Personal Liabilities of Director for Mismanagement and Fraud - the UK & UAE - Assignment Example

Personal Liabilities of Director for Mismanagement and Fraud UK & UAE Company Law (Student’s name) (Institution’s Name) Good Corporate governance is an indispensable element in themanagement of limited liability companies under both the United Kingdoms and the UAE company laws. Companies are often managed by aboard of directors selected by shareholders to act in their best interest and in the interest of the company too. Directors, therefore, just like other stakeholders, are bound to take care the company’s management with respect to its transactions and other commercial dealings. From the juristic perception, a company is a legal person separate from its members. This is the principle of the veil of incorporation. Its major effect is the fictional veil (curtain) between a company and its members including the directors. However, in some cases, the Court ignore or pierces this corporate veil to get to the person behind the cover or to expose the true form and vices in the company in question. In such cases, the court holds that corporate form is being misapplied and, hence, the need to expose the person who is responsible. Examples of acts may include wrongful trading, the fraudulent conduct of business, mismanagement, failure to refund application money among other vices deemed inappropriate before the law. This paper, however, focuses only on two of the vices mentioned abovewith respect to the fiduciary duty of a director to a company; fraud and mismanagement. Upon the lift of corporate veil, a company director who commits fraud or mismanages company’s resources is likely to suffer personal liabilities as per provisions the UAE and UK company law statutes. Lifting corporate veil The day a company is adequately registered under the Companies Act, marks its birth date. It becomes an artificial person viewed as separate and distinct from the owners before the law (Chew, 1999). This gives the company separate legal capacity to file a case against a deemed offender, ability to own property, be sued, initiate contract, and to exist perpetually. In other words, it becomes a body corporate with an independent legal existence (veil of incorporation). Lifting or piercing the corporate veil, pursuant to, the company laws refers to the act of disregarding the notion of corporate personality and looking behind the curtain see the real person who is responsible for the management and control of the company. For instance, when the court detects a fraudulent act, dishonesty or mismanagement in the use company assets, the individuals responsible will be revealed. In this sense, they are not allowed to conceal or hide behind the corporate personality. Other instances under which veil of incorporation may include (1) in case of investigation of a company’s affairs, (2) investigation of the company’s membership, (2) Reduction in the company’s membership below the required numbers, (4) in case of Fraudulent Trading, (5) Mismanagement, and other reasons provided under the Companies Act 1986. The Legislative Aims The primary aim of the unlawful trading provisions in the UAE and UK is to stop directors from carrying on with trade while it is evident that their companies are going into insolvency, thereby, hopefully, limiting the possible loss or damage suffered by creditors. The purpose behind the legislation in these two countries was to place more responsibility on directors should their companies fall into the trap of financial strife and to give liquidators a chance to seek restitution for creditors in regards to the engagements of honest, but careless and cavalier, directors (Altman& Hotchkiss, 2010). This particularly surfaces when the directors fail to show responsibility, or where directors just sit passively although their company collapses around them. Lifting the veil of a corporation can also be seen as deterrent based on theprovisionsof the company laws. In a way, it deters directors’ illegal engagements through the threat of civil or criminal penalty, civil liability, for allowing their company to plunge in debts and failing to take any strategic action to avoid or limit damage or loss to creditors. The objective of the respective legislatures is to inspire directors to closely monitor the financial matters of their companies. Thus, there is a positive requirement of directors to strive and prevent losses, which, in effect, may damage the interests of creditors leading to a loss. Therefore, provisions exist to embolden the directors to embrace commercially moral standards of conduct intheir companies and to shield creditors from the abuse of the companies’ principle of limited liability. “Fraudulent Trading” and “Wrongful Trading.” A company faced with the wind-up petition due to insolvency, or any other rational reason thereof stands a higher chance of being indicted for wrongful trading especially if it continues trading after being pronounced insolvent. On the other hands, a director trying to use his position to for personal benefit through deliberate misapplication of the company’s resources is practicing fraud. This implies that it is very important that the director understands the differences between fraudulent