A company with limited liability simply means that the liability of the shareholders for any claims, demands etc. if the company is unable to pay its debts, will be limited to the value of their shareholding in the company as evidenced by their share certificates. In certain circumstances the courts are able to piece this corporate veil and open up liability where it can be shown that certain compulsory business insurances for example that are commonly used to satisfy claims were not taken out to protect the customers and third parties, or there has been wrongdoing or mismanagement of the company resulting in significant loss to customers and third parties. This will expose the directors and shareholders to claims such as wrongful, fraudulent trading, negligence in managing the company. The corporate veil could also be pierced by the courts for other reasons based in the facts of the case in question.
Most often entrepreneurs sign documents such as bank opening forms, a business lease, Memorandum of Association etc. during the company formation process. It is worth remembering that a company is a separate legal entity from its owners and does not come into existence until the company is licensed by the relevant authorities to carry out business. The company therefore cannot conduct any business, enter into contracts, conduct business dealings, assume responsibilities, liabilities or take up benefits from a contract until it has a legal existence, i.e. a license or certificate of incorporation. Founding entrepreneurs signing on the company’s behalf are bound and liable for what they sign and should protect themselves by ensuring that all such contracts and documents are in the name of the company and are qualified with the words “company under formation”. As soon as a license is issued, their personal liability is removed, all liability is assumed by the company.
In 2011 a new law was issued to clear the way for entities (a free zone company or a free zone establishment) operating in free zones to open branches in Dubai. The said law states that no one is permitted to conduct economic activities outside the free zones except through a corporate entity licensed by the Economic Development Departments. Anyone who violates this law could be fined up to AED 100,000. The common legal forms for free zone entities to conduct business in in the mainland of each of the seven Emirates is through a civil works company, limited liability company (LLC) or a branch provided that the activities of the branch matches with the activities of the parent company. A branch must be wholly owned by the free zone entity and have the same trade name as of its parent company. A UAE local service agent must be appointed. The requirement to appoint a UAE local service agent may be removed by the Ministry of Economy if the free zone entity is owned 51% or more by a UAE national.
The UAE Commercial Company Laws require entrepreneurs when applying for a business license or a renewal of the licenses, to show ownership of an office or a valid lease of a defined and recognizable office premises. There are several implications in the UAE of sharing offices with another corporate entity. Firstly this will be a breach of the business lease, local labour laws and company laws. There are often express terms in a business lease requiring the consent of the landlord to any subletting, a failure to comply gives an automatic right to terminate the business lease. The UAE labour laws require that employees must work at the registered office of their employer. There are also similar restrictions for free zone companies. Any inspection undertaken by the licensing authorities will have serious implications for the license holder and tenant. An employer sharing the office premises of another company will also experience difficulties applying for employee visas. A Secondment Agreement can be used to assign staff for a limited period to work in the offices of associated companies. The agreement must address a number of issues including salaries & benefits, responsibility and liability for employees, health insurance etc.
Banks in the past have had two causes of action against defaulters, firstly by filing a case in the civil courts for the debt and a police case attracting a jail term. In October 2015, a royal decree announced the decriminalization of the issuing of bounced cheques, which has now been extended to expats. More recently it was reported in the National Newspapers on the 28th March 2016 that the UAE Banks Federation (UBF) agreed and UAE Central Bank approved a rescue initiative not to prosecute SME’s for bounced cheques due to concerns over sustainability in the SME sector. This new initiative will allow debtors a 15-day period to agree a restructuring scheme with the banks, followed by up to 90 days in which the banks will refrain from taking legal action including prosecution in the courts or travel bans. The initiative will apply to companies with a minimum of AED50 million borrowing or a turnover of more than AED100 million.
The UAE has corporate tax laws, their implementation across all sectors has been delayed. The tax laws apply to all companies in the UAE (free zone and mainland) albeit free zone companies have a tax exemption for up to 50 years from the date of company incorporation. Presently corporate tax applies only to oil & gas companies and banks. If corporate tax is implemented any time in the future, the rates is likely to be quite low. No credits are being considered at present for taxes paid in one’s home country. A GCC wide VAT law is being discussed and is likely to be implemented in the UAE in 2018. The healthcare industry, social services and essential commodities will be exempt. It is uncertain if the fee zones will continue to be exempt from VAT, given the general tax exemption that they enjoy by virtue of their status. It is best to monitor the tax development in the press, assess its impact on your business, incorporate tax and VAT into your business plans and working capital. Also consider tax implications such as withholding tax on contracts with third parties.
A well drafted contract can be used in several ways to mitigate business risks. For example, late or non- performance of a party can be managed with a liquidated damages clause, performance bonds or a well drafted termination clause. Market changes can be managed with a price revision clause. Insolvency and non-paying customers can be controlled by asking for a bank guarantee, parent company guarantee (this is a rare practice in the region) and insuring receivables. Unforeseen and uncontrolled circumstances can be controlled with force majeure and hardship clauses in the contract. It is best to speak to a corporate & commercial lawyer.
Most foreign partners forming a limited liability company (outside the free zones) with an Emirati partner in the UAE, protect themselves through a number of related side agreements to ensure that the foreign partner has complete control of the company i.e. decision making, business operations and the Emirati partner is limited in his ability to claim rights as a majority shareholder. Business owners need to be mindful of the UAE Anti-Fronting Law (Federal Law No 17 of 2004), the UAE Company Laws and court decisions in recent times that can invalidate these “side agreements”, as they take away from the Emirati partner, his or her economic and other rights. The Anti-Fronting Law came into force in 2004 but its implementation has been deferred. Penalties for violation include fines, imprisonment, revocation of company licenses and dissolution of the company.
