Comparison of the position under the UAE Commercial Companies Law and the DIFC regime

News / / Dubai

This article compares the general principles that apply to directors’ duties and liabilities in the UAE – onshore with those applying in the Dubai International Financial Centre (DIFC). The comparison will be of interest to businesses that have both DIFC and onshore companies in their group structure as it gives an insight into the differences and the similarities between the two regimes.

The duties and liabilities of the directors and managers of onshore UAE companies are governed principally by the Commercial Companies Law (Law No. 5 of 2015) (“UAE CCL”) and the Civil Code (Law No. 5 of 1985). In addition, the UAE Penal Code (Law No. 3 of 1987) sets out criminal liability that may apply to the actions of directors and managers. There is other legislation that addresses the duties and liabilities of directors and managers in specific areas such as the environment, health and safety, financial markets, insolvency etc. The statutory provisions establishing liability of directors for specific offences can also be found in less obvious places. For example, the Law on Mortgage of Movable Property (Law No.20 of 2016) contains punitive measures in the form of imprisonment and fines for the members of the board of directors for, amongst others, intentional damage or disposal of a pledged object, unless the director proves that he/she was unaware or did not contribute to the decision-making process.

In the DIFC, the principal legislation governing the duties of directors and officers includes the Companies Law (DIFC Law No. 9 of 2009) (“DIFC CL”) and the Law of Obligations (DIFC Law No. 5 of 2005). The regulations issued by the Dubai Financial Services Authority will also apply to companies supervised by it. The onshore UAE commercial laws do not apply in the DIFC, but the UAE Penal Code does apply.

The definition of directors under each regime is a good place to start with the comparison. Under the onshore regime, provisions setting out directors’ duties apply to “any person authorised to manage a Company” (UAE CCL, Article 22). In addition, there are specific provisions regarding duties and liabilities of the members of the board of directors of joint stock companies, which also apply to managers of limited liability companies.

The duties under DIFC CL apply to company directors regardless of the individual’s ‘label’. The all-embracing definition of “officers” includes “director, member of a committee of management, chief executive, manager, secretary or other similar officer of the body corporate or association, or a person purporting to act in such capacity, and an individual who is a controller of the body” (DIFC CL, Article 131). The provisions setting out the general duties owed to the company apply equally to directors and officers. Therefore, the scope of duties under the DIFC regime is potentially applicable to a wider category of persons than the UAE CCL.

Despite the fundamental difference between the two regimes – one being common law based and the other civil law based – the general scope of the directors’ and officers’ duties in the onshore and the DIFC regimes is similar. The onshore regime requires the directors to act in line with the company’s objectives and the DIFC legislation contains a duty to act in the best interests of the company. Both regimes require the directors to exercise their duties in accordance with the standard of care and skill expected of a prudent person. The DIFC Law of Obligations also imposes the fiduciary duty of loyalty on the directors comprising duties to the company of loyalty, confidentiality, care, skill and diligence, and duties to avoid a conflict of interest and to avoid secret profits (Schedule 3 to the Law of Obligations).

Due to the fact that the legal system in the DIFC is a common law legal system, some of the concepts, for example the concept of a fiduciary duty, do not exist under the UAE onshore civil law system and so do not form part of the UAE onshore directors’ duty liability regime. However, the positive duty to act in the best interests of the company introduced by the UAE CCL in 2016 encompasses similar duties (for example, a duty to disclose conflict of interest and a duty not to misuse confidential information). From the legislative perspective, there are more similarities in the two systems than one might expect, but there is scope for differences in the regulatory and judicial interpretation that may affect the position. Thus, in the DIFC, English case law assists in defining the scope of the directors’ duties.

Some of the requirements imposed on directors are similar in nature under both regimes, but differ in their detail. For example, both regimes contain restrictions on financial assistance to directors. Whilst, under the DIFC regime, it is possible for the company to provide financial assistance to directors provided that it is approved by 90% of shareholders and all of the directors, under the UAE onshore regime, a company is prohibited from providing any loan, guarantee or security to directors. Directors who obtain such forms of financial assistance can be subject to imprisonment and fines, as can other directors who have approved such assistance.

Generally speaking, any violations of directors’ duties under the UAE onshore regime are typically accompanied by a criminal liability regime consisting of a combination of imprisonment and fines under the UAE CCL. The DIFC liability regime for contraventions of the DIFC CL is set out in Part 13 of the law and it entitles the Registrar appointed by the Board of Directors of the DIFC Authority to impose fines for certain breaches of the law as set out in Schedule 2 to the DIFC CL.

The rules regarding civil liability of directors also have some similarities under the two regimes, although the civil liability of directors and officers under the DIFC regime is potentially wider in that directors and officers can be liable to anyone who has suffered loss or damage as a result of any breach they have committed intentionally, recklessly or negligently. Directors and managers under the UAE CCL regime will be liable to the company for such actions as fraud, abuse of power, breach of any law, memorandum of association or contract of appointment or gross error as well as to shareholders and any third parties for fraudulent actions. However, the wide liability regime in the DIFC is counterbalanced by the fact that the DIFC Court has discretion to relieve a director or officer from liability, wholly or partially, if it appears that he/she has acted honestly and having regard to all circumstances of the case.

An important distinction between the two regimes is that the UAE CCL provides that any exemption from liability is void. This provision can hinder the ability of an onshore-based company to provide an indemnity to directors and officers. It does not, however, stop the directors and officers of such a company from obtaining insurance cover for management liability. The DIFC legislation does not contain restrictions on indemnities that can be offered by the company to directors and officers.

The two major regimes for directors’ and officer’s liability that exist in the UAE (in addition to the Abu Dhabi Global Market regime) are, therefore, built on similar principles but have different solutions to common risk areas. It is important to understand those differences to avoid falling foul of the respective regimes and to know how to manage the risks in both cases. It should also be noted that the DIFC Authority has recently announced a public consultation in relation to the proposed amendments to the DIFC CL, which include enhanced directors’ duties.We will report further on this in due course.