The new DIFC companies' law regime consisting of the Companies Law (DIFC Law No. 5 of 2018), Operating Law (DIFC Law No. 7 of 2018) and Companies Regulations and Operating Regulations came into effect on 12 November 2018.
There is now an automatic conversion of all (previously incorporated) limited liability companies (LLC) to private companies limited by shares. As a result of these changes, the duties of directors of DIFC companies have been enhanced and these duties now also apply to officers who used to be 'Managers' of a LLC, as these individuals have now become directors.
This article provides an insight into the respective duties that each director of a DIFC private company limited by shares should be aware of.¹ It is noteworthy that additional duties may apply to directors of public companies, DIFC companies that hold a DFSA license, and further obligations may continue to arise for directors in their capacity as fiduciaries under DIFC Law of Obligations, neither of these aspects are considered for the purpose of this article.
What duties apply generally to directors of private companies in DIFC?
The DIFC Companies Law, the Companies Regulations as well as the Articles of Association of a DIFC Company generally sets out the general duties which directors owe to a private company and its shareholders. The following is a summary of the duties:
- The Companies Law grants directors very wide powers to manage a company's affairs and the directors have the duty to act on the company's behalf with a view to achieving its objectives. Any limitations contained in a company's articles of association and shareholders' resolutions have to be observed. The law states that directors shall only use their powers for the purpose they have been conferred.
- All actions undertaken by a director in relation to managing the business and affairs of a company, are carried out on the company's behalf. The law requires that directors act as a reasonably diligent person at all times, and the standard applied to a reasonably diligent person is fairly strict. In order to meet the duty to exercise reasonable care, skill and diligence a director should have adequate knowledge of to the company's business and its management.
- Directors have an active duty to promote the success of the company. Acting with a view to achieve the objectives of the company may not be enough and directors are required to take such actions, which they consider acting in good faith to promote the success of the company and for the benefit of all the company's shareholders in a fair way. Therefore, considering short term financial success may not be enough and directors may be asked to consider: employees' interests, impact of actions on business relationships with customers, suppliers and other third parties. Long term consequences of decisions, and even possible impact of the company's operations on the society and environment, or the company's reputation and business conduct standards could also be relevant.
- Each director has the duty to always exercise independent judgment and decisions need to be based on the overriding success of the company and not on certain shareholder's interests.
- Each director is essentially acting as agent of the company and occupying a position of trust. Apart from a few exceptional cases the law therefore requires that a director needs to avoid situations in which the director's own (in)direct interests, and / or interests of a person connected to a director either conflict, or possibly conflict with those of the company. It is also noteworthy that the duty continues to exist even after the director ceases being an officer of the company.
- A director is prohibited to accept a benefit from a third party where the benefit is conferred on him either due to his position as a director of the company, or for him doing (or not doing) anything in his function as a director, unless the acceptance of such benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
- Unless where at least 90% of the company's shareholders have given their consent and giving the financial assistance does not materially prejudice the company's or shareholders' interest, or the company's ability to discharge its liabilities as they fall due, directors have a duty not to enter into any arrangements with the DIFC company that would provide financial assistance to the director or certain persons connected to the director.
- The directors are responsible to ensure the accounts prepared by the company comply with the Companies Law and accounts are to be prepared in relation to each financial year of the company.
- Where the DIFC Company meets certain criteria, the directors have a duty to appoint an auditor and where an auditor is appointed there is also a duty on the directors to cooperate with such auditor. This includes taking reasonable efforts to provide such information and assistance as required by an auditor for the purposes of the auditor carrying out its duties under the Companies Law and the Companies Regulations.
- The Companies Law also provides more specific directors duties, which are applicable to specific situations, such as a company intending to purchase its own shares, reducing the share capital or in connection with a merger transaction.
Where directors breach their duties, the consequences can be serious, including a personal civil liability with fines up to USD 25,000 and/or an obligation to pay damages to the company in respect of any loss suffered by the company in accordance with the DIFC Law on Damages and Remedies. Also, the director is liable to account to the company for any benefit he has acquired in consequence of the breach.
A director could also be disqualified from his position based on a breach of the duties, and even face criminal proceedings against himself in certain instances that would qualify as a criminal offence under the UAE Federal Penal Code.
Although directors of a DIFC company might be able to protect themselves to a certain degree by seeking an indemnity from the company for personal liability arising towards third parties, it is important for directors to take their duties seriously, act diligently and in good faith. Before accepting a director's position, each person should consider whether he/she has the capabilities, capacity and knowledge to be involved in the management of the respective DIFC Company. For officers in doubt about their own responsibilities and duties it would be prudent to seek legal advice from an independent counsel.