Bankruptcy proceedings in the U.A.E, are directors and mangers liable?

 Bankruptcy proceedings in the UAE are governed by the Federal Decree-Law No. 9 of 2016 on Bankruptcy (the Bankruptcy Law). The Bankruptcy Law provides a framework for the rehabilitation or liquidation of insolvent companies and individuals.

 Partners and managers' liability

 Partners and managers of a bankrupt company may be held personally liable for the company's debts in certain circumstances. Under Article 144 of the Bankruptcy Law, a court may order partners and managers to pay all or part of the company's debts if:

Partners:

Partners in a general partnership are jointly and severally liable for the debts of the partnership. This means that each partner is personally liable for all of the partnership's debts, even if their contribution to the partnership is less than the total amount of the debts.

 Partners in a limited partnership have limited liability for the debts of the partnership. This means that their liability is limited to the amount of their capital contribution to the partnership. However, a limited partner may become personally liable for the debts of the partnership if they participate in the management of the partnership business.

• The company's assets are not sufficient to pay at least 20% of its debts; and
• The partners or managers committed any of the acts listed in Article 147 of the Bankruptcy Law, such as:
• Mismanaging the company's assets or engaging in reckless business practices;
• Breaching their fiduciary duties to the company; or
• Intentionally or negligently causing the company to become insolvent.

In addition to civil liability, partners and managers of a bankrupt company may also face criminal liability under the Bankruptcy Law. For example, Article 198 of the Bankruptcy Law provides that partners and managers who conceal or destroy the company's assets or records may be sentenced to imprisonment for up to five years.

 Recent developments

 In October 2021, the Dubai Court of First Instance issued a landmark ruling in the Marka case, holding the directors and managers of a bankrupt public joint stock company personally liable for the company's outstanding debt of AED 450 million. The court found that the directors and managers had mismanaged the company's assets and engaged in reckless business practices, which led to the company's insolvency.

 Shortly after the Marka ruling, the Bankruptcy Law was amended to clarify the circumstances under which partners and managers may be held personally liable for a company's debts. The amended law now requires the court to prove that the partners or managers committed one of the specific acts listed in Article 147 of the Bankruptcy Law before ordering them to pay the company's debts.

 The Marka ruling and the subsequent amendments to the Bankruptcy Law demonstrate that the UAE courts are willing to hold partners and managers personally liable for their misconduct, particularly when it leads to the insolvency of a company.

 Conclusion

Partners and managers of companies in the UAE should be aware of the potential risks to their personal liability if the company becomes insolvent. It is important to take steps to avoid mismanagement and reckless business practices, and to comply with all applicable laws and regulations.