Article 21 of the Federal Decree-Law No. 32 of 2021 on Commercial Companies clearly mentions that a company acquires a legal personality upon its registration and is considered as a separate legal entity distinct from its shareholders and managers. In a limited liability company, the liability of the partners us limited to the extent of their contribution under Article 71 of the Commercial Companies Law. A company shall be legally responsible for its own debts since it is a separate legal entity. However, this protection is not absolute. UAE law has always recognised situations where managers may be held personally accountable for wrongful conduct, particularly where they commit fraud, exceed their authority, breach statutory duties, or misuse the company’s legal personality.
In a recent case of Abu Dhabi Court of Cassation does not change these traditional principles of law yet it addresses a different yet significant issue and that is;
“Whether a manager’s conduct during enforcement proceedings can justify coercive measures such as imprisonment or travel bans, even where fraud is not established.”
Facts of the Case
The dispute arose after a creditor obtained a judgment against a limited liability company (LLC) in relation to unpaid contractual obligations.
When the enforcement proceedings were initiated, there was no identifiable assets in the business to pay of the debts.
During the execution process, the company’s former manager, who had negotiated and signed the contracts giving rise to the debt, had already transferred ownership of the company to a third party.
The enforcement court appointed an expert to examine the company’s financial affairs. The expert found that the company had no audited or unaudited financial statements for several years and that there were no accounting records capable of revealing the company’s financial position. The manager failed to show that the companies records were shared to the new owner after the transfer.
Based on these findings, the Enforcement Court added the manager to the enforcement proceedings under Article 322 of the Federal Decree by Law No. (42) of 2022 Promulgating the Civil Procedure Code allowing enforcement measures to be pursued against him. This was challenged in the appellate court.
The key issue before the court
The principal issue before the Abu Dhabi Court of Cassation was whether a company manager could be subjected to coercive enforcement measures, such as imprisonment or a travel ban, where the underlying judgment had been issued only against the company and not against the manager personally.
The Court’s Findings
The court held that the managers refusal to submit the financial records is an abnormal conduct which prevents the court from effectively carrying out its enforcement proceedings. An obstruction of enforcement is not limited to fraudulent acts, if there is conduct that delays, frustrated or hinders the execution of a judgment may itself justify judicial intervention.
The creditors are not required to establish fraud or dishonest intent before enforcement courts can impose restrictive measures. The court further stated that imprisonment and travel ban are enforcement measures that are used to ensure compliance and not to punish the manager hence these may also be imposed on the manager.
The financial records, statements and documents are essential to determine whether the company genuinely lacked assets or whether assets had been diverted. The managers refusal to provide these documents and records prevents the enforcement court from tracing company assets and assessing the company’s financial position. The Court therefore viewed the failure to provide such records as conduct capable of obstructing enforcement.
One of the manager’s main arguments was that he had already transferred ownership of the company and therefore could no longer be subjected to enforcement measures. The court rejected this argument and stated that selling or transferring the company doesn’t automatically relieve the former manager from obligations arising during the period in which he managed the company.
Significance of the Judgment
This judgement strengthens the effectiveness of enforcement proceedings by preventing managers from delaying execution through non-cooperation. The enforcement mechanisms of the court are stronger which in turn enhances the creditor protection. The decision also promotes transparency and accountability by encouraging managers to maintain proper financial records and cooperate fully with enforcement authorities.
Conclusion
The judgment clarifies that the separate legal personality of a company does not provide complete protection to managers who obstruct enforcement proceedings. A manager may face personal enforcement measures where failure to cooperate prevents the court from determining the company’s financial position. The decision reinforces the importance of maintaining proper records, transparency, and accountability in corporate management.
We at Ayesha Aldaheri Advocates and Legal Consultants, we assist clients in complex enforcement proceedings, including cases involving recovery of debts, execution of judgments, and measures against parties who obstruct the enforcement process.