Those who are asked to serve as directors of companies need to be aware of their duties and responsibilities in the legal context. This is particularly relevant given recent decisions which have highlighted the consequences of breaching the duties that directors owe to their companies. The leading principle as to a director’s duties in the UAE is that they must act with loyalty and with the diligence of a good businessman.
The duties of directors are primarily found in the UAE Companies Law and in addition to that several provisions are also found in the UAE Civil Code, the UAE Commercial Transaction Law and the UAE Penal Code. Additionally, the company’s constitutional documents such as the memorandum and articles of association set out the objectives and internal rules of the company. This article provides a brief guideline to some of the key duties which are expected of directors under UAE law.
- Duty to establish financial reporting procedures: Article 238 of the UAE Companies Law requires directors to regularly review strategic and financial matters. The directors have overall responsibility for establishing financial and other reporting procedures, and to provide them on a reasonable basis on which to make proper judgments as to the financial position and prospects of the company.
- Duty to avoid conflict of interest: Article 108 of the UAE Companies Law deals with conflicts of interest and provides a general prohibition on directors from competing with the company. Article 108 states that a director is not entitled to carry out an activity which is the same as any of the businesses carried on by the company, unless prior approval is obtained from the shareholders.
- Duty to disclose personal interests: Article 109 of the UAE Companies Law states that a director must notify the board of directors of any personal interest in a transaction and present it to the board for approval if that interest conflicts with the company’s interests.
- Duty to convene General Meetings of the company: As per Article 244 of the UAE Companies Law, directors should convene at least one meeting per year during the first four months after the end of the financial year. The meeting usually deals with the issues and topics mentioned in the agenda, however Article 247 of the UAE Companies Law, also makes it important to discuss urgent and critical topics that may emerge during the meeting, making the directors obliged to accept the request for urgent discussions.
- Duty to make clear representation of the company to third parties: Directors are also required by Article 21 of the UAE Companies Law to make a clear representation of the company to third parties.
- Duty of loyalty: Whilst Article 111 of the UAE Companies Law does not contain explicit provisions relating to directors’ duties, it provides that directors are liable to the company, the shareholders and third parties for all acts of fraud, abuses of power, mismanagement of the company and breach of the company’s constitution.
Directors should also be aware of certain pertinent provisions in the UAE Civil Code. In particular, under article 665(3) of the UAE Civil Code, a director can be liable for any loss sustained by the company as a result of an act outside the scope of the director’s authority. Also, under article 667 of the UAE Civil Code, a director may also be liable for a resignation at a time likely to cause damage to the company.
It is of paramount importance that directors strictly adhere to UAE laws while executing their duties and also give appropriate consideration to how any action against the company (and themselves personally) might be properly defended.