A company’s continuity is not measured only by its financial position or operational stability. It is also reflected in the legal framework that governs those entrusted with its management and those who benefit from its corporate structure. That is why the liability of management and shareholders forms an important part of the discussion. UAE company law gives effect to limited liability across the corporate forms it regulates. At the same time, the Companies Law expressly recognizes specific cases in which personal liability may arise for directors, managers, partners, shareholders, and the owner of a one-person company.
In a joint stock company, the board is not only responsible for strategy and oversight, but is also subject to clear legal duties. The law prohibits fictitious profit distributions and places responsibility on the board, or those acting in its place, for the consequences of such conduct. It also restricts board members from competing with the company without the required approval, disclosing company information, or benefiting from prohibited loans, guarantees, or similar arrangements. Certain major decisions also cannot be taken freely without the approvals required by law or the company’s constitutional documents. Even where the general assembly discharges the board, that does not necessarily eliminate liability for errors committed in the course of management. The message is clear: management is not only a position of authority, but also a position of accountability.
For shareholders in a joint stock company, the starting point remains limited liability. In principle, a shareholder’s exposure is tied to the value of his participation in the company. However, the Companies Law does not leave shareholders entirely outside the consequences of unlawful distributions. While responsibility for fictitious profit distributions is placed on the board or similar body, the law also requires any shareholder who receives profits distributed in violation of the law to repay them. Limited liability therefore remains the rule, but it does not exclude specific obligations arising directly under the statute.
In a limited liability company, management liability appears in even more direct terms. The manager may be liable toward the company, the partners, and third parties for fraud, misuse of authority, breach of law, breach of the memorandum of association, breach of the terms of appointment, or gross error. Any attempt to exclude such liability is void. The manager is also restricted from carrying out competing activities without proper approval and remains responsible for the preparation of the annual financial statements and reporting. This reflects a broader principle in the Companies Law: management powers are granted for the benefit of the company, not as a shield against responsibility.
As for partners in a limited liability company, the law goes further in identifying situations where liability may arise directly. A partner may be liable to the company for property held by him in a fiduciary capacity, and for profits or benefits obtained through the company’s business, assets, name, or commercial relationships. The law also addresses structural non-compliance. If the number of partners exceeds the legal limit and the situation is not regularized within the prescribed period, the partners may become personally liable in their own assets, jointly among themselves, for the company’s debts and obligations from the date of that increase, subject to the statutory exception for those who prove lack of knowledge or objection. Reported Dubai case law has also indicated that, although unanimity is not required for a capital increase, a dissenting partner may still challenge such increase where it violates the law, causes harm, increases obligations, or serves the interests of some parties without regard to the interest of the company itself. But what if the capital increase is later found unenforceable, and the partners who pushed it did so in bad faith? Could liability then extend to any resulting damage?
The one-person company perhaps makes the limits of limited liability even clearer. Although the law recognizes its separate legal personality, it also expressly provides that if the owner acts in bad faith by liquidating the company or suspending its activity before the end of its term or before achieving its purpose, that owner may become personally liable for the company’s obligations. In other words, separate personality remains protected, but not where bad-faith conduct gives rise to liability under the statute.
The broader point is that corporate law does not look only at the existence of the company, but also at the way it is run. Management remains subject to duties of loyalty, proper authority, and compliance with law. Shareholders and partners generally benefit from limited liability, but that protection is not absolute and may be displaced in the specific cases recognized by statute. The one-person company illustrates this especially clearly, by showing that separate legal personality remains protected only within the limits recognized by the Law itself.
Make sure to read about Part One and stay tuned for the next part, we will address another important dimension of the going concern: Shareholders Disputes
Seek Legal Counsel
For further information or advice in relation to any of the matters addressed above, please feel free to contact our Head of Commercial Disputes, Alia AlMulla at Habib Al Mulla & Partners.
Disclaimer
The content provided in this article is intended for informational purposes only and does not constitute legal advice. While every effort has been made to ensure the accuracy and completeness of this information, the article does not offer a guarantee or warranty regarding its content. The matters discussed in this article are subject to interpretation, and legal outcomes may vary based on specific facts and circumstances. We recommend that readers seek individual legal counsel before making any decisions based on the information provided. If you require specific legal advice, please contact us directly.