It refers to a situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts.
As a general rule and as enunciated in a plethora of cases, piercing the corporate law under the United Arab Emirates law has limited applicability, and courts rarely uphold such doctrine.
As provided under article 71 (1) of the UAE Commercial Company Law (CCL for brevity), which states that- “a limited liability company is an association of a maximum number of fifty and minimum of two partners, EACH OF THEM SHALL BE LIABLE ONLY TO THE EXTENT OF HIS SHARE IN THE CAPITAL.” (Emphasis ours).
Furthermore, Article 71 (2) of the same law specifically mentioned that- “xxx the owner shall be liable only to the extent of the share capital mentioned in its Memorandum of Association.”
Evidently, the provisions set out above demonstrated that the shareholder of an LLC could not be held liable for the acts and omissions of the company. The principle of piercing the corporate veil under this circumstance holds no water. However, this is subject to certain exceptions, to wit:
- Article 30 of the CCL provides that- “If the company makes any allocation of profit contrary to the provisions of this Law and the decisions issued pursuant hereto, the partner or shareholder shall return the sums received contrary to such provisions, and the creditors of the company may request each partner or shareholder to refund the sums received even if he has acted in good faith.”.
- Article 75 of the CCL provides that- “(1) If after the establishment of the company of partners exceeded the limit fixed by Article 71 of this law, the manager (s) shall notify the concerned authority within 30 days from the date of such increase. (2) xxx, the company must rectify its position within three months from the notification date, and the concerned authority may extend such period for another three months. If the company fails to do so, it shall be deemed dissolved, and the partners shall be jointly liable to the extent of their assets for the debts and obligations borne by the company from the date such excess occurred.” (Emphasis ours)
- Article 78 of the CCL provides that- “(4) notwithstanding paragraph 2 of this Article, the partners may agree on the value of corporeal shares, provided that the concerned authority approves such value. The partner who submits the corporeal share shall be liable for the correctness of its amount stated in the company’s Memorandum of Association. If it is proven that the share was over-evaluated, the said partner shall pay the difference in cash to the company.” (Emphasis ours)
- Article 204 of the CCL provides that- “(c) If a creditor of the company, after signing the undertaking on the Board Member, objects to the ability of the company to pay its debt, and its proven that company is incapable of payment its debt, then the Board Members who have signed the undertaking shall be jointly liable to payment the objector’s debt which is calculated on the basis of assets, rights, and liabilities of the company if it has been liquidated on the day proceeding the date of signing of the undertaking (sic).” (Emphasis ours)
The corporate veil enables the company to maintain its separate and distinct personality from its shareholders and to be held liable for its acts and omissions. Likewise, it bears limited liability to protect the shareholder from being personally liable for the company’s obligations, except in the cases mentioned above.