In UAE, there is no specific legislation to govern the liability of director but it is governed through various sources such as Company Law, Civil Code, Penal Code, Commercial Transaction Law. Directors and managers are the same people and both the terms are used interchangeably.
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When the Director is Personally Liable?
In case of fraud, deception, misuse of power, violation of law, management error, the director of the company is personally liable. It is expected from the Director of the company to use reasonable care and caution and act as a prudent director while taking decisions for the company.
If any provision attempt to remove these liabilities of a director would be held to be invalid under Company Law of Dubai. If more than one director jointly passes a resolution for any decision of the company which comprises of above mentioned wrongs, then all of them would be held liable jointly.
The liability of a director of a company is categorized into two heads under the UAE Commercial Companies Law:
- General Duties and Liabilities- they apply to the directors of all commercial companies.
- Specific Duties and Liabilities- they apply only to the directors of certain nature and legal form of a company.
Criminal Liability of a Director is Mentioned Under the Penal Code of UAE
The acts for which the director of the company can be held liable are as follow:
- Breach of any duty expected out of the profession
- Fraud or embezzlement of property or a legal right
- Disclosure of confidential information of the company
- Breach of obligation generated under company’s responsibility
- Failure to comply with health and safety measures that may result in a serious incident
- Cheque is drawn in bad faith
Penalty and Criminal Liability of a Director of a Company
Documents and Information- the director of a company is obliged to provide the document and information of the company to the auditor or the company and the ministry of the authority.
In case they fail to provide such information or conceal such information or provide misleading information, the director will be held liable for a fine that is a minimum of AED 100,000 and a maximum of AED 300,000.
Distribution of profit and interests to shareholder– the director has to distribute the profit and interest of the company with the shareholder complying with the Companies Law or the Article or Memorandum of the Company.
In case they distribute it in contravention of the law, they are liable to be punished for imprisonment between 6 months to 3 years and/or a fine between AED 50,000 and AED 500,000.
Disclosure of Confidential Information– the director gets to have much confidential information about the company and it is his duty not to disclose it to others as it would harm the business of the company.
If the director discloses any such information or intentionally causes damage to the company business, then he will be punished with imprisonment for up to 6 months and/or a fine between AED 50,000 and 500,000.
Participation with other entities– if the director of the company gets involved with another entity that might influence the price of the securities issued by the company, then he is liable and can be punished for up to 6 months and/or a fine between AED 1,000,000 and AED 10,000,000.
Insolvency– the director of the company is under civil as well as criminal liability when a company goes under the insolvency process. It comes under the general duties of the director.
The director must file for bankruptcy within 30 days of the date of suspension of the payment of debts. If he fails to perform this duty, then he is personally liable for any bankruptcy of the company.
Under Article 882 of the Commercial Transaction Law, the directors are subject to custodial sentence if they don’t supply the information requested by the court or trustee in bankruptcy.
They are subject to custody if they sell the company’s assets at lesser than the original value due to a delay in the declaration of the bankruptcy of the company.
Under Article 144 of the Bankruptcy Law, the director may be directed by the court order to pay the debt of a bankrupt company where the asset of the company is insufficient to settle at least 20% of its debts.
Liability of Director Under The Civil Code
There are various restrictions imposed on the performance of director duties under the Memorandum of a company and other documents. Apart from all those restrictions, the Civil Code which is also known as limits of custom provides that the court may deem any action of the director as exceeding ‘limits of custom’ and the director would be held liable under the Civil Code. There is no specific definition of limits of custom and it is interpreted by the court on case to case basis.
Who can initiate a proceeding against the Director?
In case of any wrongdoing by the director, he is liable towards the company, shareholders, and third parties.
Under Article 166 of the CCL, each shareholder may individually pursue a liability claim against the board of directors of the Company if not filed by the Company, provided that the error may cause damage to him personally as a shareholder and that such shareholder shall notify the Company of his intention to pursue the claim. The claim is limited to the damage only.
The shareholder cannot claim for a specific performance or declaratory relief against the director. The shareholder has to proof that the director has acted in bad faith or gross negligence and such an act is detrimental to the interest of the company. A strict burden of proof lies with the claimant shareholder against the director of the company.
In case the company fails to file for insolvency when their debts become overdue, the creditors can bring a claim on this ground under Article 162(1) of the Commercial Companies Law.
In case there is a dishonored cheque due to insufficient funds maintained by the director, a suit can be initiated under Bankruptcy law by the cheque holder/creditor who is the unsecured creditor.
If the company fails to distribute declared profit to the shareholders, the shareholders can initiate a claim against the company as well as the director of the company if the director has committed an act of gross negligence and/or a serious mistake.
Under Article 8 of the Commercial Company Law, “A Company is a contract whereby two or more persons agree to participate in an economic profit-making venture by contributing a share of capital or work and splitting among themselves the profit or loss resulting from the venture.”
Insurance Policy of Director
There are insurance policies available for the director liability cover in UAE. The company can obtain the insurance for the director to indemnify a director for the actions taken by him in the ordinary course of business.
Such insurance is taken by the financial institution more often nowadays as there has been a rise in the regulatory framework. They are not taken by family companies because there are very low chances that shareholders will claim damages for failure of the director’s duty in such companies.
When a director takes a decision and acts as per it, certain duties arise out of that. if the director fails to comply with the duty, personal liability and expenses are imposed on the director of the company. Insurance policies are taken to protect the director from such consequences.
D&O Insurance also contains some limitations up to which it will cover the damage and liability. In the event such as intentional breach and criminal conduct, the policy does not cover the damages incurred on the director.
So the director must look in detail at the limitations of the insurance policy they are getting. The directors also need to consider how ‘claim’ is defined and the extent of awards, losses, or expenses covered by any policy.
For example, if a court settlement has been made against the director, it is important to check if the insurance policy coverage extends to fines imposed by regulators or administrative authorities.
Also, the risks that arose in UAE must be covered by the insurance policy of UAE itself because they don’t consider global policies in case of indemnifying the liability of a director.
Conclusion
These liabilities are imposed on the director of the company to protect the interest of the company, shareholders, and third parties. There must be restrictions on the director in the performance of his duties.
Thus there are various civil and criminal liabilities imposed on directors under the various legislature of UAE. But if the liability is very strict in nature, then the director would fear taking actions even in the interest of the company.
There are situations in a company when a director has to make decisions that are risky and may or may not work well for the company. The director should be protected in a certain way to let them take such decisions.
Hence, there are insurance policies available for the director which are generally taken by the company for its directors to give those protections to the director of the company.