Bank files lawsuit against loss-making company, partner - is this legal in UAE?
Conditions under which it can and cannot be done explained
Question 1: I am a partner in a limited liability company. The company is currently going through a financial problem and many creditors have filed lawsuits against the company. One bank has also filed a lawsuit against the company and all the partners.
Is the bank legally entitled to do this? Is it possible for a ruling to be issued against the partners? If a ruling is issued, will the execution be carried out against the partners with their own money? And if I currently leave the company, will this spare me these lawsuits?
Answer 1: As a general rule, it is decided by the court that every limited liability company has its own entity which is independent of its partners. A partner in the such a company is not responsible for its debts and obligations, except to the extent of his share in the capital, and the creditors have no security other than the assets and liabilities of the company itself, without the personal funds of the partners.
The company has the standing to sue as a plaintiff or defendant independently from its partners. As an exception to this principle, a partner in a limited liability company will be responsible for its obligations and debts from his own funds if he exploits the principle of the independence of the company’s liability as a means or a cover for his actions that involve fraud, clearly apparent deception or serious error.
This is what the person claiming this fraud or deception must prove and the court must decide according to the documents presented.
The bank is not entitled to file a case against the partners and there is no standing to file a lawsuit against the partners alone or with the company regarding its debts and obligations. The ruling will be issued against the company itself, not the partners.
But in case the partner commits any fraud or serious error which is proved by the bank in front of the court, a ruling will be issued against that partner and he will be responsible (in the execution) for the company’s debts from his own funds.
Leaving the company by selling your share or pledging it will make you irresponsible for its liabilities from the date of this sale only, not for the period before according to Article 79 of the UAE Companies Law. Such assignment or pledge shall be valid vis-à-vis the company or third parties only as of the date of being recorded in the commercial register with the competent authority.