Legal guide for company directors and CEOs in the UAE

Because environmental, social and governance (ESG) is such an increasing focal point of good corporate governance, we address ESG duties and responsibilities first. For more general duties and responsibilities of directors and CEOs, please scroll down the page or use the navigator to jump to the relevant section.

The United Arab Emirates (UAE) is a union of seven Emirate states. Legal regulation across the Emirates broadly comprises Federal Laws, which generally apply in all the Emirates, and local laws, which apply to specific Emirates only. In addition, there are around 45 “free zones” in the UAE at the time of writing, and each free zone has a set of internal rules and regulations applicable to companies registered and operating in that zone.

This guide focuses on the duties and liabilities of managers and directors in relation to UAE companies including limited liability companies (LLCs) and public/private joint stock companies (JSCs) which are primarily set out in the:

• Company’s constitutional documents (the memorandum and articles of association)
• Commercial Companies Law (UAE Federal Decree- Law No. 32 of 2021) (CCL)
• Ministerial Decision No. 272 of 2016 on the Implementation of Some Provisions of the Public Joint Stock Companies to Limited Liability Companies
• Securities and Commodities Authority Board Decision No. 3/RM/2020, as amended (SCA Code)
• UAE Penal Code, Federal Decree-Law No. 31 of 2021 (Penal Code)
• UAE Civil Code, Federal Law No. 5 of 1985, as amended (Civil Code)
• Federal Decree-Law No. 51 of 2023 (New Bankruptcy Law)
• Relevant banking and financial markets legislation

This guide focuses on LLCs and JSCs as these tend to be the most common forms of onshore companies within the UAE. The CCL is the main source of legislation regulating the duties, obligations and liabilities of managers and directors of such companies. The SCA Code is a secondary main source of legislation which sets out further key corporate governance principles which should be followed when dealing with the affairs of public JSCs.

It is worth noting that whilst the CCL contains separate provisions for LLCs, public JSCs and private JSCs, the provisions relating to public JSCs 1) apply to LLCs to the extent consistent with its nature (Article 104(1) of the CCL); and 2) apply to private JSCs (Article 267 of the CCL), provided that in either case, the specific provisions relating to the LLCs or private JSCs (as applicable) do not directly contradict the specific provisions relating to public JSCs. This demonstrates a degree of consistency across the various corporate vehicles, and managers and directors should therefore be mindful of the breadth of specific requirements that might apply to them.

We have sought to flag key points within this Article, however managers and directors are encouraged to familiarise themselves with all applicable requirements. Please get in touch with our team if you require further guidance on any of these requirements or on the specific rules relating to other types of company in the UAE, such as free zone entities.

While there are no direct obligations relating specifically to ESG considerations for companies, the CCL does indirectly require managers and directors of LLCs and JSCs to ensure that the company complies with applicable laws (Art 6(2) of the CCL).

With regards to the wellbeing of employees, this requires the managers and directors to comply with obligations in the UAE Labour Law (Federal Decree-Law No. 33 of 2021, as amended) (Labour Law) which, among other things, imposes duties on employers to provide a safe environment for employees at work (Article 13(13) of the Labour Law). This principle was used throughout the COVID-19 pandemic to ensure that employers maintained their working environment in compliance with all COVID-related measures for the safety and benefit of employees. Employers must provide safe, clean, well-ventilated places of work with adequate lighting, drinking water and sanitation facilities (Article 13(6)) of the Labour Law), and must maintain health insurance for all of their employees (Article 13(9) of the Labour Law). Equal pay for men and women is also required where they are carrying out the same work or work of “equal value” (Article 4 of the Labour Law).

There is a Corporate Social Responsibility framework for all companies in the UAE, however this is only a voluntary framework and does not impose any positive obligation on managers or directors of companies to comply (Cabinet Decision No. 2/2018 on Corporate Social Responsibility).

