UAE corporate law: When the manager of an LLC can be held financially and criminally responsible

Dubai: Not many people are aware that directors and managers of limited liability companies (LLCs) can be held personally liable for their wrongdoings. This is because the general rule is that LLCs are legal entities exempting shareholders and managers personally from any liabilities related to the company. However, in some cases, such as the one illustrated below, the manager’s breach may be so severe that it could result in their personal liability, be it civil, criminal or both.

A recent important judgement at Dubai’s Appeal Court concerned a person who was the owner of a company while also being the manager of another company. He involved the company he owned commercially with the one that he managed, resulting in benefits for his own company and losses in the hundreds of millions of dirhams for the company he managed. He also tried to cover his tracks by providing shareholders with inaccurate financial statements, seeking to be cleared from liability for the fiscal year in which the offence took place.

A few shareholders suspected something was amiss. Hence, they refrained from approving the manager’s request during the assembly meeting to reduce capital and approve the financial statements. They wanted to escalate the matter, and the law stipulates that shareholders can only do so if they own five per cent or more of the company’s total shares. Thus, they registered a complaint with the UAE’s Securities and Commodities Authority (SAC), seeking a temporary freeze on the Board of Directors’ resolution, until litigation was initiated.

The request was denied, since the percentage indicated in the complaint was shy of five per cent of the capital. The suspicious shareholders were not put off by this and still proceeded to litigate. Dubai’s Court of First Instance perused the matter but, unfortunately, ended up passing the Board’s resolution.

The general rule is that LLCs are legal entities exempting shareholders and managers personally from any liabilities related to the company. However, in some cases, ... the manager’s breach may be so severe that it could result in their personal liability, be it civil, criminal or both.

- Ahmed Kashwani, founder and CEO of Kashwani Law Firm in Dubai

Appeal Court finds manager liable

The shareholders did not give up, and they appealed the verdict. The Appeal Court delegated an expert who examined all the paperwork thoroughly and ended up pointing fingers at the severe liability of the manager, who was not happy with the result. He objected to it before the court, which responded by delegating a trilateral committee of experts to further examine the matter. The committee concluded the manager had committed serious breaches, whereby he violated the Commercial Companies Act (Federal Decree Law no. 32 of 2021), which nullified any resolution issued in violation of the law or the Company’s Articles of Association (AoA) or Memorandum of Association (MoA), or issued in favour of certain shareholders, or to bring private benefit to relevant parties or other parties, disregarding the company’s benefit. Thus, the court ruled the Board’s resolution was nullified, with all its consequences.

Criminal investigations initiated

Simultaneously, the SAC received a report from the Board of Directors, which was found to be suspicious. Hence, the SAC referred the matter to the Public Prosecutor to investigate the criminal aspect.

The crimes listed above entail penalties ranging from three months to three years in jail, and steep fines, which - in certain cases such as influencing the prices of securities - can be as high as Dh10 million.

This type of financial crime is also called ‘white-collar crime’, and the penalties stipulated in the abovementioned law do not affect other more severe penalties involving the same act, stipulated in a different law, such as the penal code, for example. The manager’s crime could also amount to money laundering.

A white-collar crime might sometimes overlap with other separate, yet related, financial crimes, such as:

a) Corporate crime: This refers to crimes committed either by a corporation (i.e. a business entity that has a legal personality separate from the people who carry out its activities) or by individuals acting on behalf of a corporation or other business entities.
b) Organised crime: Criminals may set up companies either for the very purposes of their crime or as a means of laundering the proceeds of crime.

False testimony

Providing false statements is one of the most common and serious crimes committed by a manager. The seriousness of this crime emanates not from the act of obscuring facts, immoral though that is, but from the fact that such an action is usually used to conceal deeper corruption and illegal operations in the company, which may carry elements of other, separate crimes punishable by law. These include theft, forgery and any other scenario that brings about an imbalance in the company’s financial statements, leading a manager to provide false statements to mask such illegal activities. Accomplices in such a crime are also punishable by law. For instance, financial controllers and auditors who knowingly audit and approve false statements.

Therefore, a manager’s liability can be dual - both civil and criminal. Moreover, a manager’s wrongdoing can have repercussions for the shareholders, even if the crime results in an increase in the company’s assets, as such crimes can overlap with corporate crime in many cases, paving the way for compensation lawsuits against the company.

- The writer is the founder and CEO of Kashwani Law Firm in Dubai