners may not take up past liabilities. And if it is a LLC company the liability of the shareholders is limited."
As a result of such malpractices, most distributors have stopped giving 90 days credit now.
"Normally we used to supply goods for 90 days credit on trust and keep the trade licence and passport copy of the owner. But what can we do with these photo copies after the shop owner leaves the country?" asks a salesman, who is a victim of such a fraud.
And in most cases, the salesmen are at the receiving end as the company normally takes a blank cheque before appointing salesmen.
The company can write any amount on the blank cheque and file a police complaint to recover the amount, says another source.
According to legal experts, if the firm is formed as limited liability companies (LLC) with one to fifty owners, the owner's liability is limited and shareholders can sell their share to a new owner.
"In case of loss and insufficient assets to fulfil LLC obligations, or if the partners are reluctant to cover such a loss, the company should be dissolved and liquefied. Upon liquidation, the accrued amount should be distributed to fulfil the company debts.
However, no partner should be liable for the company obligations in all his own assets, unless otherwise a partner has guaranteed to fulfil certain debts," says a legal expert, quoting relevant UAE commercial law.
An LLC company can be formed with two to fifty partners.
Each partner is liable up to the extent of his share in the capital and he can sell the shares without owning up any previous liability of the company.
Fifty-one per cent shares in the LLC company are local ownership and 49 per cent for expatriates.
When an LLC shares are sold the new owner may not be liable for the previous debts, he adds.
By VM Sathish
© Emirates Business 24/7 2010