With respect to public JSCs, the SCA Code sets out a comprehensive governance framework for all public JSCs in the UAE based on principles of “accountability, fairness, disclosure, transparency and responsibility” (Article 2 of the SCA Code). The SCA Code specifically refers to obligations being owed to shareholders (Article 2(1)(b) of the SCA Code) “and stakeholders” (Articles 2(3) and 2(4)(a) of the SCA Code), which includes any person who has an interest in the company, such as employees, potential investors, creditors and suppliers etc. (Article 1 of the SCA Code).

The SCA Code places duties on the boards of directors of public JSCs to ensure compliance with the code (Article 4 of the SCA Code). Among other matters, the SCA Code includes the following:

• the board must set a policy towards the local community and environment (Article 14(10)(d) of the SCA Code), and must ensure a balance between the objectives of the company and those of the community to promote the socio-economic conditions of the community (Article 81(1) of the SCA Code)
• the board is obliged to prepare and disclose an “Integrated Report” (either as a stand-alone report or (more commonly) as a section of the company’s annual report) which addresses, among other things, social and sustainable activities of the company (Article 76 of the SCA Code)
• a “comply or explain” obligation to achieve a minimum female representation of not less than one member on all PJSC boards (Article 9(3) of the SCA Code)
• an obligation to ensure boards maintain an appropriate balance of experience, diversity and independence and to implement an ongoing training and development programme for board members (Articles 9(2), 10, 12 and 15 of the SCA Code)
• an obligation on boards to set policies on gender diversity and a set of actions to meet those objectives (Article 9(4) and 59(1) of the SCA Code)
• a general obligation on the board to perform its goals in creating sustainable value for shareholders, taking into account other stakeholder interests (Article 13(3) of the SCA Code)
• an obligation to set procedures to apply governance principles across the group and to review those provisions on an annual basis (Article 14(12) of the SCA Code)
• an obligation to implement a mechanism for engagement with stakeholders and enabling accountability of the board towards stakeholders (Article 52 of the SCA Code)

As a general comment, the relaxation of foreign ownership restrictions set out in the CCL is intended to enhance foreign investment into LLCs and JSCs in the UAE. As such, and recognising the investor sentiment and requirements of many international investors, we anticipate that ESG considerations will increasingly feature for businesses seeking to engage further with the international investor community and that at some point in the near future, the UAE will look to put in place further regulations to explicitly recognise ESG requirements.

1. What form does the board of directors take?

LLCs

One or more managers must be appointed to manage the LLC’s day-to-day affairs (Article 83(1) of the CCL). Such individuals are identified on the LLC’s commercial licence and are vested with all the required authorities, unless specifically limited in the LLC’s memorandum of association or other power of attorney or granting instrument (Article 83(2) of the CCL).

If there is more than one manager, the partners (ie. the shareholders) may appoint a Board of Managers, however this is not mandatory. If a Board is formed, such Board shall have the powers and functions set out in the LLC’s memorandum of association (Article 83(1) of the CCL).

For LLCs with more than 15 partners, the partners must appoint a supervisory board consisting of at least three partners who may be re-elected or replaced by the general assembly (Article 88(1) of the CCL). The supervisory board in this context is akin to a board of directors in the sense that it is charged with controlling the LLC’s balance sheet, annual report and dividend distributions (Article 89 of the CCL). The managers may not vote on the election or dismissal of members of the supervisory board (Article 88(2) of the CCL).

JSCs

JSCs have a single board which must have at least three directors and may have up to 11 directors (Article 143(1) of the CCL). For public JSCs, at least one member of the board must be female (Article 9(3) of the SCA Code).

In addition, a JSC is required to have a company secretary who is not a member of the board of directors (Article 143(4) of the CCL).

2.  What is the role of non-executive or supervisory directors?

LLCs 

Non-executive directors are not required in the UAE for LLCs. However, LLCs with more than 15 partners are required to have a supervisory board comprising at least three partners who will oversee the management and will report to the partners (Article 88(1) of the CCL).

JSCs 

Public JSCs must have executive and non-executive directors. At least one third of the board must be independent and a majority must be non-executive independent directors (Article 9(5) of the SCA Code).

3.  Who can be appointed as a manager/director? 

LLCs 

There are generally no restrictions on who can become a manager of an LLC. However, certain licensed activities may require the manager to meet particular educational and/or professional standards.

