<p><span>However, The Dubai Court of Cassation in its rulings  established an exception to this general rule laid by law. The court in  the following judgment rendered its decision extending the liability of  the partners in a limited liability company to reach their personal  assets provided the satisfaction of certain extraordinary specific  circumstances as we will see.&nbsp;</span></p>
<p><strong>Summary of Facts:</strong>&nbsp;</p>
<ul>
<li>The Claimant (a creditor of a limited liability company) obtained a  court judgment (First Action) against its debtor (the limited liability  company, referred to as &ldquo;the LLC&rdquo;) obligating the latter to pay the sum  of AED 781,619.07 with interest.&nbsp;</li>
<li>The Claimant, upon failing execution of the First Action, sought  recourse against the shareholders of its debtor ,the LLC, by filing  another commercial action against the Respondents (shareholders of the  LLC).&nbsp;</li>
<li>The Claimant requested in its second action engaging the liability  of the Respondents in their personal assets to pay the sum of the debt.&nbsp;</li>
<li>The Claimant also stated that the Respondents as shareholders in the  LLC are liable to pay the awarded amount each to the extent of his  share in the capital. Furthermore, according to the UAE Commercial  Companies Law the &ldquo;Law&rdquo; the Second Respondent being the Manager of the  LLC is liable to the full extent of his personal assets for the  company&rsquo;s liabilities and for claims for indemnity. Additionally the  Respondents are personally liable for their fault to comply with  Articles 238 and 255 of the said law.&nbsp;</li>
</ul>
<p><strong>Procedural History:</strong></p>
<ul>
<li>The Court of First Instance dismissed the case.</li>
<li>The Claimant appealed before the Court of Appeals which overturned  the appealed judgment on the grounds of pre-adjudication in the same  subject matter.</li>
<li>The Claimant, therefore, appealed to the Dubai Court of Cassation  which in turn overturned the Appeals Court&rsquo;s decision, and referred the  case back to the Appeal Court to adjudicate the case. The Cassation  Court held that the lower court erred in its application of the law when  it considered the matter pre adjudicated against the Respondents  although there is no unity in the parties or the causation of the  dispute.&nbsp;</li>
<li>The referral court after referring the case to the Dispute  Resolution and Expertise Department of the Ruler&rsquo;s Court rendered its  judgment obligating the Respondents to pay to the Claimant the sum of  AED 781,619.07 jointly and severally each to the extent of his  share/shares in the capital.&nbsp;</li>
<li>The Respondents appealed to the Court of Cassation requesting overturning the judgment.&nbsp;</li>
</ul>
<p><strong>The Court of Cassation</strong></p>
<p><span>The Respondents in their challenging the Court of Appeals judgment raised two arguments</span></p>
<p><span>&nbsp;</span><span>1. The Respondents argued that the lower court  erred in obligating the Respondents to pay the sum awarded in the first  action. On the grounds that the lower court contradicted the principal  of res judicata (courts may not re-adjudicate matters which have been  previously judicially finalized). In this sense the Appeals Court  allowed the Claimant to obtain a court order with the payment of the sum  awarded twice from the same transaction.&nbsp;</span></p>
<p><span>Responding to this argument the court held that it was  groundless. It is an established judicial principle, that if there are  several sources of an obligation, meaning if one person&rsquo;s liability is  derived from the contract and another person&rsquo;s liability is derived from  the harmful act, while both liabilities are tied to the same matter,  each of these persons will be held liable against the injured party for  full compensation.&nbsp;</span></p>
<p><span>In this case, the Claimant did not receive satisfaction of the  debt from the LLC as an entity, therefore, the Claimant sought recourse  against its shareholders personally (the Respondents). However, the  Claimant will not obtain compensation twice. The Claimant&rsquo;s right is  limited to receiving satisfaction of the sum just once. If he receives  the awarded sum from either the LLC as an entity or from one of the  Respondents, then the other is discharged. The Claimant will then have  no right of recourse or enforcement against any of the obligors (being  the LLC or the Respondents).&nbsp;</span></p>
<p><span>Since there was no proof furnished that the Claimant obtained  the awarded amount, he has the right for recourse against the  Respondents for their harmful act.&nbsp;</span></p>
<p>2. The Respondents further argued that the Court of Appeals erred in  establishing that the Respondents intentionally committed an aggravated  harm to the Claimant.&nbsp; The appealed judgment did not demonstrate the  harmful act or the Respondents&rsquo; role in harming their company&rsquo;s creditor  (the Claimant).</p>