trading and wrongful trading as well as the significance that each of the acts holds before a court of law either in UK or United Arab Emirates. Insolvency Act 1986, defines wrongful trading as a situation in which a company that continues with its daily business or trade regardless of being insolvent (Goode& Goode,2011). That is, unable to redeem its debts as they fall due. Such companies usually base their acts on the hope that things will get better even though it continues to spiral downwards. In wrongful trading, therefore, the company has no intent to defraud its creditors. It is just a case of poor judgment and an indication that the directors have failed to carry out their duties as required by law. It is the onus of the directors to monitor the financial position of the organization continuously. Equally, they owe the members of the duty of information. The members have to know when the worth of the aggregate assets falls below a particular value. Insolvency of a company reveals the negligence and irresponsibility of the management team (directors) in case wrongful trading. In the case of financial problems, directors are supposed to inform the higher authorities immediately and consult with insolvent practitioner by offering their creditors maximum protection failure which they stand liable to make a contribution in the assets of the company. The contribution only goes up to the extent their negligence or loss caused Fraudulent trading arises when directors or management of the company decides to continue in business even after realizing that it is impossible to prevent the company from liquidation due to insolvency with the intent of defrauding creditors to make more money (Goode & Goode, 2011). In such a case, the liquidator must prove that directors were well aware of the insolvent position of the business and they knew that it was impossible to prevent the company from going into an insolvent liquidation. If successfully verified, the directors will be personally liable for the offense under the civil law. The directors’ liability under the fraudulent trading is more severe than liability under wrongful trading. This is because while the latter will be treated as civil offense prosecuted under the civil law, fraudulent trading is treated as a criminal case. From a personal perspective, fraudulent trading provision is under the UK company law is drawn rather narrowly, since it calls for dishonesty on the part of a director. The provision for the wrongful trading (in Section 214 of the Insolvency Act), on the other hand, is drawn more broadly, and it exposes directors to a wider extent of risks. In practice, however, accuses against directors attaching them with wrongful trading are comparatively rare, and a recent High Court decision illustrates the reason for this: the provision is not as threatening to directors as it seems. In Grant v Re Ralls Builders Ltd (2016), the judge resolved that the company in question made a wrongful trade because there was feeling that the company treated the creditors whom it acquired in the period of wrongful trading was reproachable manner. Hence, there was no need for directors to contribute to the assets of the company. Management and Mismanagement Directors play an important role in the management of a company. From the very onset of a company, a board of directors is created and the main role of the board is to oversee the management of the company’s affairs. The boards exist up to the time the company officially winds up its business operations. This implies that the duties of the directors immediately come to cessation when a company is wound up or dissolved. In normal situations directors,’ acts are normally executed through meetings. However, sometimes an individual director can be given more power than the others mostly because of the controlling interest. Thus, if any personal liability is to be imposed on a director, then this has to be passed by the board in a discursive meeting. Section.2 of the Companies Act of 1986 defines a company director as any person holding the position of a director regardless of the name called. Thus, the position, function and duties discharged are the defining elements of a director, not the name. The company, on the other hand, a legal personality. Board of directors (who acts as the agents of the company) are the human faces in the company. Their work is to act on behalf of judicial personality. In management, the directors are supposed to work as a unitary team, exercise power and do all the activities the company has bestowed on them. Engagements that require collective approach through board meeting should not at any time be conducted or exercised at personal levels. To determining such kind of duties, it is important that directors make close reference to the Companies Act or their Memorandum of Association(Lewis, 1970). This is because there is alikelihood that acting singly may lead to misuse of power which may, in turn, result in mismanagement of the company. Defining Mismanagement According to Chew (1999), to come up with proof that a company has actuallybeen mismanaged, one has to establish that “an affair of the company has been in a way prejudicial to the company’s interest or interest of the public. Section. 