In a landmark bankruptcy case judgment issued on 10 October 2021 the Dubai Court of First Instance has held the directors and managers of an insolvent Dubai-based PJSC to be personally liable to pay the outstanding debts of the previously listed company (now in liquidation) pursuant to the UAE Bankruptcy Law. This decision represents a very significant milestone in the UAE insolvency landscape since the enactment of the Bankruptcy Law in late 2016, being the first known instance of a case where such personal liability has been ordered. The approach taken by the Dubai Court in the bankruptcy of Marka PJC confirms that duties of directors and managers of a UAE company are clearly owed towards the company’s creditors. Until now, whilst it has always been provided that there may be such personal liability under the Bankruptcy Law in defined circumstances, it has perhaps been seen more as a theoretical possibility with no such orders made in practice, even in cases where the circumstances would appear to have been apposite to attract such liability. The Marka decision is therefore a powerful signal from the Dubai Courts as to their willingness to order such relief to the benefit of creditors in appropriate cases.
The key points of the Marka decision are:
- The directors and managers of the company were held personally liable to pay the outstanding liabilities of the company in an amount exceeding AED 448 million, on the basis that (i) the assets of the insolvent company were not sufficient to pay at least 20% of its debts and the Court is satisfied that the directors are responsible for the low creditor recovery (Article 144 of the Bankruptcy Law) and (ii) the directors and the managers of the company have been accused of mismanaging the company (Article 201 of the Bankruptcy Law and Article 162 of the UAE Companies Law). The Court did not go as far as using the term “fraud” in respect of the relevant conduct.
- The Court ordered the directors and managers to pay the company’s debts of its own motion applying the aforementioned Bankruptcy Law provisions, thus it does not appear that such relief was specifically requested by any of the creditors – none of the directors or the managers of the company were named defendants in the bankruptcy proceedings.
- The Court’s order applies to the current directors of the company, as well as to five former directors. Resignation by a director without having their concern noted in board minutes when the main decisions were made will not absolve a director from their liability.
- An attachment order was made against the bank accounts, securities, properties and vehicles of the company, its subsidiaries and the directors and managers of the company to prevent any of them from dissipating their assets beyond the reach of the creditors.
Whereas the Court of First Instance judgment will be subject to a possible appeal, it is a compelling reminder (if any were needed) that managers and directors of companies should be closely mindful of the duties owed to their companies and to creditors of those companies, with the real risk of facing personal liability for debts of the company in an insolvency situation where they are found to have acted wrongfully or without due care in incurring liabilities on behalf of the company in their management of it. This is particularly likely to be the case in times of macroeconomic stress, where a company may be experiencing challenging trading conditions and the risk is heightened of trading while insolvent to the detriment of creditors.