Directors Duties: a stark reality following the recent Marka Ruling and subsequent amendments to the UAE Bankruptcy Law – JD Supra

Posted: December 15, 2021 at 9:40 am

On 1 November 2021, the Federal Decree Law No. 35 of 2021 (the "Decree") (amending certain provisions of the Federal Decree Law No.9 of 2016 concerning Bankruptcy (the "UAE Bankruptcy Law")) came into force. The publication of the Decree follows a significant decision relating to directors' duties by the Dubai Court of First Instance in the matter involving the bankruptcy of Marka Holdings PJSC ("Marka") (the "Marka Case").

In the Marka Case1, the Dubai Court of First Instance found the managers and the directors of Marka personally liable for the debts of Marka in an amount equal to approximately AED 450 million (which was close to the total amount of all the debts payable by Marka).

Prior to the publication of the Decree, the UAE Bankruptcy Law and the Federal Law No. (2) of 2015 concerning Commercial Companies (as amended) ("CCL") contained provisions relating to the potential personal liability of the members of the board of directors and managers of a company. In particular, such individuals were previously able to, subject to certain conditions, be held personally liable under the UAE Bankruptcy Law for payment of a company's debts if a UAE court deemed them to be responsible for that company's losses.2

The Marka Case may therefore seem to be consistent with the provisions of the UAE Bankruptcy Law prior to the publication of the Decree. Notwithstanding this, since the court's findings have been reported, the Marka Case has been viewed as a significant development in the UAE's approach towards personal liability in corporate bankruptcy proceedings. This is because (1) such an approach towards personal accountability does not appear to have been previously applied in practice by the UAE courts; and (2) the extent to which such personal liability was applied. Whilst it may be that the particular fact pattern is specific to the case and distinguishable going forward, nevertheless there has been a discernable market reaction to the outcome.

The Decree came into force shortly after the Marka Case. The amendments brought about by the Decree apply to Article 144 and Article 201 of the UAE Bankruptcy Law, specifically in relation to the liability of the directors and managers in a bankruptcy scenario. It is worth highlighting that the Decree itself does not provide for any significant standalone amendments to the UAE Bankruptcy Law save for clarifying the previous provisions relating to the personal liability of the directors and managers. The amendments include, amongst others, (1) clarification that each director or manager will be held liable to the extent of their responsibility for such debts; (2) providing the directors or managers held in contravention of the law the right to appeal the relevant ruling; and (3) further introducing a financial penalty for contravention of the relevant articles of an amount equal to no more than AED 100,000) (this is in addition to the criminal liability previously included in the law).

The timing of the enactment of the Decree to be read alongside the decision of the Marka Case can be seen as a key reminder to the market by the UAE Government of the existence of personal liability to senior officials in a company. Additionally, taken together, the Decree and the Marka Case reinforces the Government's aim to demonstrate and uphold "best practice" standards of corporate governance and accountability in the UAE, in order to continue to attract inward investment in the country.

The decision of the Marka Case may potentially be reversed following its appeal. Notwithstanding this, directors and managers (which, under the UAE Bankruptcy Law includes anyone who plays an active role in the decision making of a company) are now likely (if they are not already doing so) to more actively seek separate independent advice to ensure that decisions made on material transactions will not affect their personal liability following a bankruptcy or similar insolvency procedure.

The decision of the Marka Case is fairly recent and it is yet to be determined whether the decision will set a new approach towards personal liability in UAE corporate bankruptcy proceedings. The UAE legal system does not operate on the basis of binding precedent. As such, the legal ruling in this case, does not mean it would apply in all other cases. Nevertheless, directors and managers across the UAE will likely remain mindful of their duties under the relevant laws and ensure compliance.

1 Case #14/2019 Bankruptcy Procedures2 Article 144 and 201 of the UAE Bankruptcy Law and Article 162 of the CCL

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Directors Duties: a stark reality following the recent Marka Ruling and subsequent amendments to the UAE Bankruptcy Law - JD Supra

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