Historic bankruptcy decision in Dubai courts – personal liability of directors and officers
In a landmark bankruptcy judgment on October 10, 2021, the Dubai Magistrates’ Court declared the directors and officers of an insolvent Dubai-based PJSC to be personally liable for the payment of the unpaid debts of the previously listed company (now in liquidation) in accordance with the Bankruptcy Law of the United Arab Emirates. This decision represents a very important milestone in the UAE’s insolvency landscape since the enactment of the Bankruptcy Law at the end of 2016, being the first known instance of a case where such personal liability has been ordered. . The Dubai court’s approach in the Marka PJC bankruptcy confirms that the duties of directors and officers of a UAE company are clearly owed to the company’s creditors. Until now, while it has always been anticipated that such personal liability may exist under bankruptcy law in defined circumstances, it has perhaps been viewed more as a theoretical possibility without such personal liability. Orders are not made in practice, even in cases where the circumstances appear to have been appropriate to give rise to such liability. The Marka decision is therefore a strong signal from the courts of Dubai as to their willingness to order such an adjustment for the benefit of creditors in appropriate cases.
The key points of the Marka decision are:
- The directors and officers of the company were held personally liable for the payment of the outstanding debts of the company in an amount in excess of AED 448 million, on the grounds that (i) the assets of the insolvent company were not sufficient to pay at least 20% of its debts and the Court is satisfied that the directors are responsible for the poor recovery of creditors (Article 144 of the Bankruptcy Law) and (ii) the directors and officers of the company have been accused of mismanagement of the company (Article 201 of the Bankruptcy Law and Article 162 of the Companies Law of the United Arab Emirates). The Court did not go so far as to use the term “fraud” in connection with the relevant conduct.
- The court ordered the directors and managers to pay the debts of the company on their own initiative by applying the aforementioned provisions of the bankruptcy law, so it does not appear that such relief was specifically requested by one. creditors – none of the directors or managers of the company were named as defendants in the bankruptcy proceedings.
- The court order applies to the current directors of the company, as well as five former directors. The resignation of a director without his concern being recorded in the minutes of the board of directors when the main decisions are taken does not release a director from his responsibility.
- A seizure order has been pronounced against the bank accounts, securities, properties and vehicles of the company, its subsidiaries and the directors and officers of the company in order to prevent any of them from dissipating their assets. out of reach of creditors.
While the judgment of the Court of First Instance may be the subject of a possible appeal, it is a compelling reminder (if applicable) that managers and directors of companies must be very attentive to the duties owed to their companies and to creditors of these companies, with the real risk of incurring personal liability for the debts of the company in the event of insolvency when it is found to have acted in a faulty or reckless manner in incurring liabilities on behalf of the company. company in the management of it. This is especially likely to be the case in times of macroeconomic stress, where a company may experience difficult business conditions and the risk is increased of negotiating while insolvent to the detriment of creditors.