Navigating Personal Liability Risks for Managers and Directors in UAE Bankruptcy Proceeding

As the UAE modernizes its insolvency framework through Federal Decree-Law No. 51 of 2023 on Bankruptcy Law, one critical area requiring heightened awareness is the personal liability risks faced by managers and directors of companies undergoing bankruptcy or restructuring. This legislation not only governs the rights and obligations of debtors and creditors but also imposes specific duties and potential liabilities on those responsible for managing the company during financial distress.

Under the new law, managers and directors hold significant responsibilities to act with due diligence, good faith, and transparency once financial difficulties arise or bankruptcy proceedings commence. Failures to meet these obligations may expose them to personal civil and criminal liabilities.

Key Obligations

Duty to Cooperate: Managers (including any person who effectively manages the company or influences decisions, even if not formally appointed) must fully cooperate with the bankruptcy court, trustees, and creditors, providing accurate and timely information about the company’s financial status, assets, and liabilities (Article 22).

Preservation of Assets: It is mandatory to preserve the company’s assets (Article 58) and avoid any acts that could diminish their value, such as unauthorized disposal, preferential payments, or fraudulent transfers (Article 271).

Submission of Financial Information: Directors are required to submit the company’s financial records, accounting books, and other relevant documentation when requested by the court or trustee to ensure transparency (Article 22).

Avoidance of Fraud and Misconduct: Any conduct aimed at deliberately harming creditor interests, falsifying accounts, or concealing assets can result in severe penalties. The chairman, board members, managers, auditors, and officers responsible for liquidating the company can face up to 5 years in prison and/or a fine of up to AED 1 million if, after a final decision starts bankruptcy proceedings, they do any of the following (Article 269):

• Hide, destroy, or change any of the company’s records.
• Steal or hide part of the company’s assets.
• Admit to debts the company doesn’t actually owe, knowing they’re false, whether in writing, verbally, in financial reports, or by withholding important documents.
• Use fraud to get approval for a preventive settlement or restructuring plan.
• Falsely report information about the company’s capital, distribute fake profits, or take company assets as bonuses knowing they aren’t entitled to them.

Proper Conduct During Restructuring (Article 256): Managers overseeing restructuring plans must act impartially and in good faith to maximize creditor recovery and business continuity, refraining from conflicts of interest. If a company stops paying its debts because of a sudden financial crisis, the board members and managers won’t be held responsible if they use the company’s assets to cover unpaid regular wages and salaries (excluding bonuses, allowances, or other extra payments) that are needed to keep the business running during the crisis. The board members and managers must update the company’s financial records to reflect losses caused by the crisis, act carefully and honestly, and do their best to protect the company’s goals and financial health.

Key Takeaways:

• Transparency and cooperation are essential from the start of bankruptcy proceedings.
• Protecting assets preserves value for all stakeholders.
• Misconduct risks severe civil and criminal penalties.

Checklist for Managers and Directors:

• Provide accurate and timely financial information to the court or trustee.
• Preserve company assets and avoid unauthorized disposals.
• Avoid preferential payments to select creditors.
• Refrain from falsifying accounts or hiding assets.

Personal Risks for Management

Non-compliance with the abovementioned duties can result in:

• Civil Liability: Managers may be held personally liable to compensate losses caused by negligence or misconduct.
• Criminal Sanctions: The law provides for punishments such as fines, imprisonment, or both in cases of fraudulent behavior, insolvency concealment, or asset dissipation.
• Disqualification: Courts may restrict or ban individuals from managing companies in the future until they are officially rehabilitated under the law due to misconduct in bankruptcy cases. Anyone who is convicted of fraudulent bankruptcy will temporarily lose their (Article 164):
  • Political rights
  • The ability to be a member of the Federal National Council
  • Hold public office or positions
  • Serve on the boards of 

1. Sports clubs
2. Federations
3. Any company

These restrictions remain in place until they are officially rehabilitated under the law.

Liability - Concealment

If a company is declared bankrupt, the Bankruptcy Court can, at the request of the trustee, the Bankruptcy Unit (if the debtor is regulated), or any creditor, require members of the Board of Directors, managers, those running the company, or those handling liquidation to pay an amount reflecting their share of fault (Article 246).

This applies if it’s proven that, in the two years before the company stopped paying its debts, they did any of the following (Article 246):

• Used risky business tactics without proper care, such as selling goods below market value in order to get cash and avoid or delay bankruptcy.
• Made deals to sell off company assets without fair compensation or any real benefit to the company.
• Paid off certain creditors in a way that harmed other creditors.
• Allowed the company’s assets to drop so low that it could not cover at least 20% of its debts due to business mismanagement.

The court won’t declare the company bankrupt if the person accused of these actions can prove they took every reasonable step to minimize losses for the company and its creditors. Furthermore, any person that officially recorded their objections in writing is protected and will be exempted from liability for the above actions (Article 246).

Claims against these individuals must be filed within two years after the company’s bankruptcy is declared; otherwise, the right to file expires (Article 246).

Liability - Fraudulent Behaviour

If a company is declared bankrupt, its Board members, managers, and liquidators may face imprisonment and/or a fine of up to AED 500,000 if they commit any of the following offenses (Article 271):

• Set excessive salaries or bonuses for board members, the CEO, or managers during the three years before the company stopped paying its debts, especially if this contributed to the company's financial collapse.
• Fail to keep proper commercial records that accurately reflect the company's financial status or neglect required inventories under the law.
• Refuse to provide requested information to the trustee, Bankruptcy Court, or Court of Appeal, or intentionally submit false information.
• Sell or dispose of goods or assets after the company stopped paying debts, if done to hide these assets from creditors.
• Make payments or dispose of assets in ways that violate the terms of an approved preventive settlement or restructuring plan.
• After the company stops paying, favor certain creditors by paying their debts or giving them special guarantees or benefits, even if done to secure approval for a settlement plan.
• Sell company goods or assets at prices far below market value to delay the company’s payment failure or bankruptcy declaration, or to postpone the cancellation of settlement or restructuring plans, including by using illegal methods to raise cash.
• Spend large sums on speculative ventures unrelated to the company's business activities, especially if these are fictitious or reckless.

Risk Mitigation Strategies for Managers and Directors

To minimize personal liability risks, managers and directors should adopt a proactive and transparent approach:

• Early Legal Consultation: Seek timely legal advice when signs of financial distress appear to understand obligations and explore restructuring options.
• Full Disclosure and Cooperation: Maintain open lines of communication with bankruptcy courts, trustees, and creditors.
• Rigorous Record-Keeping: Ensure accounting and financial records are accurate, up to date, and readily accessible.
• Implement Internal Controls: Establish robust governance and oversight mechanisms to detect and prevent misconduct.
• Engage in Good Faith Negotiations: Participate genuinely in restructuring or settlement processes with a focus on fair creditor treatment and business preservation.

Conclusion

The evolving UAE bankruptcy regime places significant personal responsibilities on company managers and directors, reflecting a global trend toward accountability in insolvency situations. By understanding their duties and adopting comprehensive risk mitigation strategies, management can navigate bankruptcy proceedings with reduced exposure to personal liability.

For tailored advice and strategic support on managing director and manager risks in UAE bankruptcy proceedings, reach out to Economic Law Partners. Our expertise helps directors and managers fulfill their obligations responsibly while safeguarding personal and corporate interests.