Business Ethics

Tareq AlTawil

Group Project: Discuss the directors’/managers’

potential civil liabilities and criminal liabilities for
acts of fraud and mismanagement

Student Names:

Safaa Laalaoui 201811597

Sara Thabet 201911135

Darin Abuaisha 201810488

This report will cover the topics that are related to veil of incorporation and what are the
exceptions in which in veil can uplifted, and how the judicial ruling takes places to deal
with presented circumstances and in this report, we will discuss two cases about identified
topics which is the frauds and mismanagements and deliberate the details of what
happened on real events that’s been dealt with by UAE law while mentioning and
clarifying how and why did the veil got lift by judge plus how significantly fine did they
have to pay and how long was the disqualification besides talking about fiduciary duties
associated with these two identified problems.

The veil of incorporation assures a business is a distinct legal entity from the corporation's
owners, managers, and stockholders, shielding their personal assets from claims. It
includes the idea of restricted responsibility, which typically follows from the corporation
personhood theory. In contrast to a partnership, the responsibility of a partnership firm is
constrained to the amount of money they have invested. As a result, the corporation's
shareholders can indeed be held accountable for any injustices that the firm does.
Though, the firm cannot perform any activity on its own because it is a juristic person and
cannot. Individuals have traditionally operated the organization. In these situations, the
authorities uncover the corporate veil of the corporation to expose the culpable parties.

What is lifting the veil?

Piercing the corporate veil entails ignoring the company appearance and seeking out the
actual individual in charge of the organization. In plenty of other terms, the court would
pierce over the corporate veil besides employ the rule of "lifting or piercing over the
corporate veil" in cases where the stockholders use the corporate behavior of the
corporation to conduct fraudulent practices.

For example, a judge possibly will empale the company’s veil by holding possessor liable
for business commitments or debts if its holders combine private and corporate assets.
There must be aware of the laws in individual state to remain certain that they are fully
compliant with them. There are additional circumstances in which the judge’s whitethorn
empale the corporate veil. In situations wherever there is a blurring of the lines among
the stockholders and the firm, judges can likewise withdraw liability coverage.

There is the following situation on which the veil can be uplifted:

• Officer in Defaulting (Unit 5 of the Performance), This Chapter discussed the

responsibility of an "agent in failure," meaning that those people who engage in
wrongdoing or prohibited activity are accountable for the offenses they conduct.
Therefore, the combined including numerous obligations of the associates is
addressed in this unit. Handling directors and full-time directors are both
considered to be "officers in failure."

• Associators Reduction (Unit 45 of the Performance) - A secluded business must

have as a minimum two associators, while a public corporation must have no less
than seven associates to remain incorporated. If a corporation is established
deprived of meeting this least criterion and lasts to operate, though, each affiliate
who is aware of this information is personally responsible for slightly obligations
incurred by the corporate throughout that period.

• Indecorous usage of Name (Unit 147 of the Performance): An official is liable if

they mark a promissory letter, exchange bill and hundi, or a check using the wrong
business name. Except it is properly waged by the firm, like officer intend to be to
the container of such hundi, exchange bill and promissory letter, or check, as the
situation could be.

• Fraudulent behavior (Unit 542 of the Performance)- If it is determined, at the period

of the company's dissolution, that the business's actions were supported out to
defraud its depositors, then those who had awareness of occupational might be
held individually liable for slightly damage instigated to those stockholders, as the
court might instruction.
 • Disaster to return request cash (Unit 69 of the Performance): The managements
of a business are together and individually responsible to reimburse the request
cash with attention if the firm flops to reimburse the candidates who remained not
assigned stocks in 130 days of the period the brochure was issued. This will not
have any impact on the corporation's ongoing operations or its distinct presence,
though.

On the other hand, there are some obligations that Directors need to follow which are
called Fiduciary Duties. These duties insist that the director must act in good faith,
confidence and trust for the company itself, and each Director must do everything for the
company and to benefit all stockholders and shareholders.

There are a lot of Fiduciary Duties, but here we will address 8 of them, and they are:

1- Duty to act bona fide in the interest of the company

Bona fide means acting in a good faith and manners, here the director must
act in the best interest of the company, and he shouldn’t act in any way that
is harmful to it.

