In our October 2010 edition of Middle East Exchange, we looked at the general duties which directors and managers of UAE companies owe to their companies and their shareholders. In this edition, we consider the position where the company's financial position deteriorates. As directors or managers struggle with the inevitable commercial and operational pressures, what additional legal responsibilities and potential liabilities does UAE law place upon them?

Bankruptcy in itself is not a crime in the UAE. However, UAE laws specify a number of misdemeanours whereby a trader, director or manager may be guilty of an offence in connection with a bankruptcy. Many of these misdemeanours are not generally criminalised in other countries, though they are often prohibited under civil law (resulting in directors incurring personal liability, the relevant transaction being voided, and/or the director(s) being disqualified). Consequently, and because of the broad criminalisation of such acts, it is common in the UAE for criminal investigations to be commenced whenever financial difficulties arise.

In this edition of Middle East Exchange, we summarise a few of the UAE criminal and civil laws which may be less obvious to directors and managers of UAE companies in financial difficulties. By developing an understanding of the legal pressures on directors and managers, it may be possible to anticipate their behaviour, or the likely drivers, in any restructuring negotiation. It is also important to encourage an awareness of the legislation that currently exists, so that businesses in difficulty consider their options and responsibilities at the earliest possible opportunity.

For ease of reference, we shall refer to "directors" in this article as meaning directors, managers or traders, and "company" as meaning any commercial enterprise, which is subject to the federal laws of the UAE.

The UAE's Commercial Companies Law, Commercial Transactions Law and Penal Code give extensive coverage as to how courts should treat insolvent companies and their directors. However, these laws, including those referred to below, are largely untested by the judicial system and open to interpretation on a case by case basis. Therefore, specific advice should always be sought based upon the factual circumstances of each case.

Criminal liability

Sufficient cash at bank / liquidity

For so long as a company continues to trade and has sufficient cash or cash-flow to be able to meet its obligations as they fall due, the risk of directors incurring criminal liability is relatively modest, provided that they act honestly and prudently (see suggestions below), in good faith, keep proper, complete and accurate books and records, and do not misappropriate the company's property.

However, even directors acting responsibly in this way should be aware that, if the company does subsequently fail and gets declared bankrupt, UAE law contains various provisions which may result in directors incurring criminal liability in connection with the following transactions or activities pre-bankruptcy:

  1.  Transactions at undervalue: directors must be careful when disposing of assets or businesses in order to improve cash-flow, and should keep careful records (eg, professional valuation advice) showing that the price obtained was not a "fire sale" or "undervalue".
  2.  Remuneration, dividends and bonuses: directors need to be careful about taking money out of the company for themselves, and ensure that any such amounts are clearly set out in the articles of association of the company.
  3.  Confidential information: where creditors are pressing the company for up-todate financial information and transparency, directors should be careful and get an express board minute approving the disclosure of the financial position of the company to its creditors for the purposes of any restructuring or settlement discussions.
  4.  Bouncing cheques: one of the better known provisions of the UAE criminal law relates to dishonoured cheques. It is an offence to deliver a cheque to another person whilst being aware of the fact that there are no funds available to meet its value, as well as intentionally withdrawing funds so that the cheque cannot be cashed. Since market practice in the UAE operates on the basis of post-dated cheques, rather than bank standing orders, writing a cheque with no genuine and realistic belief that the funds will be available at the time it is to be cashed, will constitute a criminal offence. Therefore, if providing post-dated cheques, directors should keep careful records of bank balances at such time, and as much other evidence as possible, in order to be able to prove a genuine belief in the availability of funds on their due date(s).
  5.  Speculative activities / diversification: directors who have diversified away from the company's core business (in order to speculate, for example, on real estate during the boom years), may have cause for concern under the provision of UAE law dealing with these matters.
  6.  General legal duties: directors must be very careful, while managing the company through its financial difficulties, to ensure that they comply with their own personal legal duties (eg, the duty to disclose conflicts of interest to the board, the duty not to mismanage the company and the duty to convene a shareholders' meeting to consider dissolution once the company has lost 50% of its share capital), that the company's constitution is accurately followed and also that the company itself complies with all legal requirements. Please see our October 2010 edition of Middle East Exchange for a summary of the personal duties of directors.

Insufficient cash at bank / illiquidity

As soon as a company runs out of cash and has to default on payment to one or more of its creditors, the position of directors becomes more acute, even for those acting honestly and in good faith.

Directors should be aware that UAE laws could result in criminal prosecution and/or liability for:

  1.  Failure to file for bankruptcy: a company must petition for bankruptcy within 30 days of the date of suspension of payments of is debts. Failure to do so could result in the directors being offenders. However, the directors are not entitled to apply for a declaration of bankruptcy without the permission of a majority of the company's shareholders. Therefore it is advisable for directors to formally communicate any payment default to the company's shareholders as soon as practicable after it occurs, and convene a shareholders' meeting in accordance with the articles of association, in order to enable the shareholders to resolve on the appropriate course of action within the requisite time.  
  2.  Preferences: directors will need to be on their guard against making settlements with creditors, because if a bankruptcy procedure is commenced later, any preferential treatment may be looked at retrospectively by the courts and could fall foul of the relevant criminal laws.  
  3.  Transactions prejudicing creditors: there are certain provisions within UAE law which, although are open to interpretation, could conceivably cover continued trading which ultimately exacerbates the eventual loss to creditors.

