What is the Responsibility of the Manager of a Limited Liability Company?

As a rule, a limited liability company has a financial standing separate from that of its partners and its director, so the director is not answerable out of his own pocket for the company's debts. That rule, however, is not absolute: under the Commercial Companies Law, every director of a limited liability company is answerable to the company, the partners and third parties for acts of fraud, and is bound to compensate the company for losses and expenses arising from misuse of authority, breach of the law, of the memorandum of association or of his appointment contract, or from gross error.

The liability of a company director also reaches his personal assets in other situations, chief among them signing without stating his capacity, exceeding the limits of his mandate, personal guarantees, and the company's default. This guide sets out — with the experience of a corporate lawyer in Dubai — the limits of a director's authority, the circles of his liability, the liability attaching to signature, and the steps by which he protects himself.

Who is the director of a limited liability company and how is he appointed?

A limited liability company is managed by one or more directors as the partners decide in the memorandum of association, and they are chosen from among the partners or from outside. If they are not appointed in the memorandum or in a separate contract, the general assembly appoints them, and where there are several a board of directors may be formed.

A director's capacity is not established by agreement alone but by its registration in the commercial register and the entry of his name on the licence. The law requires written notice to the competent authority within 15 working days of any change in the registered particulars, and makes directors jointly liable to compensate loss suffered by the company, the partners or third parties where that duty is breached. The Financial Restructuring and Bankruptcy Law also addresses expressly anyone responsible for the company's actual management, even if his name does not appear on the licence.

What are the limits of a director's authority in an LLC?

The Commercial Companies Law provides that a director — unless his appointment contract, the memorandum of association or the internal regulations restrict his powers — holds full authority to manage the company, and his acts bind it provided they are accompanied by a statement of the capacity in which he is dealing. That condition is the key to everything that follows on the liability attaching to signature. The source of any restriction is the written instrument, and unlimited authority means, when accountability arrives, unlimited liability to match.

Where there are several directors and each has been assigned a defined remit, each is answerable to the partners only for the acts falling within his own remit. That written allocation is among the strongest protective tools available.

A director's liability to the company, the partners and third parties

The liability of a director of a limited liability company falls into three circles, each with its own basis and route of claim:

The law expressly voids any provision in the memorandum of association or the appointment contract that conflicts with the rules on a director's liability, so a clause exempting the director from all liability carries no weight; real protection lies in disciplined authority and documentation.

When is a director answerable out of his own assets?

Separation of the company's estate remains the rule, and it is pierced only in cases the legislator has defined, chief among them:

Liability and signature: when does a director's signature bind the company, and when him?

This is the finest point of all, and many claims are settled on it without the merits of the dispute ever being argued, because signature is the fact that determines who is bound: the company or the individual.

Stating the capacity is a condition for the act to attach to the company

The Commercial Companies Law provides that a director's acts bind the company provided they are accompanied by a statement of capacity, and the converse is clear: a bare signature does not attach to the company. On the same logic, the Civil Transactions Law provides that where an agent attributes the contract to his principal within the limits of the agency the rights under it revert to the principal, whereas if he attributes it to himself without declaring that he contracts as agent, those rights revert to him.

Signing without a mandate, or beyond its limits, binds the signatory personally

In negotiable instruments the rule is sharper still: a person who signs a bill of exchange on behalf of another without a mandate is personally bound by it, and the same applies to a representative who exceeds the limits of his authority.

Conversely, the company is bound by the acts of an officer towards third parties acting in good faith even if it later transpires that his appointment was irregular, in the interest of certainty in dealings.

Cheques and company debts on default and bankruptcy

The rule for cheques is the same rule of capacity: a cheque drawn on the company's account and signed by its director in that capacity and under its seal binds the company, whereas one signed in his bare name binds him. The Commercial Transactions Law makes a cheque endorsed by the drawee as unfunded an enforceable instrument executed by compulsion, while penalties remain for defined acts such as closing the account before issue, ordering a stop on payment outside the prescribed cases, and forgery.

Obliging directors to settle the company's debts

The Financial Restructuring and Bankruptcy Law allows the bankruptcy court — where the company has been adjudged bankrupt — to oblige directors or anyone responsible for actual management to pay a sum proportionate to the fault attributed to them, where it is established that, in the two years preceding the company's cessation of payment, one of the following occurred: commercially imprudent risk-taking; disposing of assets without adequate consideration; paying one creditor to the detriment of others; or assets proving insufficient after bankruptcy to meet 20% of the debts together with proven mismanagement.

The claim must be brought within two years of the judgment declaring bankruptcy, failing which the right lapses. The law also requires directors — where the company's losses reach half its capital — to place the question of dissolution before the general assembly.

Regulatory obligations and the criminal liability of a director

The burden of discharging regulatory obligations falls in practice on the director: keeping accounting records that disclose the company's financial position accurately and retaining them at its head office for at least 5 years, appointing an auditor, and tax registration and filing of returns on time. The Anti-Money Laundering Law also provides that the criminal liability of the legal person does not prejudice the personal criminal liability of whoever committed the act.

On the criminal side, the Commercial Companies Law penalises the deliberate entry of false particulars in the company's documents or in its balance sheet, the omission of material facts with intent to conceal the true financial position, and disclosure of the company's secrets. Under the Crimes and Penalties Law, anyone who misappropriates, uses or dissipates movable property delivered to him by way of agency to the detriment of the person entitled is punished, and that is the provision under which the taking of company funds is usually characterised. A final judgment for acts of fraud entails removal from office by operation of law and a three-year bar from executive functions.

How does a company director protect himself from risk?

Effective protection is built before the dispute, through measures that create a documentary trail one can rely on:

Resignation, removal, discharge and limitation of the liability claim

Unless the memorandum of association or the appointment contract provides otherwise, a director is removed by resolution of the general assembly whether or not he is a partner, and the court may remove him on the application of one or more partners for a legitimate cause. A director may tender a written resignation to the general assembly, notifying the competent authority with a copy, and the assembly must decide on it within 30 days failing which it takes effect. Resignation, however, ends the capacity for the future only and does not erase liability for acts committed while in office, and leaving the name on the licence keeps the director clothed with apparent authority towards third parties.

A director who is also a partner may not vote on resolutions discharging him from liability for management. The law provides that a discharge does not extinguish the civil liability claim for errors committed in performing his duties. Where the act was placed before the general assembly and ratified, the claim lapses one year after that meeting; yet if the act constitutes a criminal offence the liability claim lapses only with the lapse of the public prosecution.

Deadlines a company director cannot afford to miss

Practical advice for a director of a limited liability company

Legal references

Frequently asked questions on the liability of an LLC director

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