JSCs 

The chairman and the majority of directors of the board must be UAE nationals. If the percentage of UAE national members falls below the required percentage, this must be rectified within no more than three months, otherwise any resolutions of the board will be void upon expiry of this period (Article 151 of the CCL).

Experienced persons who are not shareholders can be appointed as board members (Article 144(3) of the CCL).

For public JSCs, directors must meet a defined “fit and proper” criteria, encompassing leadership capacity and competency skills, integrity, accountability and transparency. Further, the director must not have been sentenced for a felony or a misdemeanour involving moral turpitude or trust, or involved in a crime involving money laundering and financing of terrorism (Article 18 of the SCA Code). A director of a public JSC must also possess “independence capacity”, which is not achieved if, for example, the member of the board of directors, or any of their close relatives, is or was employed in the senior executive management of the relevant company, parent company, or subsidiary, during the previous two years (Article 19 of the SCA Code).

No person may be appointed or elected as a member of the board unless and until such person has accepted such nomination in writing, which includes disclosure of any activities conducted directly or indirectly which could be considered to be in competition to the business and a statement of other companies of which they are a board member or employee (Article 147 of the CCL).

Directors may not (Article 149(1) of the CCL):

• be a member of the board of more than five joint stock companies based in the UAE
• act as chairman or vice-chairman of more than two companies based in the UAE
• act as a managing director of more than one company in the UAE

4. How is a manager/director appointed?

LLC 

The managers of an LLC are appointed by the partners, either in the memorandum of association, by separate agreement or by a resolution of the general assembly of shareholders (Article 83 of the CCL).

If the managers are listed in the memorandum of association, that document will need to be updated each time a manager is replaced by a resolution of the partners executed before the UAE notary public.

JSCs 

The JSC’s articles of association determine the method of formation of the board of directors, including the number of members and the term of membership, provided that the number is between at least three and no more than 11, and the term is no longer than 3 Gregorian calendar years (members may be re-elected for more than one term) (Article 143(1) of the CCL).

The board shall then elect from its members, by secret ballot, a chairman and a vice chairman and may elect a managing director who cannot be an executive officer or general manager of another company (Article 143(2) of the CCL).

If the JSC’s articles of association do not provide for a method of appointment, the directors are to be elected by secret ballot at the annual general meeting (Articles 144(1) and 188(1) of the CCL), save that on incorporation, the founding members may appoint the first board of directors in the articles of association (Article 144(1) of the CCL). Each shareholder has an equivalent number of votes to the shares held by them, and these can be allocated to one candidate or distributed between them (Article 146 of the CCL).

The general assembly may appoint a number of experienced persons to the board who are not shareholders (Article 144(3) of the CCL).

If, during a director’s term, that director’s position becomes vacant, the board of directors can appoint a new member to hold the vacant position until the expiry of the current term, provided that the appointment is referred to the general assembly at its first meeting for approval, unless the public JSC’s articles of association provide otherwise (Article 145(1) of the CCL).

If the Federal Government or the local government holds 5% or more of the capital of the company, it will automatically have board appointment rights as provided for in the CCL (Article 148 of the CCL) and for public JSCs, the SCA Code (Article 6(3)).

5. How is a manager/director removed from office? 

LLCs

Unless an LLC’s memorandum of association (or other appointing contract) provides otherwise, a manager may be dismissed by a decision of the general assembly of the LLC (whether or not the manager is a partner). The court may also dismiss a manager at the request of one or more partners of the LLC if the court deems the dismissal justified (Article 85(1) of the CCL).

A manager may file a written resignation to the general assembly with a copy to the authorities. The general assembly then has 40 days to decide on such resignation otherwise it is deemed accepted upon expiry of that period, unless the memorandum of association (or other appointing contract) provides otherwise (Article 85(2) of the CCL).

The LLC must file notice of termination of the manager’s services and appoint a replacement within 30 days (Article 85(3) of the CCL).