It is always advisable to carry out background checks (including credit checks) on new customers. This is valuable in decisions to offer credit terms to a customer. Business debts are best dealt with by discussion and negotiation with the debtor and by paying regular visits to their offices. It is effective in many cases and cheaper than litigation in the courts. In some instances the debtor may be caught up in a string of linked transactions, particularly in the construction industry, where payment of an invoice is dependent on receipt of funds from another company up the chain. Provide the debtors with prompt payment incentives such as a discount off the amount owed or future work upon prompt settlement. Remind the senior management, directors and shareholders of the debtor company of their personal liability for acts of fraud and mismanagement of the company if they refuse to pay. Settlement agreements can be used to spread the debt over a period of time with a commitment by the debtor to pay it off by equal monthly instalments. The creditor reserves its right to ask for settlement of the whole amount immediately or file a case in the civil courts if there is a default. Having credit risk insurance can mitigate losses. If all else fails, consult a licensed Advocate in the UAE.
The UAE law accepts contracts made electronically including electronic signatures under the Electronic Transactions and Commerce Law 2006, provided the key elements exists -an offer, acceptance of the offer and the subject matter of the contract is defined. All of these elements indicate an intent to create a contract. Contracts can be made verbally, in writing, by conduct, telephone and other means. The parties however should agree the manner of acceptance, whether is by return emails or an electronic signature.
The form of accepting a contract an be in any means stimulated by the parties - oral, in writing, by conduct, depending on what the parties agree. Under Article 135. of the UAE Civil Code, silence may be deemed consent, it states that:
(1) A person who remains silent shall not be deemed to have made a statement, but silence in the face of a circumstance in which a statement is called for shall be regarded as an acceptance.
(1) A person who remains silent shall not be deemed to have made a statement, but silence in the face of a circumstance in which a statement is called for shall be regarded as an acceptance. There are also complex rules relating to receipt of email communications and when an email is deemed to have been received (e.g. when it reaches a server, when it is displayed on a screen or when it is opened). This is why this form of accepting contractual relations is not used by lawyers except the signature and transmission of documents electronically.
Under UAE law, a legally binding commitment/agreement may be formed.
A contract may be formed verbally, in writing or by conduct as long as the full essential elements are there i.e. an offer to do something, an acceptance of the offer, the subject matter of the contract is defined and there is a lawful purpose for the obligations arising under the contract. The Civil Transactions Law 1985 recognises the above as a legally binding contract, subject to specific cases as per Article 130 where the contract is required to be in writing.
Article 143 of the Civil Code states that a contract may be made by telephone or other similar means. As regards the place where the contract was made, it will be assumed that the parties had made the contract in a single majlis with both of them present at the time of the contract with respect to time and place.
Further legal recognition of these forms of contracts made by electronic means can be found in the Electronic Transactions and Commerce Law 2002. This law recognizes electronic signatures on contracts. Electronic files and documents are also recognised as long as there is evidence to prove they are identical to the original hard copies that the parties intended to sign.
Where there is a dispute, courts will consider the reliability of creating and saving the electronic document, security of information and verification of the identity of the person who created the information.
It is incumbent on every employee to act in the best interests of his or her employer and to ensure that their personal interests do not conflict with that of the employer.
If you want your spouse’s company to bid for work, be transparent about it with the procurement teams. The procurement process has to be fair, free of outside influence, bribes and kick-backs.
A failure to do so, and if later discovered, could lead to adverse consequences and accusations, especially if the employee also works in the team that makes key decisions relating to who wins a bid for work.
If any of the employees signed up to the restrictive clause above, their employers will be able to enforce it in a court of law if they can prove the restriction is:
1. Reasonable in time and geographic location;
2. Designed to protect legitimate interests of the employer e.g. employer's trade secrets, know-how, business processes etc. while existing contracts are in place with the government;
3. Prevent employees touting the company's clients to new employers.
As regards personal guarantees, it all depends on the approach of the bank and the credit worthiness of the individual offering the guarantee. Most banks in the UAE will prefer a guarantor to be in the UAE for enforcement purposes.
Parents are liable for their own debts unless their children step in and officially act as guarantors or such children are directors and shareholders of a family business jointly with their parents, they all become liable for fraudulent acts and debts of the company depending on the level of wrongdoing.
The banks in the UAE are authorised by the UAE Central Bank to freeze funds in employee accounts upon termination of their employment to satisfy any liabilities with the bank. The funds will only be released when those liabilities have been settled or there is proof that alternative employment has been secured accompanied by a salary certificate.
The above principle applies irrespective of guarantee cheques held by the banks as security. To answer your question, until all loans are cleared or there is a new job and salary certificate in place, the funds in your account will continue to be frozen in your bank.
Entire Agreement clauses are contractual clauses that are typically seen in most business contracts. They are known as "entire agreement clauses".
This clause essentially says what you sign and the contents of the contract/agreement forms the entire understanding and contract between you and the other contracting party and any oral agreements or statements made before or after signing will be excluded.
It is, however, possible to present a case if the additional terms were included after a document is signed and a party wishes to reply on them.