The general obligations placed on managers arise from a number of sources, including the company’s COE, the CCL, the UAE Civil Code and the UAE Penal Code.
Article 111 of the CCL
Whilst the CCL does not contain explicit provisions relating to directors’ duties, these can be inferred from the provisions of the CCL which deal with the liability of directors. Of key relevance is article 111 of the CCL which applies to both directors of joint stock companies and managers of LLCs. This provides that the chairman and the directors are liable to the company, the shareholders and third parties for:
- all acts of fraud
- abuses of power
- violations of the law or the company’s COE.
Directors may also be liable for the mismanagement of the company. There is little in the way of reported cases providing guidance on how the UAE courts interpret the potential application of article 111 and, in particular, the scope of “mismanagement”. However, it appears to be a fairly wide-ranging offence – not necessarily limited to acts of deliberate or serious wrongdoing.
Persons to whom managers are liable under article 111
Article 111 of the CCL clearly sets out that the managers are liable to the company, the shareholders and also to third parties. This could include creditors, employees and, in theory, any other person who has suffered loss as a result of the managers’ actions.
Any person considering accepting a manager position in an LLC should be aware that – in the event of a breach of one of the duties set out in article 111 of the CCL – all managers are jointly liable under article 112 if such breach arises from a resolution adopted unanimously. It is therefore important for any manager who does not agree with a proposed action to vote clearly against that resolution – and to have his objection noted in the minutes. Simply not being present at the meeting in question is not a defence under the CCL and a manager, if not present, must show that he was not aware of the proposed action or, if he was aware, was unable to object.
In addition, article 115 of the CCL provides that it is not possible for the managers to relieve themselves of liability simply by procuring a resolution of the shareholders endorsing a particular decision or course of action. However, such a resolution does have the benefit of limiting the prescription period for any action against the managers to a period of one year from the date of the relevant shareholder resolution, except where there has been criminal action.