JSCs 

A director may resign from their office at any time by notice to the public JSC (Article 21(4)(d) of the SCA Code).

For public JSCs, a general assembly of the shareholders may resolve to remove all or any of the directors, even if the articles of association provide otherwise. If a board member is dismissed, the member may not be renominated for directorship for three years from the date of the dismissal decision (Article 22(1) of the SCA Code). Further, where a court has deemed that the director has been involved in a deal or transaction involving a conflict of interests, the director shall be dismissed, and may not be renominated for three years from the date of dismissal (Article 22(2) of the SCA Code). Where the director has been imprisoned or fined as a result of a complaint filed by a shareholder, the director may not continue in office or be renominated until at least three years have elapsed from the date of conviction (Article 22(3) of the SCA Code).

Where a director is appointed for a fixed term, the director may be re-elected for more than one term (Article 143(1) of the CCL).

In addition, if a public JSC board member is absent for three successive meetings or five intermittent meetings without acceptable excuse, the director shall be deemed resigned (Article 21(4)(g) of the SCA Code).

Both LLCs and JSCs 

A manager/director may be liable for loss suffered if that manager resigns at a time likely to cause damage to the company. This could be of particular relevance to managers/directors of companies in financial difficulties: while the temptation may be to resign from the company in an effort to minimise exposure to potential shareholder or third party claims, in doing so, the manager/director may put itself in breach of the Civil Code, if that manager’s resignation were to deprive the company of important skills and experience at a time when it was most in need of them (Article 667 of the Civil Code).

In the event that a manager/director is replaced, the company must also ensure that the power of attorney under which that manager/director derives their authority to act is removed from the commercial register, because this will remain in force until such time as it is removed, regardless of whether the individual remains a manager/director of the company.

6. What authority does a manager/director have to represent the company? 

LLCs 

The basic proposition is that an LLC shall be bound towards third parties by the acts of its duly appointed managers for decisions or actions taken in the “usual manner” (Article 23 of the CCL). Although “usual manner” is not defined, we can assume that this means decision/actions taken in the ordinary course, and absent any fraud or material impropriety or extraordinary circumstances. However, this does not prevent the LLC or its partners from then bringing a claim against a manager for breach of duty which may have caused the LLC losses.

The authority of a manager is assumed to cover the full powers required in order to manage an LLC to perform the business it is intended to carry on, unless there are specific restrictions set out in the LLC’s memorandum of association or in any other document under which the manager derives their authority. As a result, absent any specific restriction, the managers are assumed to have full authority and discretion to manage the LLC, and those acts shall bind the LLC, provided that the manager has made it clear that they are taking such actions in their capacity as a manager of that LLC (Article 83(2) of the CCL).

Furthermore, the provisions relating to a directors’ powers for JSCs (as below) apply equally to managers of LLCs (Article 154 of the CCL).

In addition to restrictions set out in the LLC’s memorandum of association, the Civil Code refers to limits of “custom” indicating that even if the memorandum of association does not specify any restrictions on the capacity of a manager’s actions and powers, they may still be liable for actions that the court deem as exceeding the limits of custom (Article 1 of the Civil Code). There is no official definition of “custom” under the Civil Code, therefore this term would be interpreted by the relevant court on a case-by-case basis, similar to the usual manner referred to above.

To be sure of due authority, third parties will usually request a specific power of attorney from the LLC granting relevant authority to managers before entering into a transaction with a UAE company. From the perspective of a third party, a claim against a corporate entity would be preferable as the corporate entity is likely to have deeper pockets than an individual manager. A specific power of attorney also allows the manager to demonstrate that they were acting in accordance with their corporate authorisations to avoid personal liability to the LLC for mismanagement.

JSCs

Under the CCL, the board of directors is deemed to have all the required powers to do such acts as are required for the objects of the JSC, other than as may be reserved by the CCL, the articles of association of the JSC or the general assembly. Reserved matters under the CCL include entering into loans for periods in excess of three years, selling or pledging the property of the JSC or the store, mortgaging the JSC’s movable and immovable properties, discharging the JSC’s debtors from their obligations, and making compromises or agreeing on arbitration, each of which must be authorised under the articles of association of the JSC or within the objects of the JSC by nature or approved by a special resolution of the general assembly of the JSC (Article 154 of the CCL).