398 of the companies Act elaborates mismanagement in a company. A relevant case in point is Haridas Mundra V. Richardson & Cruddas Ltd which was decided in Calcutta High Court. It was ruled that a situation in which a group of people or persons in the management is colluding to defraud other parties is an open mismanagement. Another instance in which directors prioritized the objects their liking and made share allotments in anticipation of a different consideration other than cash. The court held that this was a case of mismanagement. Incidents of mismanagement Under the Companies Act of United Kingdom, running a company for an interest that is prejudicial to the primary interest of the company and the shareholders alludes to mismanagement (Kraakman, Armour, &Davies, 2009). The role o bf the direct is to avoid conflict of interest and buffer the company’s or the shareholders’ interests because it is them to whom they owe duties and responsibilities. Furthermore, holding a company’s office after a term shows some mismanagement. There are circumstances in which a managing director continues to be in office even after his term had expired and no protocol followed or available in his reappointment. This regarded in the Companies Act as mismanagement. Some directors also initiate the sale of company’s assets for their personal reasons or in improper ways. Since the company owns the assets, its sale must be mutually agreed upon by the board of directors, failure to which results in mismanagement of the company’s resources. Other incidences of mismanagement in a company may include (1) director failing to take an interest in the company’s affairs, (2) fighting among the directors, (3) infringement of fiduciary duties, (4) violation of Memorandum of Association, Articles and statutory provisions (5) misuse of company’s resources, and (6) directors fating a company to trade unprofitably or unlawfully. Personal Liabilities for Mismanagement Director might suffer a different range of personal liabilities in regards to acts of mismanagement in a company. These comes from the fact that they work as agents of the company and thus, have the mandate to represent the company properly and according to the memorandum of association. This includes looking into the proper and legitimate application of the capital of the company. According to the doctrine of ultra vires, the director is only allowed to act within a specified jurisdictional authority and power. Actions that surpass the directors’ level of authority would make personally liable. This applies particularly in the case of substantive ultra vires. For instance, entering a transaction which they have no authority to engage, would make them liable to pay for the transaction from his pocket or to refund the company it used the company he used the company’s fund. This can be done based on the court order requiring the director to refund the company on a specific date. Selling a company’s property through dubious means or at a price lower than the book values is a sign of mismanagement. In this case, the director as the initiator must restore the asset either physically or in cash or cash equivalent to the asset sold. For this process to succeed, however, it must be proven that the director was actually involved or knew about the action but never took any step to stop it. When a director misuses the company’s funds, he may be mandated to pay compensation, repay the money, or restore the property. This is based on the court’s holding the misapplication or misappropriation properties or money of a company by a director (or when it has been approved he is guilty of breach of misfeasance or trust) would force him restore the property or repay the money in full to the company. Director’s Personal Liability under UAE Law Mismanagement. A company’s director is personally liable for acts of ‘mismanagement’ and any descent on the business performance of the company due to the ‘mismanagement.'Under the fact liability for mismanagement is not well captured in Article 21 of the UAE Draft Law, very few directors often fall into this trap and end up being sued for the mismanagement. However, underArticle 186, the directors who engage reckless handling of the company’s resources or in any way whatsoever mismanages the company should compensate the same company for any losses made or damages suffered because of erroneous judgments. It is the fiduciary role of the director to ensure that company is well-managed and is in good health. Article 111 of UAE Commercial Company Law, however, does not specify the extent to which a company or its stockholders can individually trail a director for mismanagement (Prasad & Ahmad, 2014). However, from experience of courts on Cassation cases, a shareholder who suffers any material loss as result of the negligence of directors to perform tasks which they are mandated under the Companies Law or that which has been generated by the company’s constitution, the shareholders can claim against him. In such a case, the directors have to compensate the shareholders up to the value damage or loss suffered. A failure to make the prompt distribution of profits may result in a valid claim based on the articles of association a given company. Civil Code. Besides article 