In a judgment rendered on 10 October 2021, the Dubai Court of First Instance had concluded that current and former directors and managers of Marka were personally liable towards creditors of the company merely on the basis that the assets of the company were not sufficient to pay at least 20% of its debts. The 20% threshold was set in onshore Federal Decree Law No. (9) of 2016 on Bankruptcy (the Bankruptcy Law) as it then was, and the Court determined that liability applied to current and former directors and managers without distinction where the threshold is not met.
Nearly a year later, in the same Marka case, the Court of First Instance clarified in a judgment dated 5 October 2022 that the liability of decision-makers is not automatically engaged when the company that they manage has insufficient assets to settle at least 20% of its debts. To engage their liability, the decision-makers (managers, directors, or de facto decision-makers) must have contributed to the losses that rendered the company insolvent, for instance by:
- disposing of assets at lower than market value;
- disposing of property without consideration, or against insufficient consideration, or in circumstances where the benefit received is not proportionate to the property disposed of; or
- discharging the debts of a company creditor to the detriment of other creditors while the company is insolvent.
The Court distinguished between decision-makers who contributed to the losses of the company and its insolvency, on the one hand, and, on the other hand, subsequently appointed managers who attempted in good faith to improve the already insolvent company’s financial position before bankruptcy proceedings were commenced.
The judgment of the Court of First Instance, which is in line with recent amendments to the Bankruptcy Law, is a welcomed clarification.
The policy underlying the recent clarification is a positive one and aligns with international insolvency practice. It encourages the engagement of professional managers to assist with reforming companies in financial difficulty by alleviating the disincentivising risk of personal liability on such managers in circumstances where a company is unable to satisfy at least 20% of its debts.