Key Developments in UAE Bankruptcy Law: Insights from the Marka Case
In the landmark Marka case adjudicated by the Dubai Court of First Instance, it was ruled that both former and current managers and directors of a company could be held personally liable for the company’s debts if its assets were insufficient to cover 20% of its obligations. This decision marked a significant precedent for two key reasons:
- It introduced an unprecedented approach to personal accountability by UAE courts.
- It expanded the scope of personal liability for directors and managers.
Amendments to the UAE Bankruptcy Law
Following the Marka case, Federal Decree Law No. 9 of 2016 (the UAE Bankruptcy Law) was amended through Federal Decree-Law No. 35 of 2021. These amendments limit directors’ and managers’ liability to debts they directly contributed to, provided their actions fall under the provisions of Article 147(a), (b), or (c), and these actions are determined to have caused the company’s insolvency.
Article 147: Basis for Personal Liability
Under Article 147, courts may order directors, managers, or liquidators to repay company debts if their actions meet certain criteria within two years of initiating bankruptcy proceedings:
- Risky Commercial Practices: Engaging in transactions like selling assets below market value to secure funds and delay bankruptcy filings.
- Unjustified Transfers: Conducting property transfers without fair consideration or clear benefit, disproportionate to the company’s assets.
- Preferential Payments: Favoring certain creditors at the expense of others during financial distress.
Appeal Provisions and Liability Limits
The recent amendments allow for decisions imposing personal liability to be appealed without disrupting ongoing bankruptcy proceedings. However, Article 147 maintains specific time constraints for pursuing such liability.
Implications for Managers and Directors
The Marka judgment also clarified the distinction between decision-makers who directly contributed to insolvency and those who attempted in good faith to stabilize the company before bankruptcy. Managers who acted responsibly to improve the financial situation are less likely to face personal liability.
To mitigate risks:
- Managers and directors should seek legal advice on permissible actions during financial distress.
- Maintaining accurate records and adhering to sound corporate governance practices is essential.
- Debtors should ensure proper documentation of the company’s financial position, as required under the Bankruptcy Law, to strengthen their case in court.
These measures help safeguard decision-makers while ensuring compliance with the evolving bankruptcy framework.