21 and 168 of the Draft Law, the civil code has been very significant in pinpointing the duties of a company directors duties. Pursuant toArticle 665(3) of the civil code, it is important that the actions of the director remain guarded under jurisdiction conferred by the company’s constitution (Whitson, 2009). This requirement covers all the engagements of a director including the fraudulent actions and mismanagement which by law are not duties of a director but rather a breach of duty since in one way or the other, the shareholders’ or the company’s interest is hurt. The director charged with this acts remains personally liable for any losses that may accrue to company or shareholders because of his action outside the jurisdiction and mismanagement. Some directors, on realizing the weight of their actions, often try to resign and avoid being attached to the perceived damage or loss the company suffers. However, once prosecuted, the court will have to pursue the director and ensure that redeems the company of its losses in full. This ismostly important when the company is undergoing a crisis, financial or mismanagement scandal as it divests the company of some crucial skills. Indemnification. As per the stipulation of Article 23 of the draft law, a company’s memorandum of Association should not capture any provision that excepts the director from personal liability because of the perceived breach of duty. Any such provision in the company’s constitution shall be rendered null and void. In the UK and several other countries, companies acting for the director is a common phenomenon. For instance, they often advance costs of the director’s defense even though in practice such costs are resettled and are more of loans than whatever one would think. In UAE, It is not yet established whether local courts are supposed to make sense of an indemnification of a company in a similar manner as an exception to liability. Insolvency. When the company is bankrupt, it is the role of the director to file a notice with the court of law indicating that the company bankrupt in not less thirty days and failure to take this shall be considered an offense (Farn, 2016). The significance of this move is the protection from the creditors whose dues might have fallen due. Further, in case company losses 50 percent or more of its first capital, the directors are supposed to consider the question of dissolution by making a clear representation to the chief stakeholders as provided in Article 289. Failure to take these steps may insinuate mismanagement of the company which may put the director at risk of injunction or prosecution in court. Fraudulent trading under the UAE commercial company laws is a criminal offense (Farn, 2016). It deprives one party personal benefits or rights while enriching the other party wrongfully. For a director, this also a breach of duty to guard the interest of the company’s creditors. By virtue of their position, directors are believed to be the chief controllers of the assets and liabilities of the company in question and as such should ensure that creditors are redeemed of their payments as soon as they fall due. Engaging in a fraud by deliberately trying to make money out of their ignorance of the real situations in the company breaches company laws, and this may imply that directors will bear a personal liability of paying certain fines that warrant their action. In extreme cases, the directors would end in prison based on the severity of damage they cause to the creditors. The petitions are, in most cases, filed by the injured creditor (s). Conclusion Notwithstanding the position of the doctrine of the separate legal entity in current corporate law around the globe, the law in different countries faces pressure from different social constructions to make directors personally responsible for some liabilities to which their companies are subjected. These scenarios are well exemplified in the United Kingdom and the United Arab Emirates. It is amply clear that incorporation of a limited liability company does not completely cut off the personal liability of its members and in all circumstances. The sacrosanctity of a separate entity holds only if the entity is consonant and compliant with the fundamental policies which give it life. Therefore, those who enjoy the paybacks of the veil of incorporation have to pledge a capital structure suitable to the size of the corporation. They must understand the distinct between corporate assets and personal assets. Withdrawing the corporate assets or mingling their personal accounts with the company’s would subject them to personal liabilities. The act of lifting the corporate veil at present remains one of the most divisive subjects in corporate law. Categories of acts like fraud, facade, unfairness agency, sham and group enterprises or accounts, appear most peculiar bases under which the Law Courts lifts the corporate veil. However, these categories are merely guidelines and are far from being exhaustive. References Altman, E. I., & Hotchkiss, E. (2010). Corporate financial distress and bankruptcy: Predict and avoid bankruptcy, analyze and invest in distressed debt (Vol. 289). John Wiley & Sons. Chew, M. (1999). 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