Introduction

Typically uncommon in the legal realm, MAS Law’s litigation team successfully held the shareholders of a company liable for the company’s action, as the judge made the rare decision to pierce the corporate veil.

A multinational European Bank has filed a commercial case against the defendant, a petroleum company, before the Sharjah Courts. The bank sought to reclaim credit amounts totalling to roughly half a Billion Dirhams. The shareholders of the defendant company held shares in ten other companies that also share the same name as the borrower company, with the only distinction being the trade license number. The shareholders exploited the corporate veil principle to distribute the credited amounts to the other companies in which they also held shares in, aiming to shield themselves as shareholders from liability for the actions of the company, thereby capitalizing on the legal protection it provides.

As per Article 71 of the UAE Federal Decree Number 32 of the year 2021, a Limited Liability Company is Defined as follows:

1- A Limited Liability Company is a company that consists of a number of partners that is not less than (2) two and not more than (50) fifty, and each of them shall only be liable only to the extent of his share in the capital.

2- It is permissible for one physical or juristic person to incorporate and own a Limited Liability Company. The owner of the capital thereof shall be liable only for the obligations of the Company to the extent of the capital set out in its Memorandum of Association. The provisions of the Limited Liability Company contained in this Decree-Law shall apply to said person to the extent that does not contradict its nature.

 Hence, the standard principle dictates that a shareholder’s liability is limited to the extent of their share in the capital. Nevertheless, there are specific legal actions that, when undertaken, result in shareholders sharing liability with the company. This case provides a clear example of such a scenario. As when the petroleum company entered into a financial facility agreement with the bank, a letter of guarantee from the company stated that the tangible assets of the company would not decrease below the value of AED 1.25 billion. Consequently, the shareholders exploited the protection granted by the corporate veil, misusing their authority to transfer funds received from the facility agreement to other companies in which they also held shares. This scheme was designed with the intention of portraying the initially funded company as insolvent, thereby evading the obligation to repay the facility agreement to the bank

Piercing The Corporate Veil

 Piercing the corporate veil is a legal doctrine that allows the court to hold the shareholders personally liable for the actions of a corporation. Contrary to the norm, where shareholders are typically shielded from personal liability due to the separate legal personality of a corporation.

This plays a vital role in maintaining accountability and liability, preventing the misuse of the limited liability protections that shareholders have. This concept contributes to the fairness of law by including, but not limited to

• Preventing Fraud and Misconduct
• Protecting Creditors
• Ensuring Accountability
• Encouraging Ethical Corporate Behavior

Judgement[1]

In the court of first instance, the judge ruled in favour of upholding the corporate veil, resulting in the dismissal of the case.  However, following our appeal, the judge revaluated the case, ultimately holding the shareholders accountable. As the judge held that the shareholders were taking advantage of the protections the corporate veil doctrine provides to engage in fraudulent and illegal activity.

The judge recognized that the shareholders were the final benefactors of the credit amounts received from the bank since they were the ones in control of the movement of the moneys between the borrower company and the ten other companies, as well as being the authorised signatories that signed the letter of guarantee to the bank to assure that the assets of the borrower company would not fall short of AED 1.25 billion. Therefore, The Federal Court ruled that the debtor company, along with the shareholders and the ten other companies they hold shares in, settle the multi-million-dollar debt. Thus, piercing the corporate veil.

Conclusion

Limited Liability Companies provide protection to their shareholders via the corporate veil principal. But this protection ends when shareholders exploit the corporate veil, as means to conceal their misappropriations or fraudulent acts.

MAS Law team advising on the matter was led by Partner Abdelmajeed Zwairi and supported by Senior Associate Hassan Merghani Mohamed.

For further information: please contact:

Abdelmajeed Zwairi: azwairi@maslaw.com

Hassan Merghani Mohamed: hmohamed@maslaw.com

_{[1] The judgment is issued by the court of appeal and it is appealable before the court of cassation.}