2- Duty to exercise the powers of the company for their proper purpose

This means that a director must follow only the powers given and written in
the Memorandum of Association, an important example of this to make sure
that you issue stocks only for the purpose of making the company grow and
not for any other personal or private reasons.
3- Duty to avoid conflict of interest

This rules that any director must not make the company for example take
on a contract with another company that will help them benefit from, and
they must follow the corporate opportunity doctrine, which states that I
shouldn’t share confidential information with anyone that could benefit me
or them to make profit.
4- Disclosure of interest
 If a director finds himself involved directly or indirectly with any transaction
or contract, they must inform the rest of the Board of Directors of their
involvement and this needs to be done formally in a meeting.

5- Duty not to accept benefit from third parties

Having private or secret involvement with any person outside the company
that could potentially bribe the director or influence the director’s decision
and responsibilities is also forbidden.
6- Duty to promote the success of the company

This means that the director must take care of the stockholder’s long-term
success and benefit while still taking care of all shareholder’s interests in
mind. They must take care of the company’s success, environmental impact
of the company …etc.

7- Duty to exercise independent judgment

The director’s actions and exercises must come only from his own judgment
and decisions, he must not be influenced by anyone else’s. Every director
must not have any dependent judgments.

8- Duty of care and skill

The director must do all actions will care, skill, confidence, and due
diligence. He must care for the company in the right actions within his
experience and not act in any careless behavior towards the company and
the company needs.

Since directors usually have the full authority to do business decisions on their own, it is
very important to make sure you use this power in a good way and in a way that will no
harm not the company nor the stakeholders.

In UAE, Following are the penalties imposed on a manager in LLC:

1. Under Article 344 of the CCL, LLC managers or boards who do not convene or
invite the general assembly of the LLC to meet are fined AED 50,000 to AED 1,000,000
if the company suffers losses after reaching half its capital.

2. Under Article 347 of the CCL, When the manager fails to provide any
documentation or information that disables the auditors/inspectors of the authority with
the information or documents they need to perform their duties or if he conceals any
information or offers any false information, a fine of AED 10,000 to AED 100,000 can be
imposed on him.

3. Under Article 363 of the CCL, if a manager distributes any profits or interests to
shareholders or others in violation of the company's CCL or MOA/AOA, he or she is
subject to a penalty of up to AED 500,000.

4. Under Article 364 of the CCL, In the event a manager intentionally fabricates false
financial statements, profit and loss statements, or financial statements, and/or omits
material incidents in those documents to conceal the true financial status of the company,
he may be fined between AED 100,000 and AED 500,000 and/or imprisoned between six
months and three years.

5. Under Article 369 of the CCL, it is punishable by a fine of AED 50,000 to AED
500,000 and/or imprisonment of up to six months if the secrets of the company were
revealed or maliciously damaged by the perpetrator.

CASE#1

AL Suwaidi & Company succeeded in obtaining the final and executory judgment
rendered by the Dubai Court of Appeal in a ruling favorable to our client, which upheld
the shareholder's joint and several liabilities for the LLC's obligations.

Short facts:

After entering into a Sale and Purchase Agreement to acquire a yacht, the client
subsequently sought cancellation of the agreement through the Dubai Court of First
Instance (CFI). He sued the Dubai Multi Commodities Centre free zone company (the
"DMCC Company") and its shareholder for breach of contract over the sale and delivery
of the yacht. He asked the court to return the parties to the way things were before (the
status quo ante) and pay damages.

The shareholder of the DMCC company contended that his responsibility should be
limited to the value of his ownership stake in the business. Additionally, he claimed that
the DMCC Company is a distinct legal entity from itself and its shareholders, and so he
was not personally responsible for any debts or obligations incurred by the DMCC
Company.

After the Sale and Purchase Agreement was legally cancelled, the Dubai CFI made a
ruling that the DMCC Company and its shareholder were both responsible for paying back
all the money that had been paid for the yacht.

So, the shareholder of the DMCC Company took the decision of the Dubai CFI to the
Dubai Court of Appeals, saying that the Dubai CFI had interpreted the law wrongly.

Issue: When deciding whether the DMCC Company and its shareholder were jointly and
severally liable for the payment of all money paid for the yacht purchase after a valid
termination of the Sale and Purchase Agreement, the Dubai CFI looked at whether the
DMCC Company and its shareholder had committed any acts of fraud or broken any
contracts.

