In prosperous times, company directors are trusted to drive growth, manage risk, and act in the best interest of shareholders. But when a business starts heading toward insolvency, that responsibility takes on a whole new level of seriousness—and legal liability.
Under UAE law, directors and senior managers can face civil and criminal liability for their actions (or inaction) during insolvency. Missteps can result in fines, lawsuits, disqualification from future directorships, and even prison in some cases.
Understanding the scope of these liabilities—and how to mitigate them—is essential for anyone in a position of authority within a company operating in the UAE. This guide offers a comprehensive overview of directors’ duties during financial distress and the potential consequences of getting it wrong.
Key Legal Frameworks Governing Director Liability
Director liabilities during insolvency are primarily governed by:
- UAE Federal Decree Law No. 32 of 2021 (Commercial Companies Law)
- UAE Federal Decree Law No. 9 of 2016 (Bankruptcy Law)
- UAE Penal Code, in cases involving fraud, mismanagement, or breach of fiduciary duty
These laws outline both proactive duties and prohibited conduct, with a focus on protecting creditors and the overall financial system.
Duties of Directors in Normal Operations vs. Insolvency
Normal Operations:
- Act in the best interests of shareholders
- Maintain accurate financial records
- Avoid conflicts of interest
- Comply with statutory duties
During Insolvency or Financial Distress:
- The duty shifts to protecting the interests of creditors
- Directors must prioritize debt repayment and asset preservation
- Continued trading while knowingly insolvent can lead to personal liability
Warning Signs of Insolvency
Directors should remain alert to common red flags, including:
- Cash flow problems or inability to meet payroll
- Breach of loan covenants
- Unpaid taxes or regulatory fines
- Repeated bounced cheques
- Excess liabilities over assets on the balance sheet
Once insolvency appears imminent, directors must act immediately to evaluate options—restructuring, preventive composition, or bankruptcy filing.
Personal Liability: What Directors Can Be Held Responsible For
UAE law holds directors personally liable for several actions during insolvency:
1. Fraudulent Trading
Knowingly continuing business operations to defraud creditors is a criminal offense. This includes taking on debt with no reasonable ability to repay.
2. Misuse of Company Funds
Using company money for personal gain or transferring assets below market value to related parties can trigger criminal charges.
3. Failure to Keep Proper Records
Directors must maintain accurate financial accounts. Lack of documentation may be viewed as negligence or intent to mislead.
4. Delayed Filing for Bankruptcy
Once a company becomes insolvent, the director is obligated to initiate appropriate legal procedures. Delay may worsen creditor losses and lead to legal exposure.
5. Preferential Payments
Making payments to certain creditors (especially insiders) over others just before insolvency may be deemed illegal favoritism.
Criminal vs. Civil Liability
- Civil liability typically involves financial penalties or compensation claims brought by creditors or shareholders.
- Criminal liability may result in fines, imprisonment, or disqualification from acting as a company officer.
In serious cases, directors may face both.
Role of the Courts and Trustees
When a company enters insolvency proceedings under UAE law, the court may appoint a trustee to oversee the process. The trustee can investigate the conduct of directors, review financial transactions, and recommend legal action if misconduct is discovered.
If wrongdoing is found, directors can be barred from managing other companies and ordered to compensate creditors.
Protection Strategies for Directors
1. Seek Early Legal Advice
If signs of financial trouble appear, directors should immediately consult legal counsel and financial advisors.
2. Maintain Accurate Records
Keep detailed financial documents, board meeting minutes, and communications with creditors and regulators.
3. Avoid Preferential Treatment
Ensure all creditors are treated fairly and transparently during financial distress.
4. Act Promptly
Do not delay filing for bankruptcy or initiating a preventive composition procedure if insolvency is clear.
5. Implement Good Governance
Adopt risk management practices, internal controls, and conduct regular audits to ensure transparency.
6. Directors’ & Officers’ (D&O) Insurance
Consider securing insurance that covers legal costs and liabilities arising from director decisions.
DIFC and ADGM Considerations
If the company is incorporated in DIFC or ADGM, directors will be subject to common-law frameworks modeled after UK corporate laws. These offer additional clarity on director duties but still impose strict fiduciary obligations during insolvency.
Real-World Examples
- Retail Chain Mismanagement: A UAE-based retailer delayed filing for bankruptcy while continuing to take orders and incur debt. The court found the directors liable for fraudulent trading and imposed fines.
- Start-up Liquidation: A tech start-up in Abu Dhabi entered preventive composition. Its CEO avoided liability by cooperating fully with the court and trustees, maintaining proper records, and acting in good faith.
Conclusion: Act with Diligence, Especially in Crisis
Insolvency is a legal and operational crossroads that demands a heightened level of responsibility from directors. What you do—or fail to do—can have lasting personal and professional consequences.
The good news is that UAE law recognizes honest, proactive efforts to address financial challenges. Directors who stay informed, act promptly, and prioritize transparency can navigate insolvency without fear of undue liability.
