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Beware Before Changing Share Capital Through Side Agreement

Often the primary step of all expatriates investing in UAE through setting up a corporation in UAE is arranging a partnership with a UAE local who will then hold 51% shareholding in such Limited Liability Company. Another most important consideration in building a company is to draft its very constitution that is Memorandum of Association which is thereafter registered before the Department of Economic Development allowing them to issue the trade license of the company. Nevertheless, Commercial Lawyers of Dubai has witnessed several cases where the partners enter of subsequent agreements within the shareholders thereby, amending the shareholding and division of profits. The courts in the UAE has severely criticized such concept in numerous judgments.

It has been lately affirmed by the UAE courts that the partners in any Limited Liability Company shall pay towards their working capital in accordance with their shares. As failure to pay the capital will empower the court to issue an invalidity order against the company and the court will subsequently appoint a liquidator to liquidate the company and to pay-off all the creditors of the company. The court-appointed liquidator will further draft the list of partners or managers in the company and will pay-off their percentage of profits in accordance with share-capital mentioned in the Memorandum of Association or Trade License of the company.

The foregoing rule of law was reflected in the Civil Court of Cassation case number 92 of the year 2009. The court opined in the said judgment where the claim was raised by the 51% shareholder of the company for claiming his profits, that the shareholder is entitled to receive the profits in accordance with the Memorandum of Association of the company and not in accordance with side agreements. Thus, the court ordered the company to pay AED 2 Million approx. to the local shareholder. The Case was referred in Court of Appeal and in Court of Cassation which was rejected and court upheld the decision of lower court.

It is rather significant for the claimant to prove that the actual participation in the share capital is different than what is mentioned in the Memorandum of Association, the court holds utmost discretionary power to issue an order for liquidation of the company. The principle was also mirrored in Court of Cassation case number 7 of the year 2009, Court of Cassation case number 239 of the year 2007 and Court of Cassation case number 318 of the year 2004.

Lastly, it is pertinent to note that in case the court orders for the liquidation of the company, the residuary profits, upon paying the creditors’ shall be distributed according to the share capital mentioned in the Memorandum of Association and not in accordance with any side or subsequent agreement. Ergo, we strongly recommend to reach to your Top Commercial Lawyers in Dubai to have a clear understanding of law and to prevent such casualties in future.

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