Recent developments in directors’ liability in the UAE and England & Wales
In this article, James Hyne and Nicola Jackson, Partners in Charles Russell Speechlys’ Corporate Restructuring and Insolvency team, based in the UK and the UAE respectively, provide a short comparative analysis of recent developments in directors’ liability in the UAE and in England & Wales.
On 1 May 2024, the UAE Federal Decree Law No. 51/2023 on Financial Reorganisation and Bankruptcy (‘the New Law’)1 came into force. The New Law repealed Federal Decree-Law No. 9/2016 on Bankruptcy (‘the Old Law’). The New Law operates in the ‘onshore’ UAE (not in the two financial free zones (the Dubai International Financial Centre and the Abu Dhabi Global Market)).
There are various provisions of the New Law which impose personal liability on directors, board members and managers including, potentially, shadow and de facto directors and managers. Liability is personal and it can be civil, or criminal, or both. Here, we set out some high level comparisons between the New Law and the current equivalent law in England and Wales.
Persons liable
Article 246 of the New Law prescribes that if the company is adjudicated bankrupt, the Court may find, in certain circumstances, “the members of the Board of Directors, Managers, or any person responsible for the actual management of the company, or those in charge of the liquidation [presumably, the liquidators(s) / trustee(s)]2, in the liquidation procedures carried out outside the framework of this Law, to pay an amount proportionate to the error attributed to the person concerned.” The circumstances in which such finding can be made are summarised as follows:3 (i) using ill-considered commercial methods, such as disposing of assets at an undervalue, with the intention of avoiding or delaying bankruptcy proceedings; (ii) disposing of assets without or without adequate consideration; (iii) making preference payments with the intention to cause harm to other creditors; or (iv) management failure which led to the deterioration of the company’s financial position in circumstances where the company’s assets are not sufficient to pay at least 20% of its debts. The New Law expands the scope of the Old Law as regards persons liable to potentially include de facto and shadow directors and managers, ie “any person responsible for the actual management of the company”.
In England & Wales, s.212 Insolvency Act 1986 (‘IA 1986’), often shortened to the label of ‘misfeasance’, relates to the misapplication, retention or becoming accountable for money or property of the company, negligence, or being guilty of a breach of any fiduciary or other duty owed to the company. If there is a finding under s.212, personal liability may be imposed upon any current or past officer of the company (including shadow and de facto directors), insolvency office holders and anyone who has been concerned, or has taken part, in the promotion, formation or management of the company. Under s.214 IA 1986 (personal liability for wrongful trading), liability can be imposed upon any past or present officer of the company, including shadow and de facto directors.
Offences
There was a well-publicised case in 2021 in the onshore Dubai Courts, called the ‘Marka Case’, in which the current and former directors and managers of the bankrupt entity were held personally liable for the company’s debts to the tune of USD120m on the basis that the assets of the company were not sufficient to pay at least 20% of its debts, without a finding of mismanagement (and in a case that the managers/directors were not party to). The Old Law was amended as a result of the decision in Marka, and the Court clarified in a further judgment in 2022 that to engage liability, the decision-makers must have contributed to the losses that rendered the company insolvent.
Similarly, In England & Wales, practitioners are still considering the advisory impact of the recent case of Wright & Ors v. Chappell & Ors (Re BHS Group Ltd in Liquidation), 4 and specifically the element of the judgment relating to misfeasant trading, where the directors were found personally liable or continuing to trade even though, at the relevant time, there was a reasonable prospect of avoiding insolvency. Interestingly, the Court also found the directors liable for a shorter period of wrongful trading later, pursuant to the higher threshold test to be found in s.214 IA 1986 whereby personal liability may be incurred by a director where they knew or ought to have reasonably concluded that there was no prospect of avoiding liquidation but continued to trade. This new and distinct legal concept of ‘misfeasant trading’ as set out in BHS is of acute relevance to directors, office holders, professional advisers and D&O insurers.
Back in the UAE, the New Law has now codified the position laid down in Marka, largely in Article 246, in that the person(s) held liable may be ordered: “to pay an amount proportionate to the error attributed to the person concerned. The amount shall be used to cover the company’s debts if it is proven that any of them committed any of the… acts [paraphrased at (i)-(iv) above], during the two years preceding the company’s cessation of payment”. The assessment of quantum is likely to be restorative, and how quantum is to be apportioned amongst those held liable will likely be developed in case law (although noting that there is technically no binding precedent in the onshore UAE Courts). It is also worth noting (albeit beyond the scope of this short article) Title 7 of the New Law: “Crimes, Penalties and Rehabilitation”, which includes penal sanction (financially punitive and/or custodial) for “Bankruptcy by Negligence” and sets out offences that can be committed by those other than directors / managers, including creditors, trustees, liquidators / trustees, auditors and employees, and Article 162 of the UAE Commercial Companies Law5 (liability of the board of directors and the executive management).
Comparatively, England & Wales has similar ‘offences’ and look-back periods, largely contained within the IA 1986 and its provisions as set out at s.212 (misfeasance), s.214 (wrongful trading), s.238/239 (transactions at an undervalue/preferences). Sections 238/239 do not prima facie seek to impose liability on directors, rather the Court will seek to restore the position to what it would have been if the voidable preference or transaction had not taken place, which is often a payment from the recipient of the benefit. However, the court has a wide discretion which, in certain circumstances, can be used to impose liability on directors, even if they are not the recipients of the benefit. Furthermore, directors who are in breach of their fiduciary duties by enabling or failing to prevent such preferences or transactions can be made personally liable for the company’s losses pursuant to s.212.
Defences
Art 246 of the New Law provides defences to an allegation of liability: “[e]very person who has proven in writing his reservations regarding the acts [paraphrased at (i)-(iv) above]… of this Article shall be exempted from liability for such acts” and the Court shall not ‘issue judgment against him/her/them’6 if “he has taken all the precautionary measures that a normal person can take to reduce potential losses on the company’s funds and creditors.”
In England & Wales, defences can be found in a number of places. By s.1157 Companies Act 2006, directors may avoid liability for misfeasance under s212 (and after BHS, misfeasant trading) if they can demonstrate to the satisfaction of the Court that they have acted honestly and reasonably and that in all the circumstances ought fairly to be excused. However, s.1157 does not offer any defence to directors to the other provisions of IA 1986, should they be found personally liable for wrongful trading under s214, or in the circumstances of the case for offences under s238 or s239. There is a separate defence for wrongful trading, built in to s214(3), which has similarities to the New Law: that after the relevant time, the directors took every step with a view to minimising the potential loss to the company’s creditors that they ought to have taken. There is no clear cut defence to s238 and 239, other than the court has discretion to make such order as it sees fit.
Summary
The introduction of the UAE’s New Law is a welcome codification of decision-makers’ duties and sends a clear message as to expectations of responsible corporate governance and personal liability for those who are in breach of their duties. Whilst England & Wales are arguably ‘further down the road’ in this regard, recent cases such as BHS and Sequana have demonstrated a significant level of judicial activity in this area which is likely to continue to evolve and will take some time to become settled law.
This article was originally published in TL4 Fire - Issue 18 - Contentious Insolvency Magazine.
1There is no official English translation of the New Law and accordingly, all citations use in this article are taken from the unofficial LexisNexis Middle East English translation.
2 Author’s interpretation
3 Author’s interpretation
4 [2024] EWHC 1417
5 UAE Federal Decree-Law No. 32/2021 on Commercial Companies
6 Author’s interpretation