The chairman of the JSC acts as the legal representative of the JSC before the courts and in its relationships with third parties, unless the JSC’s articles of association provide for the general manager to act in such capacity (Article 155(1) of the CCL). The chairman may delegate some of its powers to another member of the board and, as with LLCs, it is common for managers/directors to operate under a power of attorney granting them specific authority to enter into contracts with third parties (Article 155(2) of the CCL).

Directors must act within the powers given to them by the JSC’s constitutional documents, and they are personally liable for a breach of the JSC's articles of association (Article 162(1) of the CCL).

7. How does the board of managers/directors operate in practice? 

LLC 

Where the partners of an LLC establish a board of managers, the proceedings of such managers shall be governed by the LLC’s memorandum of association or other constituting document, provided that the board must meet at least four times per year (Article 156(1) of the CCL).

If the LLC has more than 15 partners, as noted above, a supervisory board is required to be established (Article 88(1) of the CCL) which may examine the LLC’s books and records and require the managers to provide management reports. The supervisory board controls the balance sheet, annual report and distribution of profits of the LLC and is required to report to the partners on these matters at least five days before the date of the general assembly (Article 89 of the CCL).

JSCs 

The board is required to meet at least four times a year under an invitation from the chairman (unless the JSC’s articles of association provide for more meetings) in accordance with the procedures set out in the JSC’s articles of association. The chairman may also invite the board to convene whenever at least two members so demand, unless the JSC’s articles of association provide otherwise (Article 156(1) of the CCL).

Meetings of the board are to be held at the head office of the JSC unless the board determines otherwise, and board meetings are not valid unless all the members are invited to the meeting and a majority are present in person, unless the JSC’s articles of association permit participation by technological means approved by the competent authorities (Article 156(2) of the CCL). The CCL does not specifically permit or prevent telephonic meetings and it is fairly common practice for meetings to be conducted this way where directors are not all available in the UAE. However, for public JSCs, the articles of association may allow participation through technological means (Article 24(1) of the SCA Code), provided that the required electronic equipment is provided by the company and is tested prior to the meetings (Article 24(4) of the SCA Code). The CCL does permit board resolutions to be passed as written resolutions which is one way to deal with logistical difficulties of convening all board members in one place (Article 157(2) of the CCL).

Board decisions are generally passed by a majority with the chairman having a casting vote in the event of a tie. The secretary of the board must prepare the minutes of the meetings and they should be signed by the board members and the secretary. Any board member who disagrees to a decision passed by the board may (and for reasons related to liability discussed later, should) enter their objection in the minutes of the meeting. The signatories to the minutes are liable for the validity of the statements contained therein (Article 159 of the CCL).

Directors may appoint another director as their proxy for a board meeting only where permitted by the JSC’s articles of association and provided that: (i) the delegated director represents only one other board member; and (ii) the number of the board members present in person is at least 50% of the board. No voting by correspondence is permitted and a delegated member shall vote on behalf of the absent member as determined in the deed of proxy (Article 160 of the CCL).

8. What contractual relationship does a manager/director have with the company? 

Both LLCs and JSCs 

The Labour Law governs most aspects of the contractual relationship between the individual and the LLC or JSC. Normally an employment contract is required, especially if the manager/director is a non-UAE national, as it is pursuant to that contract that the company sponsors the individual’s work visa.

It is therefore common to see two contracts in existence between the company and the manager/director: a short- form service contract on the MOHRE’s prescribed form, and a more detailed employment contract setting out further employee provisions. In practice, the short-form service contract is the one used by the company to sponsor the individual’s work visa.

JSCs 

The JSC’s articles of association must specify the terms for calculating the remuneration of board members provided that the remuneration must not exceed 10% of the net profits of the ending financial year after deducting depreciation and reserves (Article 171(1) of the CCL). Any penalties imposed on the JSC as a result of breaches of law or the articles of association by the board of directors during the ending financial year may be deducted from the remuneration of the board. However, the general assembly may resolve not to make such deductions if it determines that the penalties were not as a result of omission or error by the directors (Article 171(3) of the CCL).

