In brief:
A recent matter which we have handled considers the following:
- exceeding director duties and failing to obtain approval from shareholders
- when a director will be personally liable to compensate a company
- whether a director should be held liable if his actions did not benefit the company
Following a four year dispute, the Dubai Court of Cassation recently issued a decision in favour of our client, a RAK free-zone limited liability company (Our Client), in a claim worth $6 million in addition of interest against the company director for abuse of his director duties.
The Dubai Court of Cassation adopted the judgment of the Court of First Instance. It held that a director of a limited liability company (LLC) will be liable to compensate the LLC where the director transfers funds from the LLC’s account without obtaining prior authorisation from the shareholders in a transaction that provides no commercial benefit to the LLC. Such a transfer constitutes a misappropriation of funds.
Facts
Our Client claimed against its director for the transfer of a sum of $6 million from Our Client to a company solely owned by that director (Unrelated Company). The director argued that this transfer was authorised as the Unrelated Company entered into an agreement with Our Client’s parent Company (Parent Company), allowing the Unrelated Company to act as an agent of the Parent Company. The director also claimed that this agreement enabled the Unrelated Company to purchase goods for the benefit of Our Client’s sister company based in South Africa (Sister Company).
Findings
Our Client disputed these points. On behalf of our client, we successfully argued that the director did not have the authority to transfer the funds and that the Unrelated Company was neither an agent of the Parent Company or Our Client. Crucially, we were able to highlight that the purchase of goods did not provide any commercial benefit for Our Client. As a LLC, Our Client is a separate legal entity from its Sister Company and is therefore financially independent. Hence, Our Client could not have derived any benefit from a purchase made using the LLC’s funds. These points were verified by accounting, banking and IT experts appointed by the Court of Appeal.
The Court of Appeal also agreed with two key points:
- the director did not have authority;and
- there was no benefit for the company.
On appeal, the Court of Cassation also agreed with Our Client, finding that the director’s actions constituted a grave error in his capacity as Our Client’s ‘manager’.
Legal Significance
This decision is important because it upholds a novel “benefit” argument. Usually, such claims are based on article 84 of the Commercial Companies Law, which holds directors personally liable to compensate a company for improper use of power. Directors are often able to successfully defend such claims by arguing they had proper authorisation.
However, as we were able to demonstrate to the court that Our Client did not gain any benefit from the director’s actions, the court was willing to accept that the director transferring Our Client’s funds was by itself in the circumstance of this matter, an abuse of his power. It then followed that the director was personally liable to Our Client for those funds.