Dubai: In 2015, the Dubai Court of Cassation ruled that the manager of a limited liability company (LLC) be obligated to settle the company’s debt with his own money. This is contrary to the general rule that separates a company’s financial liability from that of its manager or any of the partners.
Although it is legally established that an LLC has a legal status independent from the personality of its manager or that of any of the partners, this rule is not absolute. The Commercial Companies Law exempts cases where the company manager has to undertake settling the company’s debt with his or her own money. One of these scenarios is where it becomes evident the manager has performed deception or fraud under the company’s name against third parties.
Although it is legally established that an LLC has a legal status independent from the personality of its manager or that of any of the partners, this rule is not absolute.
– By Ahmed Kashwani, Special to Gulf News
In the judgement, the Court ruled that the manager, along with the company under his management, be obligated to pay the amount of the indebtedness, which was evident by virtue of cheques signed by the manager from the company’s account. He was aware that the company did not have the bank balance for covering those cheques. It is the duty of a manager, when he is aware that the company’s financial balance does not cover the value of the cheques, to refrain from issuing cheques under the name of the company. In this case, he clearly did not do so, and issued cheques from the company’s account. He was, therefore, obliged to settle the same with his own money.
What the court ruled
The judgment of Dubai Court of Cassation was as follows: “It is established – as per the rules of this Court – that the partner manager in the limited liability company shall not be asked to use his money to pay for its debts, unless he commits a mistake. It is established, also, that if the manager of the limited liability company breaches one of his management duties or violates the law or the text of the company’s Memorandum of Association or its Articles of Association, he shall be responsible for his personal mistakes or any works involved with deception, fraud or serious fault.
“Based on the aforesaid, it is evident according to the papers that the third respondent – joined litigant – in his capacity as partner and manager of the second respondent company has issued, in favour of the appellant company, the cheque under No. [REDACTED], the subject matter of the litigation, and it is dated [REDACTED], for a sum amounting to Dh25,398,529 drawn on [REDACTED]. The said cheque was returned unfulfilled due to lack of balance for covering it at the time of issuing the cheque – as was evident in the report of the expert, who was appointed in the case. The third respondent [manager] did not argue against the same [in court] – and this indicates that he was the drawer for the account of a third party, aware of the balance of the account on which the cheque was drawn. Therefore, he [manager] shall be a guarantor for fulfilling the value of the said cheque.”
– The writer is the founder and CEO of Kashwani Law Firm in Dubai