Civil liability

While the criminalisation of some of the above activities may of itself be a very serious deterrent, UAE law can also result in directors incurring personal civil liability as a result of their misdemeanours.

In particular, UAE law provides as follows:

  1.  Criminal acts: any of the criminal offences described above would, if committed, also render the directors personally liable to the company, its shareholders and third parties as a matter of civil law. Court can "pierce the corporate veil":  wherever the court considers it appropriate to "pierce the corporate veil", and hold the individuals behind the company responsible for its bankruptcy, it has power to do so.
  2.  Less than 20% recoveries: while not a criminal offence, a bankruptcy with very low recoveries (where the assets are insufficient to satisfy at least 20% of the debts) can result in directors being personally liable for the debts of the company.
  3.  General legal duties: irrespective of bankruptcy, directors will incur personal liability if they breach any of their personal duties (for example, mismanagement – which the court might, with the benefit of hindsight, infer in a bankruptcy case) as summarised in our October 2010 edition of Middle East Exchange.


For those directors who were not involved in, or who did not support, the improper actions of other directors which fall foul of any of the above laws, there are some defences available:

  •  in respect of criminal offences, it is generally a defence, if it can be proven, that the director did not participate in the criminal act, or comply with the relevant decision; and
  • for civil liability, a director may not be liable if he was not one of the majority who adopted the relevant resolution and if his objections were entered in the minutes of the meetings, or, if he was absent from the relevant meeting, it is proven that he was not aware of the resolution, or that he was aware of it but was unable to object to it.

Therefore, directors who cannot gain the cooperation of their fellow directors for ensuring compliance with the above laws should ensure that their efforts and objections are fully recorded in appropriate minutes and correspondence.


Clearly, the UAE is a place where high standards of behaviour are expected in all aspects of life. Directors of companies in financial difficulties are subject to such high standards as a matter of law. Prudent and responsible directors would therefore be well-advised to confront financial difficulties at the earliest opportunity and to work closely with experienced legal and financial advisors.

Michael Barker has been a restructuring and workout specialist for over 20 years. He has recently relocated to Dubai and now leads the Middle East restructuring practice. Much of the focus of his practice has been on advising bank groups and borrowers in relation to multi-bank restructurings and workouts, as well as in relation to formal insolvency, schemes of arrangement and cross-border recovery.

Recent legal developments

DIFC jurisdiction over property disputes, one for investors to watch

A recent case in the DIFC Courts is expected to give further guidance to investors as to how the court will approach its jurisdiction in respect of Dubai property disputes. It has been reported in the press that an application was made by National Bonds last week for the DIFC Courts to strike out a property dispute for lack of jurisdiction because the relevant contract provided that all disputes were to be governed by Dubai Law and be subject to the jurisdiction of the Dubai courts. The property at the heart of the dispute is located in the DIFC.

The DIFC Courts have previously refused jurisdiction in respect of a dispute brought by an investor in properties. Similarly, in that case, the relevant contracts contained a dispute resolution clause providing for the jurisdiction of the Dubai courts. The dispute related to several properties, one of which was in the DIFC. Counsel for the investor argued that the reference to the Dubai courts should be read to include the DIFC Courts. However, this submission was rejected.

The facts of that case led Justice Coleman to conclude that it was highly improbable that the parties intended to submit to the jurisdiction of the DIFC Courts and he noted that the contracts were executed before the enactment of the DIFC Real Property Law (Law No. 5 of 2007), prior to which the Dubai Land Law applied to property in the DIFC.

There has been uncertainty over the interpretation over the jurisdiction of the DIFC Courts (which is set out in Article 5(a) of Dubai Law 12 of 2004). In order to clarify their respective jurisdictions, the DIFC Courts and Dubai courts entered into a protocol on jurisdiction in December 2009. The protocol provides that the DIFC has jurisdiction over:

  • civil disputes involving the DIFC, its authorities and entities registered therein;
  •  civil disputes arising from or related to a contract that was to be performed in whole or in part within the DIFC;
  •  civil disputes arising from or related to a financial or associated transaction that has taken place in whole or in part in the DIFC;
  • civil disputes arising from or related to an incident that has occurred in the DIFC, except criminal proceedings; and
  •  disputes about civil remedies flowing from or related to any criminal offence that has occurred in the DIFC.

New DIFC investment fund rules introduced

The Dubai International Financial Centre (DIFC) has recently introduced wholesale changes to its investment fund regime. In particular, DIFC funds can now be established as "Exempt Funds", with reduced regulatory oversight and more flexible structuring options. The marketing of non-DIFC funds in or from the DIFC has also been made easier under the new rules. For a more detailed analysis of the changes, please click here to see our recent e-bulletin.