Decision:

The Dubai CA upheld the CFI's decision and dismissed the DMCC Company's appeal.
According to the Dubai Court of Appeal, the DMCC Business license proves that it is a
limited liability company formed by the laws of the Dubai Multi Commodities Centre
(DMCC). But Articles 10 and 12 of Regulation No. 4 of 2002 (the "DMCC Regulation") on
the Organization of Operations at the Dubai Commodities and Metals Centre say that
each limited liability company set up according to DMCC rules and regulations must say
the following in all of the DMCC Company's activities, contracts, ads, invoices, letters,
and publications:
 ➢ The company has been set up with limited liability and has also been set up
according to the standards of the DMCC.

If a DMCC firm fails to include the foregoing items nos. 1 and 2, the company's owners
will be individually responsible for the company's debts.

Article 13 of the DMCC Regulation says that any dispute that arises from a company's
activities in the DMCC must be ruled by the laws of the DMCC, with the law of the United
Arab Emirates as a supplement.

After reviewing the DMCC company's invoices and other correspondence, the Dubai CA
concluded that the company had failed to comply with nos. 1 and 2 of article 12 of the
DMCC Regulations. Accordingly, the aforementioned Court determined that the DMCC
Company and its shareholder are jointly and severally liable to our client for the restoration
of all money paid by the latter as a result of the lawful termination of the Sale and
Purchase Agreement for the yacht.

Notably, the liability of a shareholder in this circumstance does not cease with his share
of the capital of the company, which is the ordinary rule laid out by the law. This decision
shows that the Dubai Courts are committed to making sure that customers who have
been wronged are fully compensated. This is done by expanding corporate accountability
to include the shareholders of the company.

CASE#2

A manager who was also a shareholder in a limited liability business was held
accountable to the company's creditors in a recent ruling from the Dubai Court of First
Instance. The court ruled that the manager was personally responsible for the company's
purportedly incurred debts because of his dishonest and deceitful activities (as an
exception to the general theory of corporate personality).

The creditor was able to recover approximately AED 183 million (US$50 million) even
though it had been years since the company's ostensible liability began and the
company's assets had been dissipated, which had previously prevented the creditor's
attempts to collect on the debts.

The facts of the case

After winning two favorable arbitration verdicts against the defendant company, the
claimant (the creditor) filed an executive action to force the defendant company to pay
the sum owing to the claimant. However, the defendant company's managers/officers
wasted the company's resources such that the creditor couldn't collect on their judgments.

Lifting the Veil of Corporate Personality in the Case of Wrongdoing

The notion that an LLC can be considered an independent legal entity from its
shareholders, directors, and parent business is widely established (Article 21 of the UAE
Commercial Companies Law, Federal Law 2 of 2015). As a result, shareholders' financial
exposure is restricted in limited firms. Investors are responsible for paying for their shares
but have no personal liability for the obligations of the company. Similarly, a corporation's
management is immune from liability to the company's creditors even though they
represent the firm to the outside world and take actions on the company's behalf in the
ordinary course of business. However, there are exceptions to this rule.

Managers are required to "use the care of a responsible person" and "perform all acts in
keeping with the company's objectives and the powers assigned thereto according to an
authorization issued by the company." (The Commercial Companies Law, Article 22.)
Under the Commercial Firms Law of the United Arab Emirates (UAE), the managers of
limited liability companies may be held personally liable for the company's wrongdoings.
Article 84(1) of the UAE Commercial Companies Law states:
 1. Managers of limited liability companies are personally responsible for the
company, their partners, and any other parties harmed by their fraudulent conduct.
If the manager abuses his authority, breaks the law, breaches the terms of his
appointment, or makes a serious mistake in his duties, the firm is entitled to
compensation for the damage he has caused. The provisions of the memorandum
of association or the manager's contract of appointment that are in conflict with the
provisions of this clause shall be null and void.
2. The requirements of this Law relating to members of the Board of Directors of joint-
stock companies apply to managers of limited liability companies, subject to the
limitations imposed by this Law on limited liability companies.

The Dubai Courts’ Finding in Dubai Court of First Instance Judgment 207 of 2020

The court relied on Dubai Court of Cassation Judgment 156 of 2013 [Property] dated
24.11.2013 in reaching its conclusion that a limited liability company is a separate legal
entity with separate financial liability from its partners upon incorporation and registration
under the UAE Commercial Companies Law. The company takes on its own debt and is
responsible for its own responsibilities. A shareholder's liability for the company's debts
is limited to the amount of money the shareholder contributed to the company.

