The General Principle The majority of the commercial businesses currently operating in Qatar, whether wholly owned by Qatari nationals and/or by Qatari nationals in joint venture with foreign investors, are registered with limited liability and referred to as limited liability companies (LLC) in accordance with the provisions of Law No.(11) of 2015 (Companies Law).
LLCs have traditionally been seen as a safe option by investors on the basis of the general principle of the "corporate veil", a legal concept which separates the personality of the LLC from the personalities of its investors. Investors rely on this concept to limit their liability to the amount each has invested in the LLC. In exceptional circumstances however, generally involving fraud, the corporate veil may be "lifted" or "pierced" in order to directly access the investors.
In Qatar the circumstances where the corporate veil can be lifted or pierced may not be so exceptional. Under Article 298 of the Companies Law (Article 298) in circumstances where the LLC loses half or more of its capital regardless of the reason for such losses it may be possible for the creditors of the LLC to look beyond its limited liability and claim against the personal assets of the shareholders and in some instances the general manager. It is critical therefore that investors, and general managers, are aware of the effect of Article 298 when doing business in Qatar through an LLC. Where the LLC has more than one manager and/or a board of directors, these individuals may likewise be culpable.
According to Article 298 where an LLC has losses amounting to half or more of its share capital, as a result of losses from its business, the following steps should be taken:
The manager(s),or any person whose name appears on the Commercial Register as an authorised signatory, of the LLC must call a Shareholders' General Assembly (Assembly) to be held no later than 30 days from the date the losses amounted to half or more of the LLC's share capital.
In that Assembly, the shareholders must resolve by a 75% majority of shareholders holding 75% of the share capital, to either:
(a) reinstate/refinance the LLC’s capital; or
(b) resolve to dissolve the LLC.
Both of these steps must be complied with and completed within the required 30 day period in order to avoid the shareholders and/or the manager(s) as the case may be, becoming jointly and severally liable for the LLC's liabilities. Failure to comply with these steps therefore effectively results in a shareholder guarantee.
Is it possible to avoid a breach of Article 298?
Anyone who has started a new business will know that it is not unusual for an LLC to incur losses which exceed half of its capital in the initial years of trading but these initial losses will not necessarily prevent the business becoming profitable once it is more established. So what can be done to prevent the principle of limited liability being lost in the early stages of a business?
When the Companies Law took effect on 6 August 2015, the previous QAR200,000 minimum capital requirement for an LLC was repealed with the result that in theory an LLC can be registered with a share capital of QAR1. In practice the Ministry of Economy and Commerce (MEC) will require the share capital of an LLC to be appropriate. With a lower share capital the risk of losses which are more than 50% is obviously increased and so investors should carefully assess the amount of capital which will be required to operate a business in Qatar in its pre-profit stages rather than merely seeking to incorporate an LLC with the lowest possible share capital the
MEC will approve. Stress testing, eg. what working capital will be required to operate the business if the business receives no income for an extended period of time, will be an important consideration and perhaps assist in avoiding the adverse consequences of Article 298.
Ensuring the LLC appoints an auditor and/or financial manager at an early stage could also be key in preventing a breach of Article 298. The Companies Law does not specify when and how to determine the LLC's losses, although the generally accepted position is that when the net position of the LLC is negative, ie. when the losses appear in the audited accounts, and the losses amount to half or more of the LLC's share capital then Article 298 could apply. Notwithstanding the practice in Qatar for an LLC to not file audited accounts, having accurate audited accounts and preparing regular interim or management accounts will allow the capital of the LLC to be carefully monitored by managers and shareholders who should then be able to predict if and when losses of half or more of the LLC's share capital are likely to occur. In such incidences preventative action can be taken, such as further capitalisation, if necessary.
What does this mean in practice?
The application of Article 298 remains largely untested before the Qatari courts. Indeed, as discussed above it is not unusual for an LLC to have losses exceeding half or more of the LLC's share capital and to still continue trading. In practice, the Article 298 issue will usually only crystallise in situations where:
(a) the LLC's third party creditors issue a debt recovery or bankruptcy claim against the LLC for failure to make payments; or
(b) where a shareholder wishes to sell its shares and the third party buyer questions the valuation of the LLC.
In order to avoid a breach of Article 298 the preventative measures suggested in this article should be considered as a matter of minimum standard practice by LLC investors.
Note: Qatari Laws (save for those issued by, eg. the QFC to regulate its own business), are issued in Arabic and there are no official translations, therefore for the purposes of drafting this article Clyde & Co LLP has used its own translations and interpreted the same in the context of Qatari laws, regulation and current market practice.