Changes in officers’ liability under bankruptcy law

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This in Brief reviews the latest changes to the Bankruptcy Law (Federal Legislative Decree No. 9 of 2016, as amended) introduced under Federal Legislative Decree No. 35 of 2021 (the New law) and their impact on the personal liability of the board of directors and officers of bankrupt companies. The new law entered into force on November 1, 2021.

Unlike previous bankruptcy law changes (such as Federal Legislative Decrees No.23 of 2019 and No.21 of 2020), which aimed to help financially struggling businesses through difficult times (such as the pandemic COVID-19), the new law is focused on amending and clarifying the scope of personal liability of directors and officers of bankrupt companies, in particular under Articles 144 and 201 of the Law on bankruptcy.

The main amendments made by the new law are discussed below.

Amendments to Article 144

Under the old section 144 of the Bankruptcy Act, if the value of the assets of a bankrupt company was insufficient to settle at least 20 percent of its liabilities, the court could order some or all of the members of its board of directors and officers to pay some or all of the debts of the company, provided that they have been found liable for the losses of the company under the Law on Commercial Companies (Federal Decree-Law No. 2 of 2015, as amended). Section 1 of the new law makes the following changes to section 144 of the Bankruptcy Act:

(a) The requirement to establish liability for losses under the Law on Commercial Companies is replaced by the requirement to establish that the directors and officers have committed any of the acts referred to in Articles 147 ( a) to (c) of the bankruptcy law. Under Section 147 of the Bankruptcy Law, the directors or officers of a bankrupt company may be required to pay the debts of the company if they have; (i) used reckless risk business methods, such as disposing of goods at prices below market value, in order to obtain assets, with a view to avoiding bankruptcy proceedings or delaying the commencement of bankruptcy -this ; (ii) entered into transactions with a third party to dispose of the assets free of charge or for an insufficient price and without any definite or proportionate advantage to the assets of the debtor and / or; (iii) honored the debts of a particular creditor with the intention of causing damage to other creditors, during the period of insolvency or during insolvency; in each case during the period of two years following the opening of the bankruptcy proceedings.

In addition to severing the mutual liability link between the Business Companies Law and the Bankruptcy Law, this amendment to Section 144 of the Bankruptcy Law also limited the scope of liability for all past acts. and future (as under Article 162 of the Law on Commercial Companies Law) to only current and future acts under Article 147 of the Bankruptcy Law (i.e. limited to actions directors and officers following the opening of bankruptcy proceedings). This will be a welcome development for directors and officers, as now any violation of the broader liability provisions under the Companies Act will not put them at risk of having to pay the debts of the bankrupt company in due course. under section 144 of the Bankruptcy Act.

(b) The new section 144 (2) of the Bankruptcy Act gives directors and officers of a bankrupt company the right to appeal against any liability judgment rendered under section 144 of the Bankruptcy Act. bankruptcies. An appeal will not result in (i) the suspension of the execution of the judgment; or (ii) a stay of the bankruptcy proceedings or compromise their validity.

Substituting the wider scope of liability under the Commercial Companies Act for the narrower scope of Article 147 of the Bankruptcy Law, the defense under Article 147 ( 2) (i.e. a person cannot be considered to have violated Section 147 (1) if that person has taken all possible precautionary measures to reduce the potential losses that may affect the assets of the debtor company or its creditors), the exemption provided for in Article 147 (3) (i.e. the directors and managers are not liable for any acts under the article 147, paragraph 1, if they can establish that they did not participate in such acts or made reservations with regard to such acts (for example, by filing their objection at the meeting (s) of the directors concerned) and the right to appeal any court decision under Article 144 of the bankruptcy law all work together to reduce the risk exposure of directors and officers of bankrupt companies; however, it should be noted that any wrongdoing (resulting in losses for the bankrupt company), committed outside the period provided for in Article 147 of the Bankruptcy Law may still incur liability under other legal provisions.

Amendments to section 201

Article 1 of the new law also introduces some minor changes to the old article 201 of the Bankruptcy Law, mainly Articles 201 (1) and (2), which when read in conjunction with the beginning put updated to Article 201 of the Bankruptcy Law, now provides that the directors and / or officers of a bankrupt company will be punished with imprisonment not exceeding two years and / or a fine not exceeding 100,000 AED if they deliberately:

  • has not kept sufficient commercial books to reveal the financial situation of the company or has not carried out the inventory required by law, with the intention of harming the company or its creditors (section 201 (1)); Where
  • refrain from providing the data required by the trustee appointed in accordance with the provisions of Title 4 of the Bankruptcy Law or the Court, or intentionally providing an incorrect date (Article 201 (2)).

The main amendments to Article 201 of the Bankruptcy Law are the inclusion of the fine of 100,000 AED and the requirement to demonstrate the intention to deliberately perform the acts referred to in Article 201 (1). and 2, from administrators and / or managers.

Conclusion

Although the new law may have dislodged the court’s ability to use the liability of a director or officer under the corporation law as a follow-up to possible liability for the debts of the bankrupt company under section 144 of the bankruptcy law, it does not eliminate the risk of liability for directors or officers who have acted dishonestly or fraudulently.

It should be remembered that the bankruptcy law and its application in practice are still in their infancy. In our experience, courts have used their wide discretion in the interpretation and application of bankruptcy law and have shown some guidance in considering the role played by the management of a business in bankruptcy and impose penalties. In light of the foregoing, it would be prudent for management of companies that are considering, or have already initiated, bankruptcy proceedings to seek legal advice and plan a clear strategy for dealing with any potential liability.


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