Suing and Enforcing against LLC Shareholders, Directors and Managers

The volatile mass number of persons establishing, liquidating, or not renewing limited liability companies (LLCs) in the United Arab Emirates causes a plethora of claims being met with enforceability issues – particularly due to lack of assets.

Debtors take action against creditor LLCs to find that the latter have expired licenses, transferred assets to a new LLC, or distributed dividends leaving no assets in the creditor LLC.

The frustration that debtors face in these circumstances is agonizing – resulting from years of litigating before the courts or arbitral tribunals, only to find enforcement is to no avail.

However, the court systems are not without resolve in these circumstances.

Here we provide a brief palatable overview of when liability may not be limited, and the evidence and procedure required to trigger the courts into action.

When is liability not limited?

Most of the legislative provisions have been discussed in various articles issued by firms in the UAE over time, but for clarity’s sake, this article is segmented into a palatable breakdown of circumstances where personal liability can arise, and at the end of this article, relevant cases and provisions of the law have been provided.

Shareholders (whom one of, if not all, are usually managers or board members) are protected by the limitation of liability, i.e. the corporate veil of an LLC.

In brief; the shareholders, board members or managers operate the LLC, benefit from it, but as a general matter an LLC’s creditor is limited to action against the LLC itself, not those operating and benefiting (unless there is a financial instrument triggering criminal liability).

There are, however, certain actions that if taken by the shareholder(s), board member(s), or manager(s) would hold them liable in their personal capacity, either jointly or severally.

Following is a brief summary of when such circumstances could be.

Shareholders can be held personally liable if they had:

1. Not contributed the disclosed share capital in cash.
2. Overvalued contributions of shares in-kind.
3. Increased number of shareholders without notifying the authorities.
4. Identified the LLC as another legal form.

Board members and/or managers can be held personally liable if they had:

1. Not registered the Articles of Association or any amendments thereto with the authorities.
2. Distributed fictitious profits to shareholders.
3. Distributed to the shareholders or other profits or interests in contravention with the law.
4. In case the company is in bankruptcy and it was found that the company’s assets are not sufficient to meet at least (20%) twenty percent of its debts.

Managers can be held personally liable if they had:

1. Clearly disclosing that the company is an LLC by name, i.e. by explicitly stating after the name of the company the expression “Limited Liability Company” or in short “LLC”. In the event of a sole proprietorship, the name of the company shall be accompanied with the name of its owner and followed by the expression “sole proprietorship with limited liability”.

Evidence

The more important, follow-up question, to the above analysis is to do with evidence.

Most, if not all, of the circumstances mentioned above, are either undisclosed to the public and/or require an uphill battle to prove without tangible evidence.

The UAE courts have powers to issue subpoena orders against defendants or third parties to provide witness statements and/or disclose documents that would assist in the plaintiffs’ claims.

A court may issue a subpoena order for the disclosure of the documents such as general assembly minutes of meeting, bank deposits at the time of establishment (to evidence share capital deposits), official documents (such as trade licenses, articles of association, etc.).

Bearing in mind that the evidential threshold for the court to issue a subpoena order, and such requests are usually to no avail.

Alternatively, plaintiffs may rely on experts to act as mediums in obtaining documentary evidence.

There is no explicit provision in the law that identifies an expert’s permissible actions, but the courts have the authority to state the expert’s duties and the urgent measures he is allowed to take.

In practice, expert duties may include investigation of documents and devices at the plaintiff’s, or any other third party’s location, in addition to valuation, obtaining witness statements, etc.

Moreover, the plaintiff and their counsel may accompany the expert during his investigation of the defendant’s (or any other third party’s) premises, documents, or devices.

Conclusively

The reality is; it is not farfetched that LLCs have issues with miscalculated profit distribution or paid-up capital, or merely not maintaining enough assets to meet at least 20% of their debts.

Any of these missteps could trigger personal liability on the shareholder, board member, or manager, piercing the corporate veil and allowing plaintiffs to find recourse for their claims / judgements / awards.