Manager’s Legal Obligation Under LLC Company Formation

There are numbers of different formation of companies establishing every other day on UAE Onshore. And among these one very common and prompt picked formation is Limited Liability Formation. The new UAE company law which comes into effect in 2015 has made significant changes to governing a limited liability company.

Composition and Liability of LLC Management

Article 218 of Commercial Company Law defined Limited Liability Company as a company in which the liability of its partner is limited only to the extent of their shares in the capital.  In order to restore their credibility in conducting transaction with Limited Liability Company  this practice from court helps customers and investors.

Manager’s Liability As per Article 84 of the company law states that every manager shall be liable for

1. The Company’s law stipulates various penalties for managers in case of a breach of provision of the law or any fraudulent acts.
2. The partners of an LLC similarly permitted to file a claim against a manager for losses incurred or any Losses & Expenses incurred due to “Improper use of power or as a result of the manager’s wrongful acts. As per Article 165 of commercial company law there should be a resolution by the general assembly upon appointing a person to pursue the claim in the company’s name
3. Article 84 precludes the possibility of limiting a manager’s employment contract which means that any provision in the memorandum of association of the LLC or the employment contract in conflict with Article 84 shall be deemed void.
4. Article 162 contains provision, makes a manager also liable for an “error in management” while Article 84 of the new company law introduces the concept of liability for gross error which potentially increases the liability threshold whereas Article 162 continues to make a manager liable for an error in management.

Legal obligations of LLC Manager

Article 111 of UAE Commercial Law explains the important provisions on the legal obligation of manager of Dubai limited liability company  which says that the legislation says that LLC co. Manager are liable to:

• The Company
• The Shareholders
• Third Parties (employees/creditors/clients or any third parties coming into contact with company)

The Duties of LLC Manager:

The general duties and obligation stipulated under the companies law and imposed on all managers and directors of limited liability and joint stock companies include, but are not limited to the following:

• To act within the confines of the law which says to comply with all legislation issued in the state(Whether federal or local) especially those relating to the legal form or the commercial activities of the company for ex: Companies law, The resolutions relating to corporate, governance issued by the ministry, the authority or the central bank(each according to its jurisdiction) – this applies to joint stock companies, the provision of the MOA and AOA, then employment and management contracts and the resolutions issued by the general assembly from time to time.
• To act in the best interest of the company and the shareholders and carries honest approach in business practices.
• To preserve the companies right and to act for its benefit with the care of a prudent person. In accordance with its objectives and the power granted to them.
• To execute their obligation with care.
• To prepare the annual budget, calculate profit and losses, prepare an annual report about the company’s activities and its financial position and have them audited by the companies auditor before approving and presenting them to the general assembly along with their recommendations on the distribution of profits within three months of the end of each fiscal year for limited liability company.

The duties imposed on Managers and Directors can be either statutory pursuant to any legislation, law and regulations issued in state or on a power of attorney issued pursuant to these contracts and even may be joint if there are more than one Managers or Directors

 Potential Criminal Liability of Manager: In addition to the general liability provision of Article 111, Article 332 also set out, a number of areas that may expose a manager to criminal sanction, which includes

• Entering false information on corporate documents
• Public Invite for shares in LLC
• Distributing Dividend against the provision of CCL (Commercial Company Law).
• Willfully entering false information in the company accounts or will fully omitting substantial information.
• Divulging company’s secrets for personal gains or for the benefit of third parties.

And above criminal liability exists not only under the CCL (Commercial Company Law) but also under:

• The Penal Code includes embezzlement, Company’s cheque which is subsequently dishonored or any other kind of fraud.
• Under civil code Manager of an insolvent company can be criminally liable in certain circumstances.

Conflict of Interest

Commercial company law also explain under Article 112 that a manager is prohibited from participating in any business that competes with the business of the company or carrying out activities same as activities carried out by the company – unless prior current dated  approval is obtained from the shareholder .

Conclusion

There are many duties and obligation imposed on Managers and Director in the UAE  of which they should be fully aware in order to avoid violation as an violation or breach may expose them to substantial liabilities, whether Civil or Criminal.

References The contents are extracted from English daily newspaper in UAE Dated 9^th March 2018 This blog post is written by Ms. Shweta. Feel free to call our Business Adviser today for a quality consultation relating your queries. Please send inquiry to info[at]flyingcolour[dot]com or call +971 4 4542366.