With the recent rapid incorporation of various types of companies in the world, the concept of directors’ responsibilities and liabilities has gained much importance (Smith & Hicks, 1994). In this regard, all companies establishing their businesses in the United Arab Emirates (UAE) are required to familiarize themselves with the various provisions of the country’s law, governing the operations of companies; Companies Law. Duties and liabilities owed by directors of companies established in UAE are contained in the various sections of the country’s Companies Law. The most relevant sections of the law include: the Commercial Companies Law (8/1984); the Commercial Transactions Law (18/1993) and the Civil Transactions Law (5/1985). Prior to discussing the potential personal liabilities that directors face under the UAE’s Companies Law, it is imperative to understand the duties of directors as stated by the law, since it is the bleaching of such duties that amount to liability. Generally, directors’ duties are prohibitive in nature and require that they refrain from acts considered unethical or unlawful. Such duties include, but not limited to; duty to exercise reasonable care, duty to act within the powers, duty to avoid competing with the company’s business, duty not to dispense false dividends, duty of not entering into a loan contract with the company, duty not to misrepresent the company’s financial position, duty to confidentiality and to avoid making profits out of the company’s secret (Wordsworth, 2001). It is important to note that breaching of one or more of these duties results in a director’s personal liability.
This study seeks to provide an in-depth analysis of potential sources for directors’ personal liability for acts of fraud and mismanagement, under the UAE law. More specifically, the study will be limited to how personal responsibility is discussed under the various categories of the UAE’s Companies Law viz. Theft and Fraud, Penal Code, Securities Law, Insolvency Law and Anti-trust Law. Finally, the study will precisely discuss on parties who possess the capacity to maintain a legal action against a director for personal responsibility.
Personal Responsibility in Theft and Fraud
The UAE’s Company Law provides that any director, who, for his own purpose, or any other purpose whatsoever, signs in the name of the company, any documents containing counterfeit information, is subject to a fine or to serve a prison sentence as deemed proper by the court handling such issue. The magnitude of the fine and the duration of the prison sentence depend on the extent of misrepresentation, as interpreted by the court. Additionally, popping in false information in a company’s documents, signing and issuing such documents, especially with prior knowledge that they contain false information also attracts similar charges. Besides, disclosure of a company’s confidential information by a director, and using such information to his benefit, or even to benefit a third party is subject to similar penalties.
Personal Liability under the Penal Code
Under the Penal Code, a director is also personally liable for fraud and embezzlement of funds, property or even legal rights (Congress UAE, 2005). This acts as a limitation to directors who may abuse their powers. In legal terms, such directors are said to act ultra-vires. Moreover, the Penal Code provides that directors who disclose a company’s confidential information are criminally liable, regardless of whether they benefited from such disclosure or not. More specifically, directors are criminally liable under the UAE’s Penal Code, for drawing a cheque on the company’s behalf, with prior knowledge that the company has insufficient funds to honor such cheque.
Personal Liability under the Securities Law
Under the UAE’s Companies Law, a director is personally liable for making a public offer of a company’s securities (shares), in a Limited Liability Company (LLC). By issuing a LLC’s shares, a director would be acting against the Companies Act which provides that such shares can’t be issued to the public. Similarly, a director who evaluates a company’s share at a price above their real value is personally liable, if by doing so, he was not acting in good faith. The two actions attract a maximum of two years imprisonment sentence or a maximum of about US$27,000 in fine.
Personal Liability under the Insolvency law
The Insolvency Law in the Commercial Code of UAE’s Companies Law provides that directors of insolvent companies are personally and criminally liable for: embezzling the assets of the company; entering into a fraudulent arrangement with the company’s creditors; falsely representing the company’s capital position; receiving an amount above the one stipulated by law in form of compensation, bonuses or honoraries; declaring debts not owed by the company in bad faith; masking, modifying or even destroying the company’s books of records; and distributing untrue profits. However, the law is not clear about the magnitude of fines or the period of prison sentence for such misconducts. It is therefore the duty of the court hearing such cases, to award the right penalties.
Personal Responsibility under Anti-trust Law
Under the Commercial Code, the UAE’s Companies Law is clear on acts of unfair competition that would result in personal liability on the part of directors (United Arab Emirates & Hall, 1984). In this regard, any director, who for his own purpose, or for the purpose of his company, approaches a competitor’s employee, with the intention of acquiring competitor’s confidential information, is personally liable for damages or monetary compensation. Furthermore, distribution of goods using deceptive techniques, aimed at coaxing consumers to make purchases attracts similar charges. Finally, publishing and communicating false information about the competitor, therefore hurting him in business also attracts similar penalties. In legal terminology, such an act is called defamation. It is however important to note that for the competitor to successfully maintain a legal action against a director for defamation, he must be in a position to prove three things; the director’s statements are defamatory in nature, they must be directed towards the competitor and must have injured the competitor in business.
Right to bring an action against Personal Liability
It is also imperative to consider the various stakeholders, capable of maintaining an action against a director for personal liability. In this regard, the company has an initial right to maintain an action against a director for acts of mismanagement that causes damages to customers and other stakeholders (Reuting, 2011). It is equally to note that the person bringing an action against a director for the above mentioned charges must have been elected by directors during a general meeting. Furthermore, a company’s shareholders possess the right to maintain an action against a director for fraudulent and mismanagement acts. This is especially the case if the company has failed in maintaining an action against the director, if the director’s misconduct causes personal injuries to the shareholder or if the shareholder has informed the company that he intends to maintain a legal action against the director. However, foreigners; parties not affected by a director’s misconduct, either directly or indirectly, have no capacity to maintain a legal action against the director.
From the above analysis, it is evident that a director may be personally liable for acts of fraud or mismanagement. Moreover, a director can be sued under one or more sections of the UAE’s Companies Law viz. Theft and Fraud, Penal Code, Securities Law, Insolvency Law and Anti-trust Law. As a rule, a director should act honestly, lawfully, reasonably and in good faith, to avoid personal liability.