<p><span>&nbsp;</span><span>The Cassation Court held that this argument was groundless. The court established its reasoning on three bases:</span>&nbsp;</p>
<p><span>1. The effect of the provisions of the UAE Commercial Companies Law in relation to limited liability companies provides:</span></p>
<ul>
<li>The share holders who are not also directors shall have the right to  inspect the operations of the company, to examine its books and  documents in addition to providing advice and guidance to the manager.&nbsp;</li>
<li>The company shall have a general assembly consisting of all of the  shareholders, which shall meet at least once a year during the four  months following the end of the financial year.&nbsp;</li>
<li>The agenda of such meeting must include hearing the manager&rsquo;s report  concerning the activities and the financial status of the company  during the year, the auditor&rsquo;s report, and a discussion of the balance  sheet and profit and loss account in addition to ratifying them.&nbsp;</li>
<li>Any of the shareholders, whether in person or by his agent, has the  right to examine minutes of the general assembly meeting and resolutions  and he shall also have the right to examine the balance sheet , profit  and loss account and the annual report.&nbsp;</li>
<li>The company must have an auditor of accounts elected by the general  assembly to audit accounts of the company and to observe whether the law  and the constitutive documentation of the company have been observed,  he must submit his report stating the result of the examination to the  general assembly.&nbsp;</li>
<li>The company must set aside 10% of its net profits to form the  statutory reserve, and the shareholders may decide to stop setting aside  such monies if the reserve reaches one-half of the capital.&nbsp;</li>
<li>The Court construed from the above that shareholders of a limited  liability company are required by the law to be aware and informed of  its profit and loss accounts.</li>
</ul>
<p><span>2. The general rule set forth in Article 218 of the CCL  provides that a shareholder in a limited liability company is  responsible only to the extent of his share/shares in the capital of the  company. The exception to this general rule, as the Court reasoned, is  that such shareholder will be held personally liable, if he exploited  the principle of the independent liability of the company, as means to  conceal his fraudulent acts or misappropriation of the funds of the  company in order to cause harm his partners or creditors. In such case,  the protection bestowed by law for shareholder in a limited liability  company will not apply. He will be held liable in his personal capacity  for such dispositions in a way that such liability will extent to his  personal assets.</span></p>
<p><span>3. It is also construed from provisions of the CCL that the  manager of a limited liability company is liable towards the company,  the shareholders and third parties for indemnifying loss arising out of  his default and neglect in management, all acts of fraud and abuse of  power and any breach of the law or the company&rsquo;s constitutive  documents.&nbsp;</span></p>
<p><span>The court further held that, the appointed expert&rsquo;s report  established the LLC&rsquo;s budget exhibited that its most valuable asset was  its reserve which value reached AED 6 million. The expert stated that  there are no traces of such reserve while the company&rsquo;s debt reached AED  1 million.&nbsp;</span></p>
<p><span>The expert report in its conclusion revealed the intentional  vast committed by the manager and the shareholders (the Respondents).  Their fraudulent acts are exhibited in concealing the company&rsquo;s assets  which represented the company&rsquo;s general guarantee to its debts.&nbsp;</span></p>
<p><span>The Court therefore established that the Respondents by  misappropriating the funds of the LLC by their faults intended to cause  damage it its creditors. The Court therefore held the Respondents  personally liable for the awarded sum and dismissed the challenge.&nbsp;</span></p>
<p><strong>Practice Note:</strong>&nbsp;</p>
<p><span>We understand from the above judgment that the exception to the  limitation of the liability of limited liability companies&rsquo;  shareholders to the extent of their shares is crucial to safeguard the  company&rsquo;s creditors. In some instances, shareholders in limited  liability companies opted to abuse the protection bestowed by law to  defraud the company&rsquo;s creditors. By engaging their personal liability,  this exception imposes a condition upon the shareholders and directors  of the limited liability company to maintain its assets as a general  guarantee to the creditors of the company. Such court practice helps  restore customers and investors credibility in conducting transactions  with limited liability companies.&nbsp;</span></p>
<p><span>&nbsp;</span></p>