To the extent that a shareholder has used the principle of the independent liability of a
limited liability company as a means or front for engaging in activities and practices
contrary to the company's Memorandum of Association, to his partners' detriment, then
the general rule outlined in the Commercial Companies Law that a shareholder is liable
only to the extent of his/her share of the capital shall not apply. A shareholder in such a
situation is liable for the actions not only to the extent of his or her shareholding but also
of his or her own assets.
In addition, the court cited another ruling from the Dubai Court of Cassation (Dubai Court
of Cassation-Cassation No. 312, 331-2015 [Property]-30.12.15) in holding that it has been
settled by the Court of Cassation that a manager/shareholder in an LLC is not legally
responsible for the debts of the LLC unless the manager/shareholder has committed a
gross error. Also, it was decided that it is settled that a manager of a limited liability
company who breaks the law, the company's Memorandum or Articles of Association, or
his or her own duties as a manager is liable in tort for his or her own mistakes or any
actions that involve deception, fraud, or a big mistake.

The defendant company's assets were completely wasted due to the recklessness of the
company's management. Without taking into account the company's debts, they sold the
company's assets to unrelated parties and bought assets in the names of unrelated
parties (such as making a large payment to a company without receiving anything in
return; making large withdrawals from the company's bank accounts without explaining;
and buying land at a loss).

Considering the above, and the fact that these events occurred while the parties were still
at odds and during the execution phase of the arbitral awards, the claimant has good
reason to believe that the managers/shareholders engaged in deception and fraud to
divert the company's assets and prevent them from being used to enforce the awards.

The court also found that all members of the defendant's board of directors were also
shareholders in the company and that its directors had carried out the company's
business as per board resolutions. So, it was clear that the above steps had been taken
with all board members' full knowledge and for their own good.

Based on their actions, the court concluded that the managers' and shareholders'
constituted deception and fraud, thus meeting the elements of fault (according to Article
282 of the Civil Code). It was proven that the creditor suffered irreparable harm because
of the defendant company's negligence, which prevented the creditor from collecting on
the relevant awards against the defendant company's assets. Due to the amount of
money that was taken out of the company's accounts without permission, the court
decided that the managers and shareholders of the Defendant company had to pay the
Claimant back.

Conclusion of the case, this decision is significant because it makes it abundantly clear
that an award creditor may still recover a debt from the corporate debtor even after the
award creditor has failed to enforce the judgment or arbitral award against the debtor's
managers or shareholders. The dissipation of assets by shareholders or managers is not
all lost.

This report is longer than it should have been because we found so many articles and
information that we needed to include to make the report complete. The veil of
incorporation is very important since it protects the personal assets of shareholders and
directors by maintaining a legal separation between the company and its directors, and
this doesn’t stop directors to act fraudulent and wrong, and when the judge decides to lift
the veil is when the director doesn’t have that separate liability and is held accountable
for wrongful doings for the company. UAE and many other countries have specific rules
and fines for these directors like the cases mentioned above.

References:

Fotis. (n.d.). Liability on Manager in case of Corporate Mismanagement. [online] Available

at: https://fotislaw.com/lawtify/liability-on-manager-in-case-of-mismanagement-of-
company/ [Accessed 15 Oct. 2022].

UpCounsel. (n.d.). Lifting The Veil Meaning: Everything You Need to Know. [online]
Available at: https://www.upcounsel.com/lifting-the-veil-meaning.

Cornell Law School (2019). Piercing the Corporate Veil. [online] LII / Legal Information
Institute. Available at: https://www.law.cornell.edu/wex/piercing_the_corporate_veil.

Suwaidi, A. (2019). Dubai Court’s Leading Judgement on Piercing the Corporate Veil.
[online] Alsuwaidi & Company. Available at: https://alsuwaidi.ae/commercial-judgment/
[Accessed 15 Oct. 2022].

Al Tamimi & Company. (2017). Manager and Shareholder’s Liability for Fraudulent Acts
under Dubai Court of First Instance | Al Tamimi & Company. [online] Available at:
https://www.tamimi.com/law-update-articles/dubai-court-of-first-instance-judgment-207-
of-2020-manager-and-shareholders-liability-for-fraudulent-acts/.