Background
On November 1, 2021, the Federal Decree-Law No. 35 of 2021 (the “Decree”) took effect, modifying some provisions of the Federal Decree Law of 2016 regulating bankruptcy i.e., the UAE Bankruptcy Law. The Decree comes after the Dubai Court of First Instance handed down a landmark decision on directors’ duties in the insolvency case of Marka Holdings PJSC (“Marka”) (the “Marka Case”).
The circumstances of the case
- A corporation that existed from 2001 to 2012 had outstanding financial standing.
- After 2012, the company plunged into financial difficulties and lawsuits, and by 2020, it had accrued debts of almost AED 20 million.
- The company was declared bankrupt due to nonpayment of commercial commitments, disruption of activities, and a loss of confidence in the business market, all of which indicate a terrible financial situation. Federal trial courts have questioned its creditworthiness (primary and appellate).
- The Federal trial courts rejected the two shareholders’ bankruptcy on the grounds that the bankruptcy requirements did not apply to them, based on the language of Article 142 of Federal Decree-Law No. 9/2016 on Bankruptcy.
- The creditors took their case to the Federal Supreme Court, alleging that Article 142 states that if a corporation is declared bankrupt and its assets are liquidated, the creditors are entitled to compensation. The joint partners of the firm are then declared bankrupt.
The decision of the Supreme Court
Because the declared bankrupt corporation is a free zone company with its own legal personality, the Supreme Court dismissed the petition. Its financial duty is separate from that of the shareholders, and each shareholder’s liability, both to the other and to third parties, is determined by its stake in the firm.
Stockholders may be held personally liable for debts up to the number of personal guarantees granted, according to the Supreme Court. If the partners are not related or do not answer for the company’s commitments with their personal property, they are not considered traders. Commercial acts do not include their participation in the company’s founding or rights to a share of its profits.
Section 142 applies to traders and partners in unlimited liability corporations (or civil firms), but not to limited liability company shareholders, according to the Supreme Court.
Article 142 should be interpreted in light of Article 2, paragraph 4, which says that bankruptcy law requirements apply to recognized civil corporations of a professional nature, through the lawyers in Dubai, according to the Court.
- Any person carrying on acts of commerce in his or her name and on his or her account.
- Any company exercising a commercial activity or adopting one of the forms by the law on commercial companies.
- Even if the activity is civil according to Article 11 of the law on commercial transactions.
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Verdict of the Court of Cassation
Whereas, the texts relating to Articles 2(4) and 142 of Federal Decree-Law No. 9 of 2016 on bankruptcy state that its provisions apply only to those:
- Who, in the legal sense, is approved by the merchant’s description?
- Who is doing business in his name in a professional and exploitative manner?
A general partner in a business that does trading as a profession fits the merchant’s description. Declaring bankruptcy, it was ruled and based on what this Court’s judiciary performed, is a punishment reserved for merchants who fail to meet their commercial commitments due to financial insolvency.
The Court went on to say that the term “merchant” solely refers to:
- Who engages in professional trade?
- That the burden of proof is on the person claiming it, and
iii. That the company’s bankruptcy includes the bankruptcy of each joint partner in it, with the result that a collaborative partner in a commercial company is considered a trader, allowing him to file with the lawyers in Dubai for bankruptcy.
Final observations
After the Dubai Courts’ recent Marka case on the bankruptcy of Marka Holdings Public Joint Stock Company, the Supreme Court’s clarification on the interpretation of Article 142 of the Bankruptcy Law came at a vital time. The Dubai Primary Court decided that Marka’s management and directors were personally liable for the company’s debts, which amounted to 450 million dollars.
The Primary Court made its judgment in the Marka case based on Article 144 of the Bankruptcy Law, which permits the Court to compel any or all board members or management to pay all or part of the company’s debts if the company’s assets are insufficient to repay at least 20% of its debts. Article 144 comes after Article 142, which deals with the obligations of partners.
It’s worth noting that the Supreme Court is currently emphasizing that the interpretation of Article 142 must be read in conjunction with Article 2(4), which limits the application of the Bankruptcy Law to licensed civil enterprises and excludes shareholders in corporations with limited liability restrictions.
This text is provided for educational purposes only and should not be considered legal advice. You should seek competent legal advice before taking or refraining from any action based on the contents of this publication. For additional information about bankruptcy law and relevant revisions, please contact our top bankruptcy lawyers in Dubai.
