Duties of Directors: A Hard Reality Following the Recent ‘Marka Decision’ and Subsequent Amendments to UAE Bankruptcy Law | White & Case LLP
On November 1, 2021, Federal Legislative Decree No. 35 of 2021 (the “Decree”) (amending certain provisions of Federal Legislative Decree No. 9 of 2016 relating to bankruptcy (the “United Arab Emirates Bankruptcy Law” )) entered into force. The issuance of the decree follows an important decision on the duties of directors by the Dubai Magistrate’s Court in the case involving the bankruptcy of Marka Holdings PJSC (“Marka”) (the “Marka Case”).
In the Marka case1, the Dubai Magistrate’s Court found the officers and directors of Marka personally liable for the debts of Marka in an amount equal to approximately AED450 million (which was close to the total amount of all debts payable by Marka) .
Prior to the issuance of the decree, the Bankruptcy Law of the United Arab Emirates and Federal Law No. (2) of 2015 Regarding Commercial Companies (as amended) (“CCL”) contained provisions relating to the potential personal liability of members of the board of directors of directors and officers of a company. In particular, such people could previously, under certain conditions, be held personally liable under UAE bankruptcy law for the payment of a company’s debts if a UAE court found them liable for that company’s losses.2
The Marka case may therefore appear to comply with the provisions of UAE bankruptcy law before the issuance of the decree. Despite this, since the court’s findings were released, the Marka case has been seen as an important development in the UAE’s approach to personal liability in corporate Virginia bankruptcy laws proceedings. Indeed, (1) such an approach to personal liability does not appear to have previously been applied in practice by courts in the United Arab Emirates; and (2) the extent to which this personal liability has been applied. While the particular fact pattern may be specific to the case and may be distinguished in the future, nonetheless, there was a discernible market reaction to the outcome.
The decree entered into force shortly after the Marka case. The changes made by the decree apply to Articles 144 and 201 of the Bankruptcy Law of the United Arab Emirates, in particular with regard to the liability of directors and officers in the event of bankruptcy. It should be noted that the decree itself does not provide for any significant stand-alone amendments to the UAE bankruptcy law, except for the clarification of the previous provisions relating to the personal liability of directors and officers. The changes include, among other things, (1) the clarification that each director or manager will be held liable to the extent of their responsibility for such debts; (2) granting directors or managers detained in violation of the law the right to appeal the relevant decision; and (3) further introducing a financial penalty for breach of the relevant articles in an amount not exceeding 100,000 AED) (this is in addition to the criminal liability previously included in the law).
The timing of the promulgation of the decree to be read in conjunction with the Marka decision can be seen as a key reminder to the market by the UAE government of the existence of personal accountability to senior officials of a business. In addition, taken together, the decree and the Marka case reinforce the government’s objective of demonstrating and upholding ‘best practice’ standards for corporate governance and accountability in the United Arab Emirates, in order to continue to attract foreign investment to the country.
Implications and Considerations
The decision in the Marka case can potentially be overturned following its appeal. Notwithstanding this, directors and officers (who under UAE bankruptcy law include anyone who takes an active role in a company’s decision-making) are now susceptible (if they don’t not already) to more actively seek separate independent advice to ensure that decisions made on material transactions will not affect their personal liability as a result of bankruptcy or similar insolvency proceedings.
The decision in the Marka case is fairly recent and it remains to be seen whether the ruling will establish a new approach to personal liability in UAE corporate bankruptcy proceedings. The UAE legal system does not operate on the basis of a binding precedent. As such, the court ruling in this case does not mean that it would apply in all other cases. Nonetheless, directors and managers in the UAE are likely to remain aware of their obligations under relevant laws and ensure compliance.
1 Case # 14/2019 Bankruptcy proceedings
2 Articles 144 and 201 of the UAE Bankruptcy Law and Article 162 of the CCL