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Misconduct by a Director in UAE LLC Entities

Published on : 05 Oct 2020

Negligence and Mismanagement by a Manager in a Limited Liability Company: UAE Companies Law

A limited liability company (LLC) is a form of a company that is subject to the regulations of laws and the governing law for the management of a company in the United Arab Emirates (UAE) is Federal Law Number 2/2015 on Commercial Companies Law (CCL). The UAE CCL is the foremost legislation that regulates the liabilities of a manager. A Limited Liability Company (LLC) is formed with a minimum number of two people and a maximum number of 50 people with any partner liable to the extent of his share in the capital. Any single natural or corporate person may incorporate and hold an LLC. All holders shall be liable to the extent of their share capital in the company as set out by the Memorandum of Association (MOA) of the company. Having said that, it is imperative to note that on account of a gross error, mischief, misconduct or any deceitful act conducted by the manager, the manager shall be held personally liable to the company/shareholders/third parties. The provisions of the LLC laid out in the CCL are bound to be applied to the manager to the extent that it is not in conflict with the nature of the company. A person authorized to manage the company shall practice due diligence and preserve its rights to act with prudence (Article 22 of CCL). The manager is to at all times perform acts consistent with the objectives of the company and the powers granted by virtue of such authorization are to be exercised in the same respect.

There are certain general and specific duties of the manager which he has to abide by in order to avoid implications of mismanagement in a company. These general duties include adhering to the terms laid out in the constitutional documents of the company. Article 83 of the CCL lays down that the management of a limited liability company shall be assumed by one or more managers as laid out by the partners of the company in the Memorandum of Association (MOA). The MOA or the Articles of Association (AOA) are the constitutional documents of a company laying out the corporate governance of the company alongside the administrative structure and management of the corporation. The managers are to be appointed via partners or third parties, and in case the MOA of the company does not prescribe for the election of the managers, then the same shall be carried out by a general assembly meeting of the partners where such managers would be selected. The MOA or AOA shall be responsible for not only the appointment of the manager but also for prescribing the powers to such managers. In case the MOA or AOA does not prescribe such powers of managers, then the managers shall be fully entitled and authorized to exercise full powers to manage the company as he deems fit and such acts shall be binding to the company provided that the capacity of the manager has been clarified upon the commencement of such acts.

Personal Liability of the Manager

Consistent with the provisions of Article 84, the CCL lays down the liability of the managers of the company which holds the manager accountable for his actions taken in the course of the company’s activities. A manager in an LLC shall be personally liable against the company, the partners and the third parties for all such fraudulent or deceitful acts committed by the manager. Any losses or expenses that are incurred due to the inadequate use of the power or any contravention of provisions of the said Law by the manager shall be borne by the manager. Absolutely no provision in the MOA can exempt any manager of his personal liability towards the company in the event of a breach or any fraudulent act committed by him in the course of the company’s activities. The manager has to also fill in the role of abiding by the MOA or AOA of the company and any failure on his part to do so shall result in liability on account of the manager. Any gross error resulting in losses or expenses shall also be borne by the manager. The provisions set out for the manager in the MOA have to be followed through, and any dishonesty arising in fulfilling such obligations shall be seen as a liability of the manager. Article 84 continues to state explicitly that the provisions in application to the directors in a joint-stock company (JSC) shall apply to the managers in a limited liability company. Hence, any liability of a director in a JSC shall be equally applicable to a manager in an LLC.

The manager shall not without the proper consent of the company's general assembly undertake the management of a competing company or a company with similar objectives to own company on his own account or on account of third parties. The manager shall not be authorized to operate in any deals of trade in competition or trade of similar activity being carried out as that of the company whereupon such actions shall result in the manager being dismissed and shall require the manager to compensate for the same (Article 86 of the CCL).

Subject to Penalties

The manager/managers shall be solely responsible for committing any acts in contravention of the provisions of the CCL and on account of committing any unfavorable acts that lead to fraud, deceit or fraudulence. Such a manger shall be subject to penalties on account of committing acts against the company and any other liabilities that arise against the objectives of the company. Since the provisions that apply to the directors in a joint-stock company shall apply to the managers in a limited liability company (Article 84 of CCL), therefore, the liability of a director in a JSC is equally applicable to a manager in an LLC. Having said that, the following penalties can be imposed on a manager in an LLC:

  1. A fine of AED 10,000 to AED 100,000 may be imposed on the manager if he fails to provide any documents or information to the auditors of the company/inspectors of the authority which disables them to perform their duties or if he provides any misleading information and conceals any information in the same regard (Article 347 of CCL).
  2. A penalty of AED 50,000 to AED 500,000 shall be imposed on any manager who distributes to the shareholders or others any profits or interests in contravention of the provisions in CCL or the MOA/AOA of the company (Article 363 of CCL).
  3. A manager shall be subject to a penalty of fine amounting to AED 100,000 to AED 500,000 and/or imprisonment from 6 months up to 3 years if he deliberately renders false documents in the balance sheet, the profits and losses account, in a financial report or omits material incidents in such documents with the intention of concealing the true financial position of the company (Article 364 of CCL).
  4. A fine of AED 50,000 to AED 500,000 and/or imprisonment of up to six months shall be imposed on the manager of the company if he utilizes or discloses a secret of the company or purposefully causes or attempts to cause damage to the activity of the company (Article 369 of the CCL).
  5. A penalty of minimum AED 1,000,000 (one million) to a maximum of AED 10,000,000 (ten million) and/or imprisonment of up to six months will be imposed on a manager in an LLC if he directly/indirectly participates with any entity that indulges in transactions for the purpose of influencing the prices of securities issued by the company (Article 370 of CCL).
  6. A fine of AED 50,000 to AED 1,000,000 shall be imposed in the manager of an LLC if the losses if the company reach half of its capital and the manager or board fails to invite the general assembly of the company to convene (Article 344 of the CCL).

A penalty of a minimum amount of AED 10,000 to a maximum of AED 100,000 is imposed on any person who violates the provisions of the UAE Commercial Companies' Law for which a penalty has not been specifically stated or whoever violates the regulations, rules or decision that are issued in the execution thereof (Article 360 of the CCL). Therefore, for any act committed by the manager for which a penalty has not been prescribed, then a penalty can be imposed for such fraudulent act under this provision.


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