UAE Federal Supreme Court rules on shareholder liability in bankruptcy proceedings

Facts and lawsuits

A company in operation from 2001 to 2012 was in good financial health. After 2012, the company faced financial difficulties and lawsuits, and by 2020 it had incurred debts amounting to almost AED 20 million.

Federal trial courts (primary and appellate) found the company to be commercial in nature, and it was declared bankrupt due to its non-payment of commercial debts and disruption of its business and lack of self-confidence in the business market, which indicates her troubled financial situation, with which her credit position is shaken.

The creditors also requested the bankruptcy of the two shareholders.

The Federal Courts of First Instance dismissed the bankruptcy of the two shareholders on the grounds that the bankruptcy conditions did not apply to them in accordance with the text of Article 142 of Federal Decree-Law No. 9/2016 on Bankruptcy.

Creditors challenged the position of the federal trial courts in Federal Court on the grounds that Section 142 provides that if there is an order for the bankruptcy of a corporation and the liquidation of its assets, all partners spouses of the company must be declared bankrupt.

Supreme Court assessment

The Supreme Court dismissed the petition on the grounds that the company declared bankrupt is a free zone company with separate legal personality, that its financial responsibility is independent of that of its shareholders, and that the liability of each of the shareholders is determined with its share in the company both vis-à-vis each other and vis-à-vis third parties.

The Supreme Court clarified that shareholders could be held personally liable for debts within the limits of the personal guarantees issued.

If the partners are not associated or do not answer for the debts of the company with their personal property, they are not considered as traders, as well as their participation in the constitution of the company and their rights to share in the profits of company are not considered a commercial act. .

The Supreme Court has confirmed that Section 142 applies to “traders” and/or partners in unlimited liability companies (or civil companies) but does not extend to shareholders of a limited liability company.

The Court clarified that Article 142 should be read in accordance with Article 2, paragraph 4, which stipulates that the provisions of the bankruptcy law apply to authorized civil companies of a professional nature.

Although not referenced by the Court, a “merchant” is defined in article 11 of the law on commercial transactions as any person carrying out, in his own name and on his own account, acts of commerce, and any company exercising a commercial activity or by adopting one of the forms prescribed by the law on commercial companies, even if this activity is a civil activity.

Supreme Court outfit

Whereas the text of Articles 2(4) and 142 of Federal Decree-Law No. 9 of 2016 relating to Bankruptcy stipulates that its provisions apply only to the person who is authorized by the description of the trader in the legal sense , that he was carrying on business in his own name and in a professional and exploitative manner, and that the description of the trader applies to a general partner of the company who carries on business in a professional capacity, and it has been decided and on the basis of what has been done by the judiciary of this court that filing for bankruptcy is a sanction reserved for traders who cease to pay their commercial debts due to the insolvency of their financial situation, and that the designation of the trader n is valid only for those who exercise the trade in a professional capacity, and the quality of a trader in commercial activity cannot be a presumption, and the burden of proof rests with the person who claims it, and that the bankruptcy of the company ity results in the bankruptcy of each of the co-partners. t, with the effect that the co-partner of a commercial company is considered as a merchant who permits its bankruptcy.

Importance

The Supreme Court’s clarification on the reading of Section 142 of the Bankruptcy Act comes at a significant time in the wake of the recent Marka decision by the Dubai Courts ruling on the bankruptcy of Marka Holdings PJSC.

The Dubai Magistrate’s Court had ordered Marka’s officers and directors to be held personally liable for Marka’s debts amounting to approximately AED 450 million.

The trial court in the Marka case based its conclusion on Section 144 of the Bankruptcy Act which allows the court to compel any or all of the board members or officers to pay any or part of the debts of the company if the assets of the company are not sufficient to cover at least twenty percent of its debts.

Section 144 reads sequentially to Section 142 – Section 142 dealing with the liability of partners.

It should be noted now that the Supreme Court points out that the reading of Article 142 must be in conjecture with Article 2, paragraph 4, which applies the bankruptcy law to registered civil companies and does not extend to shareholders companies protected by limited liability provisions.