9. What rules apply in respect of conflicts of interest? 

LLCs 

The LLC provisions provide that a manager of an LLC may not undertake the management of a competitor or make deals in a competing trade (whether for their own account or for the account of third parties) without the consent of the LLC’s general assembly; otherwise the manager may be dismissed and required to pay compensation to the LLC (Article 86 of the CCL). 

Furthermore, the provisions relating to conflicts of interest for JSCs (as below) apply equally to managers of LLCs (Article 150 of the CCL).

JSCs 

The CCL contains a positive duty on directors to avoid conflicts of interest. Any conflict should be declared at any board meeting convened to discuss the matter in question, where such conflict should be noted in the minutes and the director in conflict shall not be permitted to vote, failing which the conflicted contract may be annulled or the contravening director may be required to account to the company for any profits made (Article 150 of the CCL).

JSCs are not permitted to provide loans to any board member (including their spouse, children or any of their close relatives) or execute guarantees or provide any collateral in connection with any loans entered by and granted to them (Article 153(1) of the CCL). In addition, no loans may be granted to a JSC where a board member (or their spouse, children or any of their close relatives) holds, jointly or severally, over 20% of the capital of the JSC (Article 153(2) of the CCL). Any agreement in conflict with the restrictions on such related party loans will be invalid (Article 153(3) of the CCL).

See also restrictions on number of appointments for JSC directors as set out above. 

10. What other general duties does a manager/director have? 

The CCL is the main piece of legislation setting out obligations and liabilities of managers and directors of onshore UAE companies and prohibits any provisions of the memorandum of association or articles of association of a company which might seek to exempt any individual from personal liability (Article 24 of the CCL). The primary duties and liabilities of managers and directors under the CCL are:

• to preserve the rights of the Company and to act “with due care” (Article 22 of the CCL). This is a departure from the previous language used in the old Commercial Companies Law which specified that the directors must manage the Company to the standard that a “diligent person” would, which was defined as “a person having sufficient experience and commitment to perform the role”. This equated to the objective standard under English law, and there was no subjective test in the old CCL (i.e. the courts would not be required to assess whether the director correctly discharged their duties by reference to their actual skill and experience), which previously resulted in a lower overall standard. This change to only refer to “due care” potentially gives the courts authority to assess the standards expected of directors through a broader lens and may increase the overall standards expected of directors in the UAE;
• to exercise full powers to manage the company (Articles 83(2) and 154 of the CCL and Article 13 of the SCA Code);
• to work within the objectives of the company and to not exceed the powers specifically granted to the manager/director (e.g. under the memorandum of association, articles of association, any power of attorney or similar) (Articles 22, 83, 84, 110 and 154 of the CCL). In this context, the CCL specifically prevents any company from carrying out certain material actions such as entering loans with a period in excess of three years, disposing or pledging the property of the company, mortgaging its moveable or immoveable property, discharging debtors of their obligations or making a compromise or agreeing on arbitration, unless doing any of these actions are “within the objects of the company by nature”, authorised by the memorandum of association, articles of association or approved by a partner/shareholder resolution (Article 154 of the CCL);
• not to commit any fraudulent act or misuse of power (Articles 84(1) and 162(1) of the CCL);
• not to breach any applicable law or any provision of the company’s memorandum of association, articles of association or any contract appointing the director (e.g. a service contract/employment contract) (Articles 84(1) and 162(1) of the CCL);
• not to make any “gross error” or “error in management” (Articles 84 and 162 of the CCL). While these terms are not defined, a court would need to consider if the actions or inactions which allegedly amount to a gross error or error in management fell below the standards that would be expected of a person having sufficient experience and commitment in the performance of that role on an objective basis; and
• not to put themselves into any position of conflict (Articles 150 and 162(3) of the CCL), take part in the management of any entity which competes with the UAE company, or make any trade or other deals in competition with the business of the company (Articles 86 and 152(3) of the CCL). Any conflicts should be declared at any board meeting convened to discuss the matter in question, where the director in conflict shall not be permitted to vote, failing which the conflicted contract may be annulled or the contravening director may be required to account to the company for any profits made (Articles 150 and 152(3) of the CCL).

Managers/directors also have specific duties under the CCL including in relation to company filings, financial accounts, reports and distributions (various provisions of Chapters 2 and 3 of Title 1 of the CCL).

It should be noted that directors’ duties are personal obligations attracting personal liability for the individual in question.

For further information on this topic see CMS’s LawNow article: ‘Managers’/Directors’ Duties in the UAE: Part 1 – Do you know your duties?

11. To whom does a manager/director owe duties? 

LLC 

For LLCs, managers’ duties are owed to the LLC, the partners and any interested third parties (Article 84(1) of the CCL). Managers/directors and anyone else exercising a managerial function  should be mindful that if the LLC becomes insolvent, or its solvency is doubtful, those duties may become owed to a wider cast of parties, including creditors and employees.

JSCs 

The position is the same for JSCs. However, in addition for public JSCs, the SCA Code now also extends directors’ duties towards all “stakeholders” which can include employees, creditors, suppliers, and any other person who has an interest in the public JSC (Articles 1 and 2(4)(a) of the SCA Code). So, the cast of parties to whom directors’ duties are owed for JSCs is potentially broader than that for LLCs.

12. How do a manager’s/director’s duties change if the company is in financial difficulties? 

Managers and directors have specific duties in situations where the company is not profitable under UAE Federal Law; such duties vary depending on whether the company is an LLC or a JSC.

LLC 

If the losses of an LLC reach 50% of its share capital, the managers are required to refer the issue of dissolution to a general assembly of the partners and a resolution to dissolve can be passed by the same majority required to change the memorandum of association of the LLC (usually 100%) (Article 308(1) of the CCL). 

If the losses reach 75% of the LLC’s issued capital, a resolution to dissolve may be passed by partners holding only 25% of the capital (Article 308(2) of the CCL). Given the relatively small amount of capital LLCs are usually set up with in the UAE (usually AED 100,000 to AED 300,000), this is something for managers to be mindful of if the LLC finds itself in a loss-making situation.

JSCs 

If the losses of a JSC reach 50% of its issued share capital, the board of directors must call a general meeting of the JSC to decide whether to dissolve the JSC prior to expiry of its term or continue its business activities. Such invitation should be issued within 30 days of the filing of the relevant periodic or annual financial statements showing such position. If the board fails to invite the general assembly to convene, or if the shareholders do not issue a decision in the matters, any concerned party may file a motion with the competent court to seek dissolution of the JSC (Article 309(1) of the CCL).

Bankruptcy provisions

In addition to the CCL requirements, the New Bankruptcy Law, which came into force on 1 May 2024 and repealed Federal Decree-Law No. 9 of 2016, as amended (Old Bankruptcy Law) imposes various duties and liabilities on directors in an insolvency situation.

Under the Old Bankruptcy Law, managers and directors were required to file for bankruptcy where a company was unable to pay its debts for over 30 consecutive business days due to financial difficulties, or where the company’s assets were insufficient to cover its liabilities (Article 68(1) of the Old Bankruptcy Law). However, the New Bankruptcy Law removes this obligation, and outlines that a manager or director may initiate the bankruptcy process where a company is unable to pay its debts for over 60 days from the date of cessation of payment, or from the date on which information became available to him that it will be unable to pay its debts when they fall due (Article 15(1) of the New Bankruptcy Law). It should be noted that failure to comply with the foregoing timing requirement will not necessarily result in the application being rejected.

As per Article 15(2) of the New Bankruptcy Law, where a manager or director initiates a bankruptcy process, it cannot (and, therefore, has a duty by implication) dispose of the company’s assets. This restriction arises from the date it submits its application to commence a bankruptcy process. Where a manager or director contravenes this, the disposal in question is invalid. However, this restriction does not apply to assets that may not be seized or assets necessary for the maintenance of the debtor, their dependents or the legal costs related to the application for opening the bankruptcy procedure (Article 15(2) of the New Bankruptcy Law).

Managers, directors and any person responsible for the actual management of the company (e.g. a shadow director) can be held liable for taking certain actions in insolvency situations (such as disposals at undervalue, preferential treatment of creditors, fraud, improper use of powers, providing false information or declarations etc) (Article 246 of the New Bankruptcy Law). However, a legal action based on the grounds mentioned above must be brought within 2 years from the date of the judgement declaring a company bankrupt, otherwise the right to sue such persons will be forfeited (Article 246(3) of the New Bankruptcy Law). Regardless, it is imperative that all such individuals give full consideration to their decisions in times of financial difficulties and after proceedings have been issued, including how such actions may affect creditors and other stakeholders and how they may be interpreted by a liquidator or a court in light of the New Bankruptcy Law. Full records and reasoning for all decisions should be kept and external professional advice sought. 

13. What potential liabilities can a manager/director incur? 

Managers and directors are liable to the company, the shareholders and third parties for all fraudulent acts, abuses of power, and violations of the law or the company’s memorandum of association or articles of association, in addition to mismanagement.

The liabilities managers and directors are exposed to can range from dismissal and disqualification as a manager or director, to civil claims against the manage or director brought by the company, its shareholders or other stakeholders, through to potential criminal sanctions of fines or, for more extreme cases, imprisonment.

Various circumstances in which a manager or director can be found personally liable are set out under the CCL and can be summarised as situations involving:

• deception or fraud;
• misuse of power; or
• violations of the law or the company’s constitutional documents. 

Any provisions attempting to relieve managers and directors of liabilities in such circumstances are deemed invalid (Article 162(1) of the CCL).

In the event of a breach of managers’ or directors’ duties, all managers and directors are jointly liable if such breach arises from a resolution adopted unanimously (Article 162(2) of the CCL). It is therefore important for any manager or director who does not agree with a proposed action to vote clearly against that resolution – and to have their objection noted in the minutes.

Simply not being present at the meeting in question is not a defence under the CCL and managers or directors, if not present, must show that they were not aware of the proposed action or, if they were aware of it, were unable to object (Article 162(2) of the CCL).

Under the Penal Code, managers and directors can be found criminally liable for a variety of matters in the context of their position, including:

• fraud or embezzlement in respect of property or a legal right;
• unauthorised disclosure of confidential information; and
• health and safety failures which result in a serious incident leading to death or injury.

Criminal sanctions including fines and imprisonment are also imposed under the Bankruptcy Law for a wide range of actions, inactions and breaches of duty.

In addition, managers and directors may also be liable for actions that the court deems to be exceeding the limits of custom referred to above (Article 1 of the Civil Code).

14. How can a manager/director limit its liability? 

The CCL includes a general prohibition on limiting the liability of managers or directors for fraud, misuse of power, legal violations and mismanagement (Article 162(1) of the CCL). However there are some protections highlighted in the CCL, such as for directors who object to the relevant decision resulting in liability and have such objection noted on the record (Article 159 of the CCL), or in the case of members of the board of supervisors of an LLC who shall not be liable for the actions of the managers unless they become aware of the faults committed and fail to mention these faults in their report presented to the general assembly of partners (Article 90 of the CCL).

As such it is important for managers and directors to be fully engaged in the decision- making process, ensure such decisions are being made having considered all relevant information, and ensure full records are kept, particularly of any objections. It is also important to take professional legal and financial advice where there may be any risk of insolvency and, where the effects of decisions are uncertain, seek shareholder approval of proposed actions.

It is possible for companies to issue indemnities in favour of managers or directors as against third party claims and/or take out an insurance policy against the financial risks to managers and directors from claims brought against them. Directors’ and officers’ insurance (D&O insurance) is increasingly important to attract and retain talented directors; however it has its limits, both in the nature of claims, costs, expenses and liabilities it may pay out on, and for the fact that it will not provide any protection against criminal sanctions or